Sanmina Q2 2023 Earnings Call Transcript

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May 11, 2023

There are 6 speakers on the call.

Operator

Welcome to Sanmina'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.

Speaker 1

Thank you, Paul. Good afternoon, ladies and gentlemen, and welcome to Sanmina's 2nd 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 Solas, Chairman and Chief Executive Officer.

Speaker 2

Good afternoon.

Speaker 1

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

Speaker 3

Good afternoon.

Speaker 1

Our agenda for today's call as 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 3 of the presentation and take note of our Safe Harbor statement.

Speaker 1

During this conference call, we 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 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.

Speaker 1

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 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.

Speaker 3

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. 1 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.

Speaker 3

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 FY2023 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 10,200,000 and $18,300,000 in FY 2020 and FY 2021 respectively. It's also Understated by $29,100,000 in FY2023 and overstated by $5,600,000 in Q1 FY2023. I'm sorry, I should have said $29,100,000 in FY 'twenty two.

Speaker 3

Apologize. Q GAAP EPS was overstated by approximately $0.09 $0.23 $0.25 in FY 2020, 2021 and 2022 respectively and understated by $0.06 in Q1 FY 2023. For more details on this, please see the 8 ks we filed today. Now on to the 2nd quarter. Please turn to Slide 5.

Speaker 3

Our team did an outstanding job delivering strong financial performance. Q2 revenue of $2,320,000,000 exceeded the high end of our outlook of $2,200,000,000 to $2,300,000,000 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 6.

Speaker 3

If you compare our Q2 FY2023 results with Q2 FY2022, Revenue grew 21 percent from $1,920,000,000 to $2,320,000,000 Operating margin improved from 4.7 percent in Q2 FY 'twenty two to 5.8 percent in Q2 FY 'twenty three. And finally, EPS grew over 50% from $1.05 in Q2 FY 'twenty two to $1.59 in Q2 FY 23. 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 twenty twenty three.

Speaker 3

First half of fiscal twenty twenty three revenue was $4,700,000,000 and is on track for full year to grow in the mid teens relative to the Non GAAP operating margins have continued to improve over time with the first half non GAAP operating margins of 5 point 9%. Finally, continuation of our current run rate for UBS for FY2023 for the rest of the year would Result in FY 2023 EPS over $6 compared to FY 20 22. Now please turn to Slide 8. First half of FY twenty twenty three, IMS revenue was $3,900,000,000 This is primarily due to continued improvements in the supply chain. First half FY twenty twenty three CPS revenue was 889,000,000 First half non GAAP gross margin for CPS improved to 13.2% relative to FY 2022.

Speaker 3

Now please turn to slide 8. 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 $718,000,000 There were no borrowings under our $800,000,000 revolver at the end of Q2. Cash flow from ops for the quarter was 65,000,000 Capital expenditures were approximately $63,000,000 At the end of Q2, we had approximately 100 and $64,000,000 of authorization of share repurchases and the Board recently approved an additional $200,000,000 of authorization. The company will continue to be opportunistic as it relates to repurchasing shares.

Speaker 3

Turn to Slide 9. 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.

Speaker 3

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 $2,200,000,000 to $2,300,000,000 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 and other expenses to be approximately $15,000,000 driven by the continued increases in interest rates. In addition, we estimate an approximate $3,000,000 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 60,000,000 shares.

Speaker 3

When you consider all of 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 $60,000,000 driven by growth of new programs and the support of future growth. We expect Q3 depreciation of around $30,000,000 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.

Speaker 2

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 few more comments about financial highlights for the Q2, and I'll review the end markets and outlook for the Q3 and the rest of the fiscal year 'twenty three.

Speaker 2

As you heard from Kurt, for the Q2, Cimina 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 Cemina 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 talk turn to Slide 14.

Speaker 2

Let's talk about Revenue for the Q2 by end markets. For the Q2, demand for our 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 the 2nd quarter. That was down slightly up 6% and strong growth year over year of 27%.

Speaker 2

Typically, for the Q2 seasonality seasonally, this is a down quarter. But we had a this quarter was stronger than typical as we delivered $2,320,000,000 So quarter over quarter was flat, slightly down 2%, but year over year growth was very strong, up 21%. Also, we continue to diversify our customer base. As you can see, our top 10 customers For the Q2 was 49% of our revenue. Please turn to Slide 14.

Speaker 2

Let me talk to you about the 3rd quarter outlook and fiscal year 'twenty three. First of all, we expect to see nice growth quarter over quarter for the Q3. As you heard from Kurt, our revenue forecast is about $2,200,000,000 to $2,300,000,000 For industrial, medical, defense and automotive markets, We expect to see nice growth year over year. In 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.

Speaker 2

Our focus is on high complexity, heavy regulated markets. Now let me talk to you more about fiscal year 2023. We're on track to deliver year over year Mid teens revenue growth for fiscal year 2023, and we expect to deliver margin expansion and EPS growth. I can tell you that Simeon has 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 2024 and beyond.

Speaker 2

Overall, we are expanding our capacity into more profitable projects. So let me give you some example. For medical defense, our motive. First of all, these markets were well established. At the same time, We have large opportunities as we look to the future, both in the new programs and some programs that are in the pipeline.

Speaker 2

For industrial, we also see some more growth through revenue renewable energy, Grid management, public safety equipment, a fair amount of our composition, electromechanical system across We focus on the new products around networking and storage products. These businesses should produce higher margin And the long term growth and stability. Let's talk about management To this challenging microenvironment, we have positioned the company to be able to navigate any market dynamics. Tameela is embedded resiliency in our focused market space and we have strong global management to do the job. EMEA is well positioned for any economical environment, but we are continuing to monitor market conditions.

Speaker 2

Our focus today is on quality of our customer base, building the right and lasting partnerships. We focus on continuing to diversify revenue growth with market leaders in mission critical products. We continue to improve productivity. Yes, we are focused on quality of earnings Please turn to Slide 15. In summary, for the Q2, we delivered solid execution Both on top and bottom line results.

Speaker 2

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 question and answers.

Speaker 2

Thank you again.

Operator

And our first question comes from Christian Schwab from Craig Hallum. Your line is open.

Speaker 2

Hello, Chris. Hi, guys.

Speaker 4

Tyler. Hey, this is Tyler on behalf of Christian. Thanks for letting us ask a couple of questions. I guess, first, inventories came down nicely, sequentially quarter over quarter, about $1,500,000,000 I guess. I 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 of years ago and maybe any decisions you made about What level you want to manage those inventories going forward given the constrained environment we just went through?

Speaker 2

Yes. Before I turn you over to our CFO, let me 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 2 years, they force us to really our customers ask us to basically buy more Good thing is our customer is 100% committed to those inventories and we expect it to continue to work them down in the next couple of quarters. With that, I'll turn it over to

Speaker 3

Yes. I think if you look overall, our inventory levels over the last couple of years have obviously dramatically Chris, I think ultimately how we think of inventory is inventory turn. And I think we've gotten our turns historically through the back 3 years, almost 6 to 7 times and ideally get it to 8. 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

Speaker 2

And into

Speaker 3

2024, again, we are starting to see and continue to see improvement in the supply chain. So that should help normalize things, but it does take a while, multiple quarters, So I would say not normal until next fiscal year most likely, but we will make progress.

Speaker 4

That's great color. I appreciate that. And then maybe following up on that then, regarding your cash balance Also very strong and as you work that inventory down, should only grow as well as continue to drive free cash flow. So You expanded your share buyback, which looks great. I guess, 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?

Speaker 3

Well, again, I think we 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 that being said, we're going to be cautious and only opportunistic as it The share repurchases. So I think by adding to the authorization, it gives us flexibility over the coming months. But at the same time, I think we're going to do What's best for shareholders?

Speaker 3

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 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.

Speaker 4

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

Speaker 2

Okay. Thanks.

Operator

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

Speaker 5

Hi, everyone. Congratulations on the good quarter. And, Gerard, I'm sorry, I'm feeling really running on my 2nd week of a In terms of the revenue guidance For the Q3, it sort of indicates a slight decline, right, The question was?

Speaker 3

Again, we finished at 2.32. The guidance is 2.2 to 2.3. So

Speaker 2

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

Speaker 5

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 Thanks for getting pushed. Are you seeing the same or are you seeing that something else?

Speaker 2

Well, as I said earlier, we are operating right now in this My current 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 last two quarters in communication And cloud were very strong as you can see. So I'm personally happy with in this environment, Anya, where we are. And I think we are we can still deliver the good financial numbers even with these numbers.

Speaker 2

But we'll see. We're still going to push for a maximum as we try to do every quarter.

Speaker 5

Okay. Thank you. And in terms of the cash 2 cycle days. What is that on a normalized basis? What are you targeting to get that down to?

Speaker 3

Well, I think again, it's You look at how we manage cash cycle days over time, we've typically kind of been In those 50 ranges, plus or minus. So I think is obviously as inventory comes down, that's helpful, but at At the same time, accounts payable come down as well. So if you look at our history, we've actually over the last 3 years despite all the challenges that We 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.

Speaker 5

Okay. And to follow-up on Craig Hallum's in terms of your Anticipated improved balance further improved balance sheet. Do you think are you at all considering a dividend?

Speaker 3

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

Speaker 5

Okay. Thank you. That was all for me.

Speaker 2

Thanks, Anya. Hope you feel better too.

Speaker 5

Yes. You too.

Operator

On your telephone keypad now. And seeing no further questions, I'll turn the call back over to management.

Speaker 2

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.

Speaker 2

Thanks a lot.

Speaker 3

Thank you.

Operator

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

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Earnings Conference Call
Sanmina Q2 2023
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