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spk05: The San Mines Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Paige Melching, Senior Vice President of Investor Communication. Please go ahead.
spk00: Thank you, Sarah. Good afternoon, ladies and gentlemen, and welcome to Sanmina's fourth quarter and fiscal year 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.
spk01: Good afternoon.
spk00: And Kurt Adzima, Executive Vice President and Chief Financial Officer.
spk01: Good afternoon.
spk00: Before I turn the call over to Yuri, 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, 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 factors set forth in the Safe Harbor Statement. 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 the earnings release, the earnings presentation, the conference call, or on 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 operation for the quarter and fiscal year ended September 30th, 2023 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 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 to our non-GAAP information. I'd now like to turn the call over to Yuri.
spk02: Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome. Thank you all for being here with us today. First, I would like to take this opportunity to recognize Samina's leadership team and our employees. So to you, Samina's team, thank you. for managing through challenging environment these last few years. Managing through COVID, supply chain constraints, and ongoing geopolitical environment. Despite all these challenges, you deliver strong results for fiscal year 23. Please turn to slide four. Ladies and gentlemen, let me give you some highlights for fiscal year 23. As you can see, revenue is 8.94, grew 13% year over year. Non-GAAP operating margin also improved from 80 basis point to 5.8%. And non-GAAP diluted EPS came in at $6.26. That's up 34% year over year. These results are a reflection of our continued focus on our customers, the market leaders in the key markets. For the rest of the agenda, we have Kurt, our CFO, to review details of results for you. I will follow with additional comments about Samina results and future goals. Then Kurt and I will open for questions and answers. And now I'll turn this call over to Kurt. Kurt? Thanks, Jerry.
spk01: Please turn to slide six. For the fiscal fourth quarter, our team did a solid job delivering consistent gross and operating margins despite lower revenues, mainly due to ongoing customer inventory adjustments, primarily in the communication and market, as the supply chain has significantly improved. Q4 revenue was $2.05 billion, slightly below our outlook of $2.1 to $2.2 billion Q4 non-GAAP gross margin was 8.7%, at the higher end of the outlook of 8.3% to 8.8%, primarily due to favorable product mix. Q4 non-GAAP operating margin was 5.7%, in line with the outlook of 5.5% to 6%. Finally, non-GAAP fully diluted EPS was $1.42, slightly lower than our outlook of $1.47 to $1.57 due to lower than expected revenues. With that, please turn to slide seven. Again, Q4 FY23 revenue of $2.05 billion was lower than Q4 FY22 revenue of $2.22 billion. Again, this decline was mainly due to ongoing customer inventory adjustments primarily in the communications end market, as the supply chain has significantly improved. Q4 FY23 gross margin was 8.7%, compared to 7.9 in Q4 of FY22, primarily due to a favorable product mix. Q4 FY23 non-GAAP operating margin improved to 5.7%, compared to 5.3%, in Q4 FY22. Finally, Q4 FY23 EPS was $1.42 compared to $1.37 in Q4 FY22 despite lower revenues. Finally, Q4 GAAP fully diluted EPS was $1.04. Now please turn to slide eight. Q4 FY23 IMS revenue was $1.64 billion compared to $1.82 billion in Q3 FY23. Again, this decline was mainly due to ongoing inventory adjustments at customers, primarily in the communication end market as the supply chain has significantly improved. Q4 IMS gross margin was 8% in Q4 compared to 8.3% in the prior quarter. Q4 CPS revenue was $440 million compared to $419 million in Q3 FY23. Q4 FY23 non-GAAP gross margin for CPS improved to 10.8% from 8.8% in Q3. Now please turn to slide nine. As Yuri said, fiscal 2023 was a really strong year for the company with excellent execution by the SAMI and the team. FY23 revenue grew 13% to $8.9 billion compared to the prior year as the supply constraints improved significantly relative to FY22. Non-GAAP gross margin improved to 8.5% compared to 8.1% in FY22, primarily due to a favorable product mix. Non-GAAP operating margins improved to 5.8% compared to 5% in FY22, as we did a good job managing our operating expenses. Finally, FY23 non-GAAP EPS grew 34% to 6.2%. $6.26 compared to $4.68 in FY22. Again, GAAP fully diluted EPS for FY23 was $5.18. Again, overall, FY23 was a really strong year for the company with continued positive annual trends in revenue growth, margin expansion, and earnings growth. With that, please turn to slide 10. We have a strong balance sheet that provides our company a competitive advantage to manage through dynamic market environment. Cash and cash equivalents at the end of the quarter were $668 million. There were no borrowings under our $800 million revolver at the end of Q4. Cash cycle days were 65.9%. and pre-tax ROIC was 26.4%. Please now turn to slide 11. Cash flow from operations was 77 million in Q4 and 235 million for the full fiscal 23. Capital expenditures were 38 million in Q4 and 190 million for all of FY23. And free cash flow was $39 million in Q4 FY23 and $45 million for all of FY23. During the quarter, we repurchased approximately 600,000 shares for a total of $33 million. And for the full fiscal year, we repurchased 1.58 million shares for about 84 million. At the end of the fiscal year, we had 279 million of remaining authorization for additional share repurchases. Next, let's talk about Sanmina's capital allocation priorities. Sanmina's top priority is to fund organic growth, and we are excited about the opportunities we are currently pursuing. During FY23, we've spent more than in recent years in capital expenditures to position SAMENA for expected growth in the second half of FY24 and beyond. In addition, we'll continue to evaluate potential strategic transaction opportunities as well as to reduce our current debt levels. Finally, we will continue to return cash to shareholders through opportunistic share repurchases. We believe that the strong balance sheet and cash flow generation position SAMENA well for future growth. Now please turn to slide 12. Let's talk about the outlook for Q1 FY24. We expect Q1 revenues to be in the range of 1.85 to 1.95 billion, as we expect customers to continue to adjust inventory levels primarily in the communications and market, as the supply chain has improved significantly. We expect non-GAAP gross margins in the range of 8.3% to 8.8% dependent on product mix, non-GAAP operating expenses in the range of 58% to 60%, and non-GAAP operating margin in the range of 5.3% to 5.7%. We expect non-GAAP interest and other expenses of approximately $12 million. In addition, we estimate an approximate $3 million non-cash reduction to our net income to reflect our JV partners' equity interest in the net income of our Indian JV. We expect non-GAAP tax rate of approximately 17% to 17.5% and non-GAAP fully diluted share count of approximately $58.5 million. When you consider all of this guidance, our outlook for non-GAAP diluted earnings per share is in the range of $1.20 to $1.30. We expect Q1 capital expenditures to be around $40 million, driven by the growth of new programs and to support expected growth in the second half of fiscal 2024 and beyond. We expect Q1 depreciation of around $30 million. And with that, I'll turn the call back to Yuri for more details on the outlook by market, as well as the upcoming full fiscal year 2024. Please turn to slide 13.
spk02: Thanks, Kurt. Ladies and gentlemen, let me add a few more comments about our results. For the fiscal year 23, fourth quarter, and outlook for the first quarter of fiscal year 24 and the future goals. Please turn to slide 14. I can tell you that I am pleased with our fiscal year 23 results. Actually, I'm pleased what we accomplished in the last three years. Every one of these years, we met or exceeded our goals, especially the last two years. If you look at the revenue growth, last year we grew 70.5%. This year, we grew 12.8%. On a non-GAAP operating income, again, nice growth over three years. Last year, we grew non-GAAP operating income by 30%. And if you look at the non-GAAP diluted earnings per share, we grew that every three years, every year. Last year, almost 29.4%. And this year, 33.7%. $6.26. Again, these are the, for all our internal plans, we either met them or exceeded them. So with that, please turn to slide 15. Now let's look at the revenue by end markets for the fourth quarter of fiscal year 23. Revenue per quarter went down, as you heard from Kurt, 7% sequentially. Mainly due ongoing inventory adjustments and it was primary in the communication and market. For the fourth quarter, top 10 customers were 45.9% of our revenues. We continue to diversify our market segments. For industrial, medical, defense, and aerospace automotive, for fourth quarter, revenue came in at 65.4%. That came to flat quarter over quarter. For the year, revenue was 60.3%, and growth for the year was 13.6%. So overall, this segment did pretty well. Communication networks and cloud infrastructure for a four-quarter revenue was 34.6%, down 18%, with more inventory adjustment than we thought beginning of the quarter. But for the year, the revenue was 39.7%, and growth for a year-over-year was up 11.7%. I can tell you that we had a solid operational execution as we deliver a competitive advantage for our customers. Let me add a few more – please turn to slide – no, stay on this slide. Please add a few more comments here about outlook for the first quarter. For the first quarter of fiscal year 24, as you heard from Kurt, we are forecasting revenue to be down, mainly driven by inventory adjustment from some of our end markets. So we expect to see some headwinds for the next couple of quarters, driven by inventory adjustments and some softness in economy. The majority of inventory adjustments and softness is coming from our communication markets. On a positive side, for the second half of the year, we expect to see nice improvements in the market demands. We remain confident in what we are hearing from our customers about the long-term opportunities. Personally, I'm excited what's in front of us and about our future. Now let me talk to you about market diversification and where we go from here. Please turn to slide 16. Sarmina is recognized leading brand in a high-complexity, heavy regulated market. We are a well-diversified company today and will be even more diversified in the future. So let me give you more details about Sarmina-focused markets and what we are working on. Please turn to slide 17. On this slide here, You can see that we've all diversified. Industrial is approximately 22% of our revenue for 23. Medical was around 20%. Defense and aerospace and automotive was about 18%. Communication, mainly around optical networks, that was 24%. And cloud infrastructure was about 16% of our revenue. As you can see with this illustration here, we do not build consumer products. Now let's turn to slide 18, so I can tell you more about industrial. For industrial, what we focus areas are renewable energy, generation and storage, factory warehouse automation, power controls and management, and semiconductor processing equipment. Our view about market is that demand in semiconductor, lithography equipment, factory automation, tests, measurements, and inspection remains healthy. Other opportunities driven by ongoing Inflation Reduction Act and other regional government support for transition to renewable energy is also driving the growth. And addition to this, we're also wrapping some new programs in renewable energy to drive long-term growth. Now let's turn to slide 19 so I can tell you more about the medical side of our business. Sarmina is very strong in our medical markets. The key focus area for Sarmina are disposable, available, consumable products, laboratory diagnostic and research equipment, Hospital and medical office equipment. Our market view is simply the short term. We see some demand adjustments as our customer healthcare providers adjusted the last year backlog fulfillment and new norms of post-COVID extremes. We're well diversified across disposable, consumables, drug delivery, surgical, diagnostic, imaging, and lab diagnostic equipment. And I can tell you that we continue to bring new programs. Overall, Samina is well positioned for growth in the medical market, driven by digital health. Now let's turn to slide 20 to talk about defense and aerospace. Defense and aerospace business for Samina has been a long-term business. We've been in this business for over 60 years. Some of our key focus areas for Samina is defense equipment. safety and security equipment, and commercial airspace. As you can see, we're well diversified in this segment. Our market view is that demand remains very healthy in this segment. New programs will drive the long-term growth for us, and also we have a strong pipeline of new opportunities for the future. Let's turn to slide 21 to talk about automotive. Automotive and transportation is also a very strong market for us. We are well positioned in automotive, especially around electrical vehicle. And as you can see in these segments, we're well diversified and also in transportation side of the business. Our market view is that growth trends are strong in electrical vehicle and electrical charges. I would say anything around electrical right now. We do have a long-term growth in this segment, and some of the global initiatives, I believe, will drive the high growth for Samina for many years in the future. I can also tell you that we are ramping a fair amount of new programs in this segment. So let's turn to slide 22 to talk about communication and cloud infrastructure markets. In this market, Cermina is well-positioned. Most of the products that we build here is in high-performance networks, as you can see here from optical systems, 400 gigs, 800 gigs. We are developing 1.6 terabytes for the future. We're expanding our business in cloud, build around the IP routers. We're working on next-generation edge-based GPU platforms. So our view of this market short term is we see softer demand for some customers due to inventory adjustments. Actually, we have few customers that are growing in this market, but some of the big ones for us are adjusting to the inventory. Future demand for cloud will be driven by AI and ML technology requirements. I can tell you that also with what position we've been expanding in this market. Also, BEAT programs is basically getting the broadband to each household in the United States. It's about $43 billion opportunity financed by federal government. When I say $43 billion, that's the whole market there. But it's basically something that federal government wants to make sure that there's a broadband in each household in the United States. The good thing about this opportunity is this has to be made in USA, and we're already starting to participate in this area. Also, we are well positioned in India. India has a lot of opportunities in communication and cloud infrastructure. Our JV is doing well. We're growing at a higher rate than we expected a year ago. So, overall, I can tell you that Samina is in a strong position as we provide some of the latest technology for these key market leaders. So, let's turn to slide 23. As you can see, we are well diversified across, you know, key market segments. We are positioned pretty well in these key markets to drive focus growth of our strategy. The key markets again for us will be cloud AI and ML, defense and aerospace, digital health, electrical vehicle, industrial and optical packaging. And the reason this is key is that Samina delivers the total time to market and integrated manufacturing solutions for these high technology markets. So we're very excited about the future. Let's turn to slide 24. Let me talk to you more about our priorities. Our priority is basically simple. It's provide a leading technology to customers in a heavy regulated market to drive the profitable growth. So let me give you some highlights. Everything we do, we build around our customers. If you look at our customer relationship, on an average, it's 10, 15 plus years. We have a strong customer base. I call that strong partners in these key markets, and we're well diversified. We provide the leading-edge technology in these heavy regulated markets by providing competitive advantage through technology. We get involved early stage of product development, focus on time to market, bringing the product to our customers to the market faster. delivering a quality of product, industry-leading. Our reputation is very, very high here. End of the day, we provide end-to-end technology solution for our key partners. The key for us is growth. We believe we have a way to drive the long-term growth and margin expansion. Short-term for 24, as you heard from us already, in this dynamic market environment, short-term especially, You know, we've seen some challenges as inventory gets adjusted. But for second half, based on what we see and what our customers are telling us, we expect to see a growth. Most importantly, the Samina invested a lot in a key market such as medical, defense, automotive, industrial, alternative energy, cloud infrastructure, optical packaging, over $400 million in the last two years that we continue to invest today. We are continuing to optimize, as you heard from Kurt, our capital structure to drive the growth in the next three years. And our internal goal is to grow the revenue between $10 and $12 billion or so. We're going to continue to generate cash. That's the name of the game for us. We deliver a respectable operating margin. We believe we can improve the margin going forward. Short-term, our operating margin will be in the range 5% to 6%. Long-term, we believe our operating margin should be 6% plus and will continue to generate enough cash to allow us to drive the growth. When it comes to maximizing shareholder value, definitely there's work to do there. Today, Sanmina is undervalued. We believe in a long-term value of Seminole stock. As you heard from her, we've been buying it. We'll continue to buy. And we are focused on leveraging our competitive advantage of our business model to maximize the shareholders' value, not just the short-term, but also long-term. Please turn to slide 25. In summary, we delivered strong results for the fiscal year 23. We see softness in demand for the first half of the year. We expect demand to improve in the second half of the year. Number one, we're going to continue to focus on growth in the key end markets. And number two, we're going to continue to invest in these key markets for a better future for our customers and our shareholders. The good thing about Semina, we have a strong balance sheet, a strong foundation. to build a better future on. So ladies and gentlemen, now I would like to thank you all for your time and support. Operator, we're now ready to open the lines for questions and answers. Thank you all again. Operator.
spk05: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Anya Soderstrom with Sidoti. Please go ahead.
spk02: Hello, Anya.
spk04: Thank you for taking my questions. I'm just curious, for the network equipment market, you said the inventory adjustments there is primarily within that segment, but where else are you seeing inventory adjustments?
spk02: Well, most of our inventory adjustments is really across the communications side of the business, 5G, some networking, you know, product, but that's mainly adding with a few customers. The rest of the markets, as you can see, in industrial, medical, defense, and automotive, that basically came in flat. We see some minor adjustment there, but nothing major like what we see in communication side.
spk04: Okay, thank you. And in terms of auto, has the strikes at all affected you, or...?
spk02: Not really. I mean, we have a few projects there, but most of our stuff was with the industry leaders in an electrical vehicle.
spk04: Okay. And in terms of the joint venture, you said you're seeing strong growth there, better than you had expected. When will we see some significant revenue streams from there?
spk02: I would expect it to have a, well, first of all, we had a great year down there. Operations performed excellent. We do expect to see some pretty good growth in 24, and I would say we are positioned end of 24, 25 to grow a lot.
spk04: Okay. And in terms of the gross margin and the product mix, with the shortfall now in the communications equipment, How should we think about the growth margin in the coming quarters and then in the coming years?
spk02: Well, first of all, let me make a comment about back to the margins. As you see, we delivered a respectable margin this year. We believe we can do better. I think the short-term, I would say, operating margin will be in the range of 5% to 6%, even with the revenue being down. But we're going to continue to tune up and position the company. We know market is going to come back as we position the company for a lot of growth. As we start shipping more, we know that in last year we could have done better. Let me put it that way. There's some room for improvements. As we look at the 24 and the 24-25, we have a lot of upside, and we think our margin should be over 6%. you know, we have a proven record on that and we'll do it. Back to communication, type of communication, market and margins, we do it. We deliver a respectable margins there, Anya. We are focused there on a really high performance, both in the networking side, you know, in a storage side, and also the routers. So we were positioned there. Unfortunately, I think our customers draw more inventory. We finally realized there's more inventory in a pipeline than we realized, so there will be some correction going on, but the long term, I think, will be there okay.
spk04: Okay, thank you. As you spoke about fiscal 2024, it's going to be softer in the first half, and then you see growth again in the second half. What gives you confidence in the growth there, and And for the full year, how should we think about the overall revenue performance?
spk02: Okay. Well, as you know, in the last three years, as you covered us, we take one quarter of the time. I think the short term definitely, you know, we see inventory being resolved in the next six months, hopefully sooner. But definitely I think inventory will get resolved based on what we see today. So definitely we're going to see some pickup in second half because of that. Unless the economy falls off the cliff, Based on my customer forecast, I think there should be some upside across all our markets, especially in the second half. And based on some of these new programs that we're working, so there's three things that we're looking at. We expect to grow. We definitely expect to grow long-term, but we'll take one quarter of the time on you.
spk04: Okay, thank you. And one last one. You said you... have some new program wins. Can you just talk about those? Are those with existing customers? Are you expanding your logo at this?
spk02: Definitely, we're expanding our logo, but most of the big wins are with existing customers, but we have a fair amount of new logos, Anja, that... that have a lot of potential, but probably that's more end of the 24, 25, because it takes some time to give this program up. So, yeah, we have an upside potential defense and aerospace side of the business. I think alternative energy has a lot, and cloud infrastructure and optical packaging, that area, I think there's a lot of that. Also, I just want to remind them, my prepared statement, I said, hey, we have goals internally to grow this company a lot bigger than what we are today. And as I mentioned, you know, in the next three years, we expect to be in the range $10 to $12 billion. So we are focused on growth, but we're going to make sure it's the most profitable growth.
spk04: Yeah. Okay. Thank you. That was all from me.
spk02: Bye.
spk05: Our next question comes from Christian Schwab with Grey Callum Capital Group. Please go ahead.
spk02: Hey, Christian.
spk03: Hey. Hey, Yuri. Most of my questions have been answered. Maybe just a little bit further clarity on the inventory correction communication. Since the inventory correction was obviously bigger than you thought in September, it's going to continue into December and continue into March. When you talk about some customers, is that like two or three or is that more than five?
spk02: Well, if we do business in that segment with all the market leaders, Christian, as you know, we let our customers speak for themselves. But, yeah, I would say the majority of the customers in that segment have a little bit extra inventory. And I think what happened there, Christian, is that when there were these shortages, I think there was more inventory driven by end customers. And our customers, so you had this pipeline that got filled up at a higher rate than I, I don't know if anybody in industry really realized that, how much inventory was in a pipeline. The good thing is that I'm seeing, or at least what customers are telling us, that this thing is going to empty, and hopefully next six months, and we'll go from there. But good thing, Christian, hey, we didn't lose any customers or any programs. Actually, we want some programs in that side of the business. a business being transferred from us and another competitor to Mexico for us, but that transfer is going to be delayed for a few quarters. Overall, we're still in a good position with those key customers for long-term. It's a basically short-term scenario. Great.
spk03: Just to elaborate just a smidge further, obviously you have historically one large customer, but When you talk about you sell to all the market share leaders and communications, you know, remind us, are you selling to 10 significant people, 15 significant people?
spk02: If you look at the market leaders in there, Christian, you know them better than I do. There's approximately, you know, 10 companies. And out of those, there's five big ones and five smaller ones. Yeah. Okay. That's what I thought.
spk03: Okay. And then... Just to follow up on the fiscal year guidance, you know, I know you don't give that, but, you know, kind of back in the envelope, you know, it does appear in a recovery scenario in the second half in communications, you know, we should be growing revenue year over year, right?
spk02: Well, you know, it all depends how market turns. You know, if demand is there, first of all, we have to – capabilities and capacity to grow. So that's not an issue. And we are, we are, we are positioning the company, we've been positioning company for last year and a half to grow. That's why I just said earlier, we had the major expansion for us, as you know, we don't throw money around unless we're going to grow and we spend We're actually spending right now, we're just finishing an expansion in Thailand. We expanded Mexico for the growth of the projects that we want and the customers that will have a growth. So we're optimistic that the second half will be better. It's hard for me to, with all the stuff going on around the world, Christian, I think a smart thing for us is As what I say, our internal people, we only control what we can control. As we can control what we do every day, so we're going to continuously stay on top of things, take care of our customers, but be aggressive as the demand comes back.
spk03: Okay. Great. Thank you, Yuri. No other questions.
spk05: Again, if you'd like to ask a question, please press star, then one at this time. showing no further questions at this time.
spk02: Well, ladies and gentlemen, again, thanks for your time, and I appreciate your patience with us. Again, we're excited about our future, and if we didn't answer any of your questions, please get back to us. With that, thank you, and we'll talk to you three months from now, I guess. Bye-bye. Thank you.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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