ICICI Bank Q3 2024 Earnings Call Transcript

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July 29, 2024

There are 6 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Sanmina Corporation Third Quarter Fiscal 20 24 Earnings Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Monday, July 29, 2024. And I would now like to turn the conference over to Paige Melching.

Operator

Please go ahead.

Speaker 1

Thank you, Ina. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Q3 fiscal 2024 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

Speaker 2

Good afternoon.

Speaker 1

And John Faust, Executive Vice President and Chief Financial Officer.

Speaker 3

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 our presentation and take note of our Safe Harbor statement. 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.

Speaker 1

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 this earnings release, their earnings presentation, the conference call or the Investor Relations section of our website, whether as a result of new information, future events or otherwise, unless otherwise required by law. Included in our press release and issued today, we have provided you with statements of operation for the Q3 ended June 29, 2024 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.

Speaker 1

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 would also like to let investors know that Sanmina will be participating in the Jefferies Semiconductor IT Hardware and Communications Conference at the end of August and Citi's 2024 Global TMT Conference at the beginning of September. I'd now like to turn the call over to Yuri.

Speaker 2

Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome, and thank you all for being here with us today. First, I would like to take this opportunity to recognize Sanmina leadership team and our employees for doing a great job. So to you, Samina's team, thank you for your dedication and delivering excellent service to our customers, and let's keep it up. Now let's go to our agenda for today's call.

Speaker 2

We have John, our CFO, to review details of our results for you. I will follow-up additional comments about Samina results and future goals. Then John and I will open for question and answers. And now I'd like to turn this call over to John. John?

Speaker 3

Great. Thank you, Yuri, and good afternoon, ladies and gentlemen, and thank you for joining us here today. Before we go through the financial results, I want to thank the entire Sanmena team for their hard work and dedication and for delivering results in line with our outlook. Now please turn to Slide 5 to discuss the P and L highlights. 3rd quarter revenue was $1,840,000,000 in line with our outlook of $1,800,000,000 to $1,900,000,000 and up 0.4% sequentially.

Speaker 3

We are beginning to see customer inventory absorption improve as the communications networks and cloud infrastructure end market grew 8.3% sequentially, partially offset by declines in the industrial and automotive end markets. Non GAAP gross margin was 8.5%, just short of the midpoint of our outlook and down 40 basis points sequentially and 10 basis points compared to the same period last year, driven by unfavorable mix, which I will comment on in more detail on the next slide. GAAP operating expenses were $60,200,000 within the guided range. Non GAAP operating margin was at the low end of our outlook at 5.3 percent, down 10 basis points sequentially and 40 basis points compared to the same period last year, driven by the lower gross margin that I referenced earlier. Our operating margin continues to be in line with the 5% to 6% short term target range that we have previously communicated.

Speaker 3

Non GAAP other income and expense was $7,700,000 favorable to our guidance of approximately $12,000,000 This was driven by our strong cash flow results as we generated higher interest income and incurred less interest expense. Non GAAP earnings per share came in at $1.25 based on approximately 57,000,000 shares outstanding on a fully diluted basis and in line with our outlook. Now please turn to Slide 6 to discuss the segment results. IMS revenue came in at 1 point up 1.1% sequentially driven by growth in the communications networks and cloud infrastructure end market. IMS non GAAP gross margin was down 10 basis points sequentially to 7.6% due primarily to unfavorable mix.

Speaker 3

CPS revenue came in at $388,000,000 down 2.5% sequentially, driven mostly by short term delays in 2 programs, which have since been resolved and will ship in the 4th quarter. CPS non GAAP gross margin was down 140 basis points sequentially to 11.5% due primarily to the delay in the 2 programs that I just mentioned. We expect CPS non GAAP gross margin to return to recent levels in the coming quarter. Now please turn to Slide 7 to discuss the balance sheet highlights. Sanmina has a very strong balance sheet, which is a competitive advantage for the company and we continue to manage it well.

Speaker 3

Cash and cash equivalents were $658,000,000 At the end of the quarter, we had no outstanding borrowings on our $800,000,000 revolver, leaving us with substantial liquidity of approximately $1,500,000,000 We ended the 3rd quarter with inventory of 1,300,000,000 dollars and turns at 4.9 times, which was a slight sequential improvement. As a reminder, we purchased inventory based on commitments from our customers, but we believe there is an opportunity to reduce our inventory levels even further so that as well as increasing our inventory turns will remain priorities going forward. Our non GAAP pre tax ROIC was 21.1 percent for the quarter, well above our weighted average cost of capital. We continue to have one of the strongest balance sheets in the industry with low leverage of 0.48 times, which allows us to both navigate complex market environments and capitalize on long term opportunities. Now please turn to Slide 8, where I'll talk about cash flow and capital allocation highlights.

Speaker 3

As I have mentioned before, cash flow is a key focus area at Sanmina, and I am pleased that we have delivered another strong quarter of cash flow performance. Cash flow from operations was $90,000,000 for the quarter, which brings the year to date total to $288,000,000 and is a $130,000,000 improvement on a year over year basis. Capital expenditures were $23,000,000 for the quarter, adding up to $87,000,000 for the year. As a reminder, last year, we made significant capital investments across multiple geographies and strategic end markets to position the company for future growth and new opportunities. Free cash flow was $67,000,000 for the quarter and now stands at $202,000,000 on a year to date basis, which is up $196,000,000 year over year.

Speaker 3

During the quarter, we repurchased 845,000 shares for approximately $55,000,000 which adds up to a total of 3,000,000 shares for approximately $162,000,000 for the year so far. As of June 29, we had approximately $118,000,000 left on our board authorized plan and we continue to repurchase shares on an opportune basis. Our strong cash flow performance gives us the flexibility to continue to invest in the business while also returning cash to shareholders over time as a part of a disciplined approach to capital allocation. To conclude on the Q3 actual results, overall it was a solid quarter as we delivered on what we said we would. Now please turn to Slide 9, where I'll cover our outlook for the Q4, which is based on what we are seeing in the market and the forecast from our customers, which are starting to trend upwards.

Speaker 3

Our outlook is as follows: revenue between $1,900,000,000 to $2,000,000,000 which is up 6% sequentially on a midpoint basis. Now, while we're not providing guidance beyond the 4th quarter, we are seeing signs of stabilization and demand improvement as we look out into FY 2025. Non GAAP gross margin of 8.3 percent to 8.8 percent consistent with prior quarters and dependent on mix. Operating expenses of $60,000,000 to $64,000,000 in line with normal levels. As our revenue starts to increase, we expect to achieve operating leverage as we have driven efficiencies in our cost structure and don't expect to make material spending We expect other income and expense to be approximately $10,000,000 which is in line with recent levels driven by strong cash management.

Speaker 3

A tax rate of 17% to 18%. And to account for our India joint venture partners interest, we estimate an approximate $3,000,000 to $3,500,000 non cash reduction to our net income. Non GAAP EPS in the range of $1.30 to 1 $0.40 based on approximately 56,000,000 fully diluted shares outstanding. Capital expenditures to be around $30,000,000 as we continue to invest in future opportunities and further strengthen our capabilities. And finally, depreciation of approximately $30,000,000 In summary, based on the demand signals from our customers and our 4th quarter outlook, we now expect to return to growth.

Speaker 3

We have the right set of customers and capabilities to be successful, and I'm excited about the opportunities ahead. And with that, let me turn the call back over to Yuri.

Speaker 2

Thank you, John. Ladies and gentlemen, let me add few more comments about our Q3. And I'll also review our end markets and outlook for the Q4. And I'll make few more comments about the next year, our fiscal year 2025. Please turn to Slide 11.

Speaker 2

For the Q3, we delivered good results, as you heard from John, in line with our outlook. In our focus markets, we had a nice growth in communication networks, cloud infrastructure market as we continue to see softness in automotive and industrial during the quarter. I can also tell you that we are working very close with our customers as they are slowly burning through their inventory. We're starting to see better forecasts from some of our customers. And in this environment, Samina team continues to demonstrate resilience by delivering solid financial results.

Speaker 2

Overall, we are seeing stabilization in some end markets. To talk more about it, please turn to Slide 12. As you heard from John, revenue for the Q3 was $1,840,000,000 within our guidance. Revenue was slightly up quarter over quarter. Industrial, Medical, Defense and Aerospace and Automotive were 64% of our revenue that was down 3.6% quarter over quarter.

Speaker 2

But for Communication Networks cloud infrastructure, that was 36% of our revenue. Here, we had a nice improvement in demand and that was up 8.3% quarter over quarter. For 3rd quarter, top 10 customer represented 49.7% of our revenue, and I can tell you that Sarmina is well diversified company. Regarding bookings, we had a strong bookings in last 6 months. Book to bill over the last two quarters was 1.1 to 1.

Speaker 2

Mainly newer products are driving better bookings. Please turn to Slide 13. Let me make a few more comments about our end markets. I can tell you that Camin has been investing in faster growing and higher margin end markets in last year, year and a half, which is cloud infrastructure, defense and aerospace, medical, automotive, industrial energy, high density performance networks. In cloud infrastructure, for AI applications are continuing to see more opportunities, driven by upgrades to cloud networks to meet AI traffic for the future.

Speaker 2

In Defense Aerospace, we continue to see solid demand. We're adding more capacity in our high technology printed circuit board fabrication business and for defense systems build. Here, mainly new programs wins should continue to drive the growth. Our medical market is driven by digital health around medical devices. In medical, we have strong base of customers positive trends long term driven by new opportunities in the pipeline.

Speaker 2

In automotive, we focused around electrical vehicle, car connectivity, advanced driver assistance systems, electrical chargers. I can tell you that Sanmina is well positioned with the new projects to drive the growth for us in this segment. In industrial and energy market, we have solid customer base with new projects in a pipeline. Good opportunities around energy generation and storage of energy, power controls and management, factory automation and for semiconductor infrastructure, we are focused around lithography products. AI architecture is driving opportunities for high density, high performance IP routing, computing and storage.

Speaker 2

And we continue to expand our optical business around advanced packaging focused on 400 gig and 800 gig and 1.6 terabytes in development. For these markets, we see positive trends for the future. Please turn to slide 14. In summary, for the Q3, our team executed well by delivering revenue of $1,840,000,000 in line with our outlook. Non GAAP operating margin at 5.3% and non GAAP diluted EPS of $1.25 in line with our outlook.

Speaker 2

And as John said, we delivered a solid cash for the quarter. For the Q4, visibility is getting better. For the revenue, as you heard earlier from John, we are guiding up $1,920,000,000 in revenue and non GAAP diluted EPS $1.30 to 1.40 dollars I am personally excited about long term growth for Cimina. Fiscal year 2024 has been a transition year for us. We are navigating this market dynamics pretty well and position Sanmina for a better future.

Speaker 2

We expect that fiscal year 2025 will be a growth year for our end markets. We are focused on optimizing capital to drive the growth in next 2 to 3 years, that's basically 25% to 27% and beyond. Short term, operating margin should be stable in a range of 5% to 6%. Long term, we're making improvements to drive operating margin up to 6 plus percent, driven by investments we made in our Integrated Manufacturing Solutions Group and Technology Components Group and products around the AI, enterprise cloud infrastructure. In summary, our focus is to drive profitable growth in a heavy regulated markets where we have competitive advantage.

Speaker 2

Again, I'm excited about opportunities in front of us. 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 answers. Thank you again.

Operator

Thank you. Your first question comes from the line of Ruplu Bhattacharya from Bank of America. Please go ahead.

Speaker 4

Hi, thank you for taking my questions. Hi, Yuri. I was wondering, Yuri, can you give us more details on the communications end market? What are you seeing specifically within optical, within wireless and networking? What did you see in the Q3?

Speaker 4

And what are your expectations for the Q4 that you're guiding?

Speaker 2

Well, as we said in our prepared statement, Ruplu, communication Net Force Cloud Infrastructure grew approximately 8% plus quarter over quarter. We expect this market to continue to move in the right direction. As I said, I think it's been driven by our high performance network, cloud grade routing, IP routers, switches, some optical packaging systems that we've been some of these are new programs. And also we're starting to see pick from some of the existing customers that they're working their inventory down, not at the level that they wanted yet and not the level that we would like to see it, but it's moving in the right direction. And some of the new programs that we're able to ship that basically last quarter there were some challenges around getting the material and test equipment.

Speaker 2

I think we mentioned that in our second quarter that started to move in the right direction and we should see that to continue to move in the right direction in our Q4.

Speaker 4

So maybe let's build on that point that you just mentioned. I think you talked about 2 programs that got pushed out in CPS. What caused that push out? How much was the dollar impact? And can you tell us which end markets that those programs were in?

Speaker 2

John, you want to talk about it?

Speaker 3

Yes. So just to touch on, so like we had said in the prepared remarks, we expect both to ship in Q4. The issues have been resolved. It was really just working with our customers on

Speaker 2

I think you're asking about the components product group in this quarter.

Speaker 3

The CPS program. Correct. Yes, exactly. So those to push out, we expect them in Q4. From a dollar perspective, Ruplu, if it was not for that, we would have been at the overall Sanmino level, a little bit above our the midpoint of our revenue guide and the same for EPS.

Speaker 3

But on both fronts, the issues have been resolved and we expect to see the numbers in our Q4 results.

Speaker 4

And John, just to clarify the sequential decline in CPS margins, was that all because of just those 2 programs? Or did you have any other impacts or any other issues impacting margins?

Speaker 3

Yes. We like all of us, we have some puts and takes. But if you look over the last couple of quarters, we are at about 13%, right? This last quarter, we are at 11.5%. And those two programs combined, Ruplu, were about a point to that impact, a little bit over.

Speaker 3

So we would have been down just slightly overall in CPS, but the majority of the impact was related to those two programs.

Speaker 4

Okay, okay. Got it. Maybe for the last one Yuri, if I can ask a little bit more detail on the IMDA segment. There are 4 different end markets there. What are you expecting for each of those end markets in the Q4?

Speaker 4

How do you expect them how do you expect revenues to trend in the Q4 for these end markets?

Speaker 2

As I said in my prepared statement, we have some softness in automotive and industrial. For automotive, at this time, we expect also the softness to continue. On industrial, I'm more optimistic. There's a lot of good programs around the energy. We'll see how we're able to ship those out.

Speaker 2

I think the opportunities are there. Medical, I will say it's flat down. It's mainly driven we're still having an impact what happened during the COVID because we had a very strong demand there. But I like where we are in the medical side of the business with existing customers and also some of the new programs with existing and new customers that are coming up. So that is good.

Speaker 2

On defense and aerospace, we're in good position there. Demand is strong. And as I said earlier, we're also expanding and we've been investing fair amount into our circuit board fabrication for military boards, high technology military boards, demand there is strong for us and also including system assembly. So expect the business to continue to move in the right direction. So overall, we probably going to I would say if I had to guess today, flat, maybe slightly up.

Speaker 4

Okay. All right. Thank you for all the details. Appreciate it.

Speaker 2

Thanks, Ruplu. Thank

Operator

you. And your next question comes from the line of Steven Fox from Fox Advisors. Please go ahead.

Speaker 5

Hi. I had two questions as well. Hello, Steve. How are you? Hi.

Speaker 5

Good afternoon, Yuri. Maybe just John, can you start off with talking about inventories a little bit more from your own on your own balance sheet? You guys already have like, I would say, best in class inventory turns, but it sounds like you think you could do better. Can you sort of give us a sense for how much better you could do? What's driving that?

Speaker 5

And then I have a follow-up.

Speaker 3

Yes. Sure, Steve. Thanks for joining the call today. So in terms of inventory, like I mentioned, we were at 4.9 turns overall. And from a DOI perspective, that was about 75 days.

Speaker 3

If you go back into our history, a couple of years back, we think we can get back into the mid-60s. So we definitely think that there's opportunity there. And from a turns perspective, we're driving towards more towards a number like 6, right? So we did make some progress. If you look at quarter over quarter sequentially inventory dollars on an absolute basis was pretty much flat, but made some progress, but more room to go on that front.

Speaker 3

So that's what we're driving from a cash conversion cycle perspective.

Speaker 5

And just to be clear, is that based on your own improving internal capabilities, better efficiencies or are you saying is that like as demand recovers, mix recovers, how much of that is like under your control?

Speaker 3

Yes, it's both Steve at the end of the day. So certainly customers are still working through inventory absorption like I was mentioned at the beginning of the call and that's a little bit different by end markets. We are seeing some improving and getting back to kind of normalized levels, but we think there's some room on that front. Then for us, we're always looking to drive efficiencies, right? And so I think there are some on both sides.

Speaker 5

That's helpful. And then Yuri, can you talk a little bit more about the book to bill? So 1.1 for 2 quarters in a row, you mentioned newer products. Can you talk about, 1, what's driving it? And like how much of the bookings is maybe longer term and how much maybe turns into revenues in the next quarters?

Speaker 5

Thanks.

Speaker 2

Yes. As I said, Steve, yes, bookings for the last quarter were pretty strong, 1.1 to 1, mainly driven by new programs. And the way we look at the bookings is really the bookings that are released to build now in the next typically 2 to 3, 4 quarters maximum because we don't put in bookings orders that are not released to be built. So that is clear. So for example, in military, we might get a contract, but if there is, let's say, over 5 years, I'm just throwing out example, Steve, $100,000,000 but first year is only $20,000,000 and that's released on a quarterly basis.

Speaker 2

We will only count bookings for what's released. We do not count for projects that are booked but not released to build. So that's pretty clear. So all this stuff that I'm talking about is really released to be built. And also we're starting to see with our existing customers as they developing the new programs they've been working on in last year, year and a half, those are starting to come out and that's also helping the bookings.

Speaker 2

So let me just go back and overall, I know we've been going through this inventory correction and our customers some of our customers have been affected by it. But I can tell you things are starting to improve. I can't tell you for sure everything is going to be perfect for the next 4, 5 quarters, but definitely all the signs are moving in the right direction. And our most of our customers are more optimistic about the future as they starting to work their inventory more, I will say, next couple of quarters or rest of this calendar year than I've seen it, let's say, 6 months ago or so. So those are positive trends.

Speaker 2

And then I we got a lot of good opportunities in our pipeline that that's going to drive our growth in next couple of years, the stuff that we'll be working on. So as John mentioned in his prepared statement, we've been investing fair amount. So we are set up to do a lot more than what we are shipping today, Steve. And so a lot of focus internally is to grow. A good thing is that we didn't lose any customers.

Speaker 2

If anything, we've been winning some programs or in some lot of cases that customer had multiple sources. We believe we're gaining there. So a lot of positive things, but we like to wait a little bit more before we can say everything is green.

Speaker 5

Understood. That's helpful. Thank you.

Speaker 2

Thanks, Steve. Thank you, Peter. Go ahead.

Operator

Yes. Thank you. And your next question comes from the line of Christian Schwab from Craig Hallum Capital Group. Please go ahead.

Speaker 5

Yuri, last quarter you guys talked about inventory headwinds and things bottoming. And now we're kind of still being impacted by push outs and it kind of sounds like we're a little bit more guarded exactly what the customer inventory broadly across the entire business kind of impacting the business maybe for multiple more quarters. Last quarter, I think you guys talked about an opportunity to exit this fiscal year and return to strong growth in 'twenty five. What should we be thinking about as far as a top line growth range for next fiscal year given the pushes and takes, strong bookings momentum, nice new design wins, but ebbs and flows of real visibility from the end customer regarding demand and inventory maybe remaining not crystal clear?

Speaker 2

Yes. So Christian, let me take that one on. First of all, the last quarter, I would say that our forecast to shipments were pretty stable. When we're talking about push outs on this small projects in our components products group, we're talking about $10,000,000 $15,000,000 in revenue and it has more profitable business or affects you a little bit, but nothing major. I would say that inventory maybe is coming down at a slower rate than what I personally thought beginning of this fiscal year.

Speaker 2

I thought the second half will demand will be stronger and the inventory will be burned out at a faster rate. So inventories continue to be burned down, but it's being burned down at a slower rate. What we're saying today is that demand we're guiding up for this 4th quarter, as you heard from us, dollars 1,900,000,000 to $2,000,000,000 So it's definitely a right step in a right direction. And as we both John and I said, if you look at the customer forecast and visibility, that's moving on a positive side. For 2025, and then I'll turn it over to John and he can give you his comment.

Speaker 2

We definitely feel very comfortable based on all the key customers that we have, the key markets that we focus that we will have a positive growth in 2025 from the markets that we are follow. So we're ready to make a commitment that we expect today to grow in 2025, but we're not ready to tell you today how much. We really want to go through this quarter into the fiscal year 2025 so that sometimes in that Q1 of 2025, I think that will be a smarter thing for us to tell you at that time what we're going to do. But we are optimistic. I like what's in front of us.

Speaker 2

I like the new programs that we won. Some of the new programs that just basically we just talked about it, what drove our communication up was mainly new program. And that's going to help us this quarter, next quarter and hopefully longer in some of the new programs that we have coming up. So that's my commitment today, but I can tell you again that we believe what we see today that the 25% will be a growth year, but I'm not ready to tell you percentage today till about 90 days from now. John?

Speaker 2

Yes. And just

Speaker 3

to add to what Yuri was saying, Christian, and the level set on some of the numbers. So if you think about our Q3 guide, so we came in just shy of the midpoint. We had guided the 1.8 to 1.9 would have been a midpoint of 1.85. If not for those 2 programs that I mentioned before, like when I was answering Ruplu's question, we would have been slightly above that and be about a 1% sequential improvement. If you think about the Q4 guide of $1,900,000,000 to $2,000,000,000 revenue, the midpoint of that would be about a 6% sequential increase, right?

Speaker 3

So we do expect to be getting on the correct trajectory from that perspective. And inventory wise, when we started this fiscal year, we are at $1,700,000,000 We're now down to about $1,384,000,000 and we've improved our turns as well. And like I was mentioning just a little bit ago, we think that there's more opportunity to work through that inventory on the customer side and certainly efficiencies that we're going to be driving to get turns back up. So as we look ahead, we definitely see Q4 as that return to growth where we're going to start to make that progress into the next fiscal year.

Speaker 5

Great. Thanks for all the clarity. No other questions. Thank you.

Speaker 2

Thanks, Christian. Operator, it looks like we don't have any further questions. I would like to thank everyone for joining us today, and we look forward to speaking with you again in few months to discuss our Q4 and our fiscal year 2025. Thank you very much. Thank you.

Speaker 2

Bye bye.

Operator

This concludes today's call. Thank you for participating. You may all disconnect.

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ICICI Bank Q3 2024
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