Sanmina Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2023

There are 6 speakers on the call.

Operator

Good day, and welcome to the Sanminas 4th Quarter and Fiscal Year 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Speaker 1

Thank you, Sarah. Good afternoon, ladies and gentlemen, and welcome to Sanmina's 4th 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

Speaker 2

Good afternoon.

Speaker 1

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

Speaker 2

Good afternoon.

Speaker 1

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 3 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.

Speaker 1

The company's actual results could differ materially from those projected in these statements as a result of The company is under no obligation to and expressly disclaims any such obligation to update or alter any of Forward looking statements made in the earnings release, the earnings presentation, the conference call or on the Investor Relations section of our Web 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 fiscal year ended September 30, 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 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.

Speaker 3

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.

Speaker 3

Despite all these challenges, You delivered strong results for fiscal year 2023. Please turn to Slide 4. Ladies and gentlemen, let me give you some highlights for fiscal year 2023. As you can see, revenue 8.94%, grew 13% year over year. Non GAAP operating margin also improved 80 basis to 5.8 percent.

Speaker 3

And non GAAP diluted EPS came in at $6.26 That's up 30% 34% year over year. These results are 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 Our results for you, I will follow with additional comments about Sanmina results and future goals. Then Kurt and I will open for question and answers. And now I'll turn this call over to Curtis.

Speaker 3

Curt?

Speaker 2

Thanks, Jerry. Please turn to Slide 6. For the fiscal Q4, 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 end market as the supply chain has significantly improved. Q4 revenue was Look of $2,100,000,000 to $2,200,000,000 Q4 non GAAP gross margin was 8.7 percent 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 percent in line with the outlook of 5.5% to 6%.

Speaker 2

Finally, non GAAP fully diluted EPS was $1.42 slightly lower Our outlook of $1.47 to $1.57 due to lower than expected revenues. With that, please turn to Slide 7. Again, Q4 FY2023 revenue of $2,050,000,000 was lower than Q4 FY 2022 revenue of 2,220,000,000 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 FY2023 gross margin was 8.7% compared to 7.9 in Q4 of FY 2022 primarily due to a favorable product mix. Q4 FY2023 non GAAP operating margin improved to 5.7% compared to 5.3% in Q4 FY 2022.

Speaker 2

Finally, Q4 FY2023 EPS was $1.42 compared to $1.37 in Q4 FY 2022 despite lower revenues. Finally, Q4 GAAP fully diluted EPS was $1.04 Now please turn to Slide 8. Q4 FY2023 IMS revenue was $1,640,000,000 compared to 1.8 $2,000,000,000 in Q3 FY2023. 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.

Speaker 2

Q4 CPS revenue was $440,000,000 compared to $419,000,000 in Q3 FY2023. Q4 FY2023 non GAAP gross margin for CPS improved to 10.8% from 8.8% in Q3. Now please turn to Slide 9. As Yuri said, fiscal 2023 was a really strong year for the company with excellent execution by the Sanmina team. FY 'twenty three revenue grew 13 percent to $8,900,000,000 compared to the prior year as the supply constraints improved significantly relative to FY 2022.

Speaker 2

Non GAAP gross margin improved to 8.5 Non GAAP operating margins improved to 5.8% compared to 5% in FY 2022 as we did a good job managing our operating Finally, FY2023 non GAAP EPS grew 34% to $6.26 compared to $4.68 in FY 2022. Again, GAAP fully diluted EPS for FY2023 was $5.18 Again, overall, FY2023 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 $668,000,000 There were no borrowings under our $800,000,000 revolver at the end of Q4.

Speaker 2

Cash cycle days were 65.9 And pretax ROIC was 26.4%. Please now turn to Slide 11. Cash flow from operations was $77,000,000 in Q4 $235,000,000 for the full fiscal 2023. Capital expenditures were $38,000,000 in Q4 and $190,000,000 for all of FY2023. And free cash flow was $39,000,000 in Q4 FY2023 $45,000,000 for all of I'm sorry, dollars 39,000,000 in Q4 FY2023 $45,000,000 for all of FY2023.

Speaker 2

During the quarter, we repurchased approximately 600,000 shares for a total of $33,000,000 And for the full fiscal year, we've repurchased 1,580,000 shares for about 84,000,000 At the end of the fiscal year, we had $279,000,000 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 FY2023, we've spent more than in recent years And capital expenditures to position Sanmena for expected growth in the second half of FY twenty twenty four and beyond. In addition, we'll continue to evaluate potential strategic transaction opportunities as well as to reduce

Speaker 3

our

Speaker 2

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 positions Sanmina well for future growth. Now please turn to Slide 12. Let's talk about the outlook for Q1 FY 2024.

Speaker 2

We expect Q1 revenues to be in the range of $1,850,000,000 to $1,950,000,000 as we expect Customers continue to adjust inventory levels, primarily in the communications end 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 We expect non GAAP interest and other expenses of approximately $12,000,000 In addition, we estimate an approximate $3,000,000 non cash reduction to our net income to reflect our JV partners' equity interest and the net income of our Indian JV. We expect non GAAP tax rate of approximately 17.5% and non GAAP fully diluted share count of approximately 58,500,000. 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 40,000,000 Driven by the growth of new programs and the support expected growth in the second half of fiscal twenty twenty four and beyond, We expect Q1 depreciation of around $30,000,000 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.

Speaker 2

Please turn to Slide 13. Thanks, Kurt.

Speaker 3

Ladies and gentlemen, let me add a few more comments about our results. For the fiscal year 'twenty three, 4th quarter and outlook for the Q1 fiscal year 'twenty four and the future goals. Please turn to Slide 14. I can tell you that I am pleased with our fiscal year 'twenty three results. Actually, I'm pleased with what we accomplished in the last 3 years.

Speaker 3

Every one of these years we met or exceeded our goals, especially last 2 years. If you look at the revenue growth, Last year, we grew 17.5%. This year, we grew 12.8%. On the non GAAP operating income, again, nice growth over 3 years. Last year, we grew non GAAP operating income by 30%.

Speaker 3

And if you look at the non GAAP diluted earnings per share, we grew that every 3 years for every year. Last year, Almost 29.4 percent and this year 33.7 percent, dollars 6.46 Again, these are the for all our internal plants, 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 Q4 of fiscal year 'twenty three. Revenue for quarter went down, as you heard from Kurt, 7% sequentially, mainly due to ongoing inventory adjustments, And it was primary in the communication end market.

Speaker 3

For the 4th quarter, top 10 customers were 45 0.9% of our revenue as we continue to diversify our market segments. For industrial, Medical Defense and Aerospace Automotive for 4th 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.

Speaker 3

Communication Networks and Cloud Infrastructure for a 4th quarter revenue was 34 0.6%, 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 few more comments here about the outlook for our Q1.

Speaker 3

For the Q1 of fiscal year 2024, 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 We see some headwinds for the next couple of quarters, driven by inventory adjustments and some softness in economy. The majority of inventory adjustments and subnet is coming from our communication markets. On a positive side, for the second about the long term opportunities. Personally, I'm excited what's in front of us and about our future.

Speaker 3

Now let me talk to you about market diversification and where we go from here. Please turn to Slide 16. Samina is recognized leading brand in a high complexity, heavy regulated markets. 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.

Speaker 3

Please turn to Slide 17. On this slide here, You can see that we will diversify. 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.

Speaker 3

For industrial, where we focus areas are renewable energy, Generation and storage, factory warehouse automation, power controls and management Our view of our market is that demand is semiconductor Conductor, lightography equipment, factory automation, test, measurements and inspection remains healthy. Other opportunities driven by ongoing Inflation Reduction Act and other regional government support for transition to renewable energy 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. Salmina is very strong in our medical markets. The key focus area for Salmina are disposable and wearables consumable products, laboratory diagnostic and research equipment, Hospital and medical office equipment.

Speaker 3

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 are 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 win new programs. Overall, Simeon 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.

Speaker 3

Defense and Aerospace This business for Camina has been a long term business. We've been in this business for over 60 years. Some of our key focus areas for Camina is defense equipment, Safety and Security Equipment and Commercial Aerospace. As you can see, we're well diversified in this segment. Our market view is that demand remains very healthy in this segment.

Speaker 3

New programs, Vince, 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.

Speaker 3

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 will 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 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.

Speaker 3

So let's turn to Slide 22 to talk about communication and cloud infrastructure markets. In this market, Cimina is well positioned. We the 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.

Speaker 3

We're working on next generation edge based GPU platforms. So our view of this market short term As 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 Driven by AI and ML technology requirements, I can tell you that also with what position we've been expanding in this market. Also B programs is getting basically is getting the broadband to each household in the United States. It's about $43,000,000,000 opportunity financed by federal government.

Speaker 3

When I say $43,000,000,000 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. I mean, India has a lot of opportunities in communication and cloud infrastructure. Our JV is doing well.

Speaker 3

We're growing at So overall, I can tell you that Cimina 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 key market segments. We are positioned pretty well in these key markets to drive focused 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.

Speaker 3

And the reason this is key is that Cimina delivered the total time to market and integrated manufacturing solutions for these high So we're very excited about the future. Let's turn to Slide 24. Let me talk to you more about our priorities. Our priorities is basically simply So let me give you some highlights. Everything we do, we build around our customers.

Speaker 3

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 this heavy regulated markets by providing competitive advantage to technology. We get involved early in the stage of product development, focus on time to market, bringing the product to our customers to the market faster, Delivering the quality of products industry leading, our reputation is very, very high here.

Speaker 3

End of the day, we provide end to end technology solution For our key partners, the key for us is growth, where we believe we have a way to drive the long term growth and margin expansion. Short term for 2024, as you heard from us already in this dynamic market environment, short term especially, We've seen some challenges as inventory gets adjusted. But for second half based what we see and what our customers are telling us, we Defense, automotive, industrial alternative energy, cloud, infrastructure, optical packaging over $400,000,000 in last 2 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 Next 3 years. And our internal goal is to grow the revenue between $10,000,000,000 $12,000,000,000 or so.

Speaker 3

We're going to continue to generate cash. That's name of the game for us. We delivered 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%.

Speaker 3

Long term, we believe our operating margin should be 6% plus and will continue to generate enough Today, Cementa is undervalued. We believe in a long term value of Cementa stock. As you heard from her, we've been buying and 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 a short term, but also long term. Please turn to Slide 25.

Speaker 3

In summary, We delivered strong results for fiscal year 2020. 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 1, we're going to continue to focus on growth In the key end markets and number 2, 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 Cimina, we have strong balance sheet, a strong foundation to build a better future on.

Speaker 3

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 question and Thank you all again. Operator?

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Anja Soderstrom with Sidoti. Please go ahead.

Speaker 3

Hello, Anja.

Speaker 4

Hi, Jura. Thank you for taking my questions. 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?

Speaker 3

Well, most of our inventory adjustments is really across the communications side of the business, 5 gs, Some networking product, but that's mainly adding with a few customers. The rest of the market, As you can see in industrial, medical, defense and automotive decks basically came in flat. We see some minor adjustment there, but nothing major like what We've seen communication side.

Speaker 4

Okay. Thank you. And in terms of auto, Has the strikes at all affected you or?

Speaker 3

Not really. I mean, we have a few projects there, but most of Our staff was with the industry leaders in electrical vehicle.

Speaker 4

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?

Speaker 3

I would expect it to have a well, first of all, we had a great Great year down there. Operations performed excellent. We do expect to see some pretty good growth in 24% and I will say we are positioned end of 2024%, 25% to grow a lot.

Speaker 4

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 gross margin in the coming quarters and then in the coming years?

Speaker 3

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 as we know market is going to come back as We positioned the company for a lot of growth. As we start shipping more And some we know that in last year we could have done better.

Speaker 3

Let me put it that way. There's some room for improvements. As we look at 24% and the 24%, 25%, we have a lot of upside and we think our margin should be over 6%. We have a proven record on that and we'll do it. Back to communication, type of communication market and margins we do it.

Speaker 3

We delivered a respectable margins there, Anja. We are focused there on a really high performance, both in the networking side, In a storage side and also the routers, so we were positioned there. Unfortunately, I think our customers draw more inventory. We finally realize there's more inventory in a pipeline than we realized. So there will be some correction going on.

Speaker 3

But the long term, I think we'll be there okay.

Speaker 4

Okay. Thank you. And 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 for the full year, how should we think about The overall revenue performance.

Speaker 3

Okay. Well, we think, Anja, as you know, in last 3 years, as you covered us, we take 1 quarter I think the short term definitely we see inventory being resolved in next 6 months, hopefully sooner. But definitely I think inventory will get The result 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.

Speaker 3

So And based on some of these new programs that we're working, so there's 3 things that we're looking at, we expect To grow, we definitely expect to grow long term, but we'll take 1 quarter at a time, Anja.

Speaker 4

Okay. Thank you. And one last one, You said you have some new program wins. Can you just talk about those? Are those with the Existing customers expanding your logo and this or how does the

Speaker 3

We're expanding logo, Most of the big wins are with existing customers, but we have a fair amount of new logos on you That have a lot of potential, but probably that's more end of the 2024, 2025 because it takes some time to give this program up. So yes, 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 them. Also, I just want to remind in my prepared statement, I said, hey, We have goals internally to grow this company a lot bigger than what we are today. And our as I mentioned, we in next 3 years, we expect to be in the range $10,000,000,000 to $12,000,000,000 So we are focused on growth, but we're going to make sure it's the most profitable growth.

Speaker 4

Yes. Okay. Thank you. That was all for me.

Speaker 3

Bye.

Operator

Our next question comes from Christian Schwab with Craig Hallum Capital Group. Please go ahead.

Speaker 5

Hey, Christian. Hey, Yuri. Most of my questions have been So maybe just a little bit further clarity on the inventory correction communication. Since the inventory correction Obviously, bigger than we thought in September, going to continue into December and continue into March. When you talk about some customers, is that like 2 or 3 or is that more than 5?

Speaker 3

We do business in that segment with all the market leaders, Christian. As you know, we let our customers speak for themselves. But yes, I will say, majority of the customer in that segment has a little bit extra inventory. And I think what happened there, Christian, Is that when there was these shortages, I think there was more inventory driven both by end customer and our customer. So you had This pipeline that got filled up at the higher rate, then I don't know if anybody in the industry really realized that how much inventory was in the pipeline.

Speaker 3

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 6 months and we'll go from there. But good thing Christian, hey, we didn't lose any customers or any programs. Actually, we won some programs in that side of the business. The business being transferred from us and couple other I mean and another competitor To Mexico for us, but that transfer is going to be delayed for a few quarters. So but overall, We're still in a good position with those key customers for long term.

Speaker 3

It's basically short term scenario.

Speaker 5

Great. And then just elaborate just a smidge further. Obviously, you have historically 1 large customer. But When you talk about you sell to all the market share leaders in communications, remind us, You're selling to 10 significant people, 15 significant people?

Speaker 3

Well, if you look at the market leaders in there, Christian, you know them better than I do. There's approximately 10 companies and out of those there's the 5 big ones and 4 is 5 smaller ones.

Speaker 5

Yes. Okay. That's what I thought. Okay. And

Speaker 3

then just a follow-up on

Speaker 5

the fiscal year guidance. I know you don't give that, but Kind of back in the envelope, it does appear in a recovery scenario in the second half in communications, We should be growing revenue year over year, right?

Speaker 3

Well, it all depends how market turns. If demand is there, first of all, we have capabilities and capacity to grow. So that's not an issue. And 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 a major expansion for us.

Speaker 3

As you know, we don't throw money around unless we're going to grow and we spend over we're actually Right now, we just finished an expansion in Thailand. We spent in Mexico for the growth Of the projects that we want and the customers that will have a growth. So we're optimistic and we 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 what we a smart thing for us is 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.

Speaker 5

Okay. Great. Thank you, Yuri. No other questions.

Operator

Showing no further questions at this time.

Speaker 3

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 3 months from now, I guess. Bye bye.

Speaker 3

Thank you.

Powered by Quartr
Earnings Conference Call
Sanmina Q4 2023
00:00 / 00:00