Sanmina Corporation

Welcome to Sam Mina's second quarter fiscal 2023 earnings conference call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to Paige Melching, Senior Vice President of Investor Communications. You may begin.

Thank you, Paul. Good afternoon, ladies and gentlemen, and welcome to Sanmina's second quarter fiscal 2023 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.

Good afternoon.

And Kurt Adzima, Executive Vice President and Chief Financial Officer.

Good afternoon.

Our agenda for today's call is Kurt will review the details of our financial results and Yuri will follow up with additional comments on the results and our future goals. Then we will open the call up for questions. Before I turn the call over to Kurt, 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 the presentation and take note of our safe harbor statement. During this conference call, you 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 could differ materially from those projections in these statements as a result of factors set forth in our safe harbor statement. The company is under no obligation and expressly disclaims any such obligation to update or alter any of the forward-looking statements made in the earnings release the earnings presentation, this 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 1, 2023, and 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, as they relate 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 Kurt.

Thanks, Paige. Before I discuss the Q2 results, I'd like to discuss the mention of the restatement of historical results in our press release. One of our divisions, which accounts for approximately 3% of total revenue and is part of our CPS business, primarily enters into long-term, fixed-price customer contracts on a project basis. GAAP requires that the estimated amount of revenue and profit expected to be realized upon completion of a profitable contract is recognized over the life of the contract. However, If a contract is expected to be unprofitable upon completion, 100% of the loss must be recognized in the period in which it is initially estimated that a contract will result in a loss upon completion. To the extent a contract has any actual or anticipated overruns, the company may seek the ability to seek recovery from its customers. During the preparation of our Q2 FY23 financial statements, the company determined that certain personnel in the division had failed to properly substantiate and update cost estimates for materials and other costs over the life of certain contracts. Primarily as a result of these findings, revenue was overstated by approximately $10.2 million and $18.3 million in FY20 and FY21, respectively. It also understated by $29.1 million in FY23 and overstated by $5.6 million in Q1 FY22. I'm sorry, I should have said $29.1 million in FY22. I apologize. GAAP EPS was overstated by approximately $0.09, $0.23, and $0.25 in FY20, 21, and 22, respectively, and understated by $0.06 in Q1 FY23. For more details on this, please see the 8K we filed today. Now on to the second quarter. Please turn to slide five. Our team did an outstanding job delivering strong financial performance. Q2 revenue of $2.32 billion exceeded the high end of our outlook of $2.2 to $2.3 billion, despite Q2 typically being a seasonally down quarter. This was primarily due to continued improvements in the supply chain. Non-GAAP gross margin was 8.4%. Non-GAAP operating margin was 5.8%. Non-GAAP fully diluted EPS was $1.59 at the upper end of our guidance range of $1.50 to $1.60. Finally, Q2 GAAP fully diluted EPS was $1.33. Please turn to slide six. If you compare our Q2 FY23 results with Q2 FY22, Revenue grew 21% from $1.92 billion to $2.32 billion. Operating margin improved from 4.7% in Q2 FY22 to 5.8% in Q2 FY23. And finally, EPS grew over 50% from $1.05 in Q2 FY22 to $1.59 in Q2 FY23. Please turn to slide 7. This shows the strong annual trends of our financial results, including revenue, operating margin, and EPS. We're off to a strong start in the first half of fiscal 2023. First half of fiscal 2023 revenue was $4.7 billion and is on track for a full year to grow in the mid-teens relative to the prior year. Non-GAAP operating margins have continued to improve over time, with the first half non-GAAP operating margins of 5.9%. Finally, continuation of our current run rate for EPS for FY23 for the rest of the year would result in FY23 EPS over $6 compared to FY22. Now please turn to slide eight. First half of FY23, IMS revenue was $3.9 billion. This is primarily due to the continued improvements in the supply chain. First half FY23 CPS revenue was $889 million. First half non-GAAP gross margin for CPS improved to 13.2% relative to FY22. Now please turn to slide eight. We continue to have a very healthy balance sheet that provides our company a competitive advantage. Cash and cash equivalents at the end of the quarter was $718 million. There were no borrowings under our $800 million revolver at the end of Q2. Cash flow from ops for the quarter was $65 million. Capital expenditures were approximately $63 million. At the end of Q2, we had approximately $164 million of authorization of share repurchasers and the board recently approved an additional $200 million of authorization. The company will continue to be opportunistic as it relates to repurchasing shares. Turn to slide nine. We continue to remain focused on efficient cash management. Cash cycle days were approximately 50 days in Q2, And non-GAAP pre-tax ROIC was 33.9% for Q2. Finally, please turn to slide 10. Let's talk about the Q3 outlook. Coming off of a very strong Q2, and given the continued uncertainty related to supply chain, as well as the macroeconomic and political environment, we expect Q3 revenues to be in the range of $2.2 to $2.3 billion. We expect non-GAAP gross margin in the range of 8.2% to 8.7%, dependent on product mix. Non-GAAP operating expenses are expected to be in the range of 60% to 62%, and non-GAAP operating margin in the range of 5.5% to 6%. We expect non-GAAP interest in other expenses to be approximately $15 million, driven by the continued increases in interest rates. In addition, we estimate an approximate $3 million non-cash reduction to net income to reflect our JV partners' equity interest in the net income of our Indian joint venture. We expect non-GAAP tax rate of approximately 17.5% and non-GAAP fully diluted share count of approximately 60 million shares. When you consider all this guidance, our outlook for non-GAAP EPS is in the range of $1.50 to $1.60. We expect Q3 capital expenditures to be around $60 million driven by growth of new programs and the support of future growth. We expect Q3 depreciation of around $30 million. Overall, we are very pleased with our recent results. That being said, we continue to believe that there is an opportunity to further improve our business model over the long term. And with that, I'll turn it over to Yuri. Thanks, Kurt.

Ladies and gentlemen, first of all, I got this bad cold, and hopefully you can understand me, but I think I can get through it. So, again, thank you all for being here with us today. First, I would like to take this opportunity to recognize Samina leadership and our employees for doing a great job, as you heard from Kurt. So to you, Samina team, thank you. and let's keep it up. Let me add a few more comments about financial highlights for the second quarter, and I'll review the end markets and outlook for the third quarter and the rest of the fiscal year 23. As you heard from Kurt, for the second quarter, Seminole delivered strong results. We had a great operational execution, and our supply chain for semi-components got a lot better, and that allowed us to ship more. Our seminar team has done an outstanding job. Despite ongoing macroeconomic uncertainty, these results are a reflection of our continued focus on execution of our strategy. Now let's turn to slide 14. Sorry, to slide 13. Let's talk about revenue for a second quarter by end markets. For the second quarter, demand for the products was stable across most of the markets. For industrial, medical, defense, and automotive, we delivered $1,362,000,000. The growth was quarter-over-quarter 2% and year-over-year growth of 18%. Communication networks and cloud infrastructure was $958,000,000, pretty strong for a second quarter. that was down slightly of 6% and strong growth year-over-year of 27%. Typically, for a second quarter seasonally, this is a down quarter. But this quarter was stronger than typical as we delivered $2.32 billion. So quarter-over-quarter was flat, slightly down 2%. But year-over-year growth was very strong of 21%.

Also, we continue to diversify our customer base.

As you can see, our top 10 customers for the second quarter was 49% of our revenue.

Please turn to slide 14. Let me talk to you about the third quarter outlook at fiscal year 23.

First of all, we expect to see nice growth quarter over quarter for the third quarter. As you heard from Kurt, our revenue forecast is about $2.2 to $2.3 billion. For industrial, medical, defense, and automotive markets, we expect to see nice growth year over year. And communication networks and cloud infrastructure, we also expect to see a nice growth year over year. As you can see, Sanmina does not serve

consumer markets at all are focusing on high-complexity, heavy regulated markets. Now let me talk to you more about fiscal year 23.

We're on track to deliver year-over-year, mid-teens revenue growth for fiscal year 23, and we expect to deliver margin expansion and EPS growth.

I can tell you that Semina has a well-diversified customer base, and it's growing. We'll continue to invest in talent and leading technologies to support the growth for fiscal year 24 and beyond. Overall, we're expanding our capacity into more profitable projects.

So let me give you some examples. For medical defense automotive, First of all, these markets were well-established. At the same time, we have large opportunities as we look in the future, both in the new programs and some programs that are in the pipeline. For industrial, we also see some more growth through renewable energy, grid management, public safety equipment, a fair amount of our coal precision, electromechanical system costs, many industrial projects. For communication and cloud infrastructure, we focus on the new products around networking and storage products. These businesses should produce higher margin and a long-term growth and stability. Let's talk about management through this challenge in microenvironment. We have positioned the company to be able to navigate any market dynamics. Salmina is embedded resiliency in our focus market space, and we have strong global management to do the job. Salmina is well positioned for any economical environment, but we all continue to monitor market conditions. Our focus today is on quality of our customer base, building right and lasting partnerships. We focus on continuing to diversify revenue growth with market leaders in mission-critical products. We continue improved productivity.

Yes, we are focused on quality of earnings and consistency for short-term and long-term.

Please turn to slide 15. In summary, For the second quarter, we delivered solid execution, both on top and the bottom line results. Our priorities have not changed. Our strategy is working, and it's delivering results. We'll continue to make investments for the future growth, and I can tell you that we are excited about the future. With that, ladies and gentlemen, now I would like to thank you all for your time and support. Operator, We're now ready to open lines for questions and answers. Thank you again.

If you would like to ask a question, please press star 1 on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star 1 on your phone now. And our first question comes from Christian Swab from Craig Hallam. Your line is open.

Hello, Christian. Hey, this is Tyler on behalf of Christian. Thanks for letting us ask a couple questions. I guess first, inventories came down nicely, sequentially quarter over quarter, about $1.5 billion. I was wondering if you could help maybe level set us what you kind of think a normalized level is. Your business is larger than it was a couple years ago, and you know, maybe any decisions you've made about, you know, what level you want to manage those inventories going forward, given the constrained environment we just went through.

Yeah, before I turn you over to our CFO, let me, you know, we believe that our inventory should be a lot better than where they are today. And we have, because of the shortages that we experienced over the last two years, it forced us to really, our customers asked us to basically reduce buy more inventory. The good thing is our customers are 100% committed to those inventories, and we expect to continue to work them down in the next couple of quarters. With that, I'll turn it over to Kurt.

Yeah, I think if you look overall, our inventory levels over the last couple of years have obviously dramatically increased. I think ultimately how we think of inventory is inventory terms. And I think, you know, we've gotten our terms historically through the back three years to, you know, almost six to seven times and, you know, ideally get it to eight. So we've got a lot of opportunity to further improve that. It won't happen overnight. But as Yuri said, we should start to see some benefit as we progress through the fiscal year and into 2024. Again, we are starting to see and continue to see improvement in the supply chain, and so that should help normalize things, but it does take a while, multiple orders, for things to normalize. So I would say not normal until next fiscal year, most likely, but we will make progress.

That's a great call. I appreciate that. And then maybe, you know, following up on that then, We regard your cash balance also very strong, and as you work that inventory down, it should only grow as well as continue to drive a free cash flow. You expanded your share buyback, which looks great. How much excess cash do you have, or rather, what's a comfortable level of cash that you'd like to run your business with?

Well, again, I think we talked about we have the strongest balance sheet in the industry. We feel very good about our cash position and the lack of leverage there. I think, you know, that being said, you know, we're going to be cautious and only opportunistic as it comes to share repurchases. So I think by adding to the authorization, it gives us flexibility over the coming months, but at the same time, you know, I think we're going to do what's what's best for shareholders. Cash tends to vary a lot with inside of a quarter. You tend to spend a lot of cash at the beginning of the quarter and then collect a lot of cash at the end of the quarter. So it's really hard to say what's the quote-unquote right level of cash. But needless to say, we feel very comfortable with our balance sheet, and it's the most unlevered, candidly, I believe, in the industry.

That sounds great. That's all for us. Gary, I hope you feel better as well. Yeah, thanks.

Thank you. And our next question comes from Anja Soderstrom from Sadatio. Your line is open.

Hi, everyone. Congratulations on the good quarter. And I'm sorry, I'm running on my second week of a cold myself. In terms of the revenue guidance for the third quarter, it sort of indicates a slight decline, right?

The question is. At the, you know, again, we finished at 2.32. The guidance is 2.2 to 2.3.

So. I would say it's flat, slightly down.

Yeah. Guidance. Okay. And in terms of the communication networks, you had a decline in that as well. What are you seeing in terms of that? I'm hearing from others that there are some delays and things are getting pushed. Are you seeing the same or are you seeing something else?

Well, as I said earlier, we are operating right now in this micro environment. There's a lot of changes going on. The good thing is it seems like demand is still there. But I think there are some moving parts that get pushed out here and there, definitely in some of the communication projects, that is true. But we had a pretty good quarter in the second quarter. Actually, the last two quarters in communication and cloud were very strong, as you can see. So I'm personally happy in this environment, Anya, where we are. And I think we can still deliver good financial numbers even with these numbers. But we'll see. We're still going to push for a maximum as we try to do every quarter.

Okay, thank you. And in terms of the cash cycle days, what is that on a normalized basis? What are you targeting to get that down to?

Well, I think, again, it's... You look at how we've managed, you know, cash cycle days over time, we've typically kind of been in those 50 ranges, plus or minus. So, you know, I think obviously as inventory comes down, that's helpful, but at the same time, you know, accounts payable come down as well. So if you look at our history, we've actually, over the last three years, despite all the challenges, have managed it pretty consistently in those 50s range. So I'd expect it to be in there, but we're always looking to be more efficient.

Okay. To follow up on Craig Helms in terms of your anticipated further improved balance sheet, are you at all considering a dividend?

We've looked at that at times, and we'll continue to evaluate that, but we have no intention at this time.

Okay. Thank you. That was all from me.

Thanks, Anya. Hope you feel better, too.

Yeah, you too.

And as a reminder, if you do have a question, please press star 1 on your telephone keypad now. And seeing no further questions, I'll turn the call back over to management.

Paul, thanks a lot. First of all, ladies and gentlemen, thank you very much. I'm sorry that I can't yell today. Hopefully I'll get a lot better for the next quarter. So with that, I appreciate your support. Thanks a lot.

Thank you.

That concludes today's conference call. Thank you for joining, and have a pleasant day.