Q3 2020 Sanmina Corp Earnings Call
After the speakers presentation it'll be a question answer session.
Asked the question during the session people need to press star one on your telephone if you acquire any further assistance. Please press star the around I would now like to hand, the conference over to your Speaker today page Melching Senior Vice President of marketing and Investor Communications. Please go ahead.
Josh Good afternoon, ladies and gentlemen, and welcome to stand Minas third quarter fiscal 2020 earnings call a copy of our press release and sites for today's discussion are available on our website at <unk> Dot com any investor Relations section.
Let me remind everyone that today's call is being webcast didn't recorded and will be available on our website you can follow along with our prepared remarks and the slides provided on our website.
Please turn to slide to the presentation, where the press release Safe Harbor statement.
During this conference call, we may make projections or other forward looking statements regarding our 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 benefit from those projections and these statements.
As a result of a number of factors set forth in the Companys annually and quarterly reports filed with the Securities and Exchange Commission.
The company is under no obligation to an 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 for the Investor Relations section of our website, whether as a result of new information future events or otherwise unless otherwise required by.
Uh huh.
You will note in our press release inside tissue today than we have provided you with statements of operations for the quarter ended June 27, 2020 on a GAAP basis.
As well, it's certain non-GAAP financial information a reconciliation between GAAP and non-GAAP financial information is provided in the press release and slides posted on our website.
In general our non-GAAP information excludes restructuring costs acquisition and integration cost noncash 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 result, 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're referring to our non-GAAP information.
I'd now like to turn the call over Department legal Chief Executive Officer.
Speech and welcome. Thank you for joining US here today, you just heard from page and also joining me on the call today is could DEMA Chief Financial Officer.
The format for todays call. They said that would open with a few comments and then turn the call over to could.
To discuss the detailed financial results.
Fiscal third quarter.
And then I will follow up with some commentary around our end market outlook.
First and foremost.
I wanted to thank all customers many longstanding some new for their business in partnership with some you know.
The benefit of these strong relationships were very apparent in particularly in the last few months as we work jointly during these challenging times.
And of course, a big Thank you go through all of also mean employees. We couldn't have delivered these results without you have April focused and hard work.
True last earnings call, we spoke about the trunking supply chain conditions.
Yes, but patient an overall operational inefficiencies Polish if I could 19 and the macroeconomic environment.
Well, we did not know back then was with great detail. This how fast we could address them.
As we look at our Q3 results I'm really pleased how well our team executed.
We were able to grow our revenue by 4% over the prior quarter and exceeded our revenue margins and E. P S expectations.
Our team's focus on customer satisfaction improved efficiencies and optimizing our cost structure is evident in our results will be important attributes to all future performance.
Again, I'm very encouraged by the actions taken by our leadership team and associates around the world to me, though commitments into mass about customers.
With that let me turn the call over to Cook to provide more details about our results for the third quarter good.
Thanks <unk>.
Given the continued challenges and uncertainties associated with Kogut 19 in the macroeconomic environment because the management team we focused on the following three things the optimization of our cost structure.
The leveraging our existing manufacturing capacity and cash generation.
Intensely focused on each dollar we spend.
We're spending only those dollars, where we are confident on the return on capital will be compelling.
I'm pleased to report the impact of these efforts were evident in the results for the quarter.
Please turn to slide three.
Third quarter revenue.
1.65 billion was up 4% sequentially and exceeded our outlook of 1.5 to 1.6 billion provided in April.
This was primarily due to the strength of demand in our communications business, driven by our IP optical networking and wireless including five G.
Q3, non-GAAP gross margin was 8.1% from 6.9% in the prior quarter.
This improvement was primarily the result of the strong focus on manufacturing efficiencies and lower costs, including medical.
The benefit of certain international government subsidies related to maintaining employment levels and those geographies that helped offset some of the inefficiencies due to covert 19.
And higher revenue levels.
Q3, non-GAAP operating expenses of 58.7 were lower primarily as the result of reduced spending including travel.
Q3, non-GAAP operating margin improved to 4.6%.
Q3, non-GAAP other expenses were approximately 4.5 milligram.
This was down probably approximately 9 million relative to the prior quarter.
This was primarily due to a gain of approximately 3.6 million related to deferred compensation assets as the result of the appreciation in the stock market and other financial assets in the third quarter.
This compares to a loss of 5.1 million related to those same deferred compensation assets in the second quarter.
As a reminder gains or losses related to deferred compensation assets have no net impact on non-GAAP earnings per share.
Deferred compensation gain or losses are equally offset with corresponding increases or decreases in manufacturing and operating expenses.
Finally, Q3, non-GAAP fully diluted earnings per share increased to 86 cents.
As a result of a strong focus on manufacturing efficiencies and lower costs, including medical benefit of certain international government subsidies related to maintaining employment levels in those geographies that helped offset some of the inefficiencies due to covert 19.
And higher revenue levels.
We continue to focus on leveraging of existing manufacturing capacity to minimize capital expenditures.
Gross capital expenditures were approximately in line point 7 million in the third quarter.
This was lower than prior expectations, partially due to a delay in delivery of some items due to covert 19, which we now expect received in the fourth quarter.
Depreciation and amortization was approximately 28.9 million in the third quarter.
Please turn to slide four.
Here are you can see additional income statement details related to the quarter and the associated comparisons.
Now please turn to slide far.
Here, you can see through our efforts to optimize our cost structure and prove our manufacturing efficiency, we delivered non-GAAP margins and earnings per share in the third quarter comparable to our results prior to cobot 19 on lower revenue levels.
Now please turn to slide six.
Here you can see both of our segment revenues and gross margins improved relative to the prior quarter.
As you can see on the left I am best segment revenue increased to approximately 1.35 billion. This was primarily due to strength of our communications business driven by our IP optical networks and wireless including Fiveg.
Non-GAAP gross margins for I.M.S. improved to 7%.
On the ROI component products and services revenues increased to 337 million.
Primarily driven by the strength in our printed circuit board and our global services businesses.
Non-GAAP gross margin for Cps improved 12%.
Now please turn to slide seven.
On this page you can see our revenues by end market.
As we mentioned we experienced strong growth in the communications market, which grew 19% over the prior quarter again, driven by IP optical networks in wireless including five G.
[noise] medical revenue driven by covered related products as well as industrial revenues grew relative to the prior quarter as well.
As expected due to factory shutdowns of our customers due to cobot 19, we saw weakness in the automotive end market.
In addition defense was slightly down due to some cobot 19 related component shortages.
Overall, the aggregate industrial medical defense automotive market segment was down 3%.
Our cloud cloud was slightly down versus the prior quarter.
Now please turn to slide eight.
Here you can see we have a very strong balance sheet, we generated approximately 64 million of cash from operations and 54 million of free cash flow.
Cash and cash equivalents were approximately 1.1 billion at the ended the quarter.
Again 650 million of our 700 million dollar revolver remain drawn down at the ended the quarter.
However, we did not use any of this cash last quarter and do not expect to use any of this cash in the fourth quarter.
Again, we generated free cash flow into third quarter expects to generate free cash flow again in the fourth quarter.
We continue to maintain a low debt to cap ratio a point SAR.
Our term loan balance has a our term loan has the balance of 357 million. It matures in November 2023.
During the quarter, we Oh, we repurchased approximately 667000 shares for approximately 17.5 million at an average price of 26.
0.25.
For the year to date, we have repurchased a total of three point approximately 3.4 million shares for a total of approximately 87.6 million.
On average price of $25.77.
We've continued to be opportunistic and repurchasing shares.
I would now ask you to turn to slide nine.
Here, you can see additional balance sheet details related to the quarter and the associated comparisons.
We now turn to slide 10, you can see that inventory was flat at approximately 884 million inventory turns also flat at 6.9.
Cash cycle days were 56.4.
Non-GAAP pre tax return on invested capital was 24.3% improving from 14.6% last quarter and the best level, we've seen in many quarters.
Now please turn to slide 11, so we can discuss the fourth quarter outlook.
Our global manufacturing operations in all our geographies are up and running however, we can we still foresee continued impact of cobot 19 to our business in the fourth quarter.
The impact of Coburn 19, and the general macroeconomic environment will continue to evolve as the quarter progresses.
Again as a management team will remain focused on the optimization of our cost structure, the leveraging of our existing manufacturing capacity.
As well as cash generation.
As we think about the outlook. It should be noted that this quarter. We will have 14 weeks relative to 13 weeks in the prior quarter.
It should also be noted for year over year comparisons that our fourth quarter does not have 14 weeks every year, but once every five years.
Our outlook reflects any additional impact of this 14th week on revenues and expenses.
Our outlook for the fourth quarter does that revenue will be in the range of 1.73 billion to 1.83 billion.
Overall customer demand for the quarter is expected to be relatively stable and all of our market segments. After adjusting for the extra week.
We expect non-GAAP gross margins to be in the range of 7.4% to 80%.
We expect to see minimal additional benefit related to certain international government subsidies relating to maintaining employment levels and those geographies that we received in the third quarter.
Non-GAAP operating expenses should be approximately 61 to 63 million.
The expected increase in operating expenses relative to the prior quarter is primarily the result of the extra week.
We expect non-GAAP operating margin to be in the range of 4% to 4.5%.
We expect non-GAAP other expenses to be approximately nine to 10 million.
Our non-GAAP tax rate is expected to be around 18%.
We expect non-GAAP fully diluted share count to be approximately 69 million shares.
When you consider all of this guidance our outlook for non-GAAP diluted earnings per share for the quarter is in the range of 73 to 83 cents.
Adjusting for estimated stock compensation of 11 cents per share that implies GAAP diluted earnings per share is expected to be between 62 and 72 cents.
We expect capital expenditures to be around 18 million and depreciation and amortization to be around 29 million.
Finally, again, we expect to generate free cash flow in the quarter.
We are intensely focused on every dollar we spend we will again continue to only spend those dollars. We're confident that the return on capital will be compelling.
Theres a lot of variables that are changing every day as we managed through the cobot 19 crisis in the macroeconomic environment.
Police Sam in has navigated through these well to date, and we're positioning ourselves well with customers and our key markets to benefit during the ultimate recovery.
I'll now turn the call back to harvest for some additional comments.
Thank you could again I'm pleased to be pleased with our financial performance, especially given the challenges we faced in the quarter.
And that's good mentioned our outlook for the fourth quarter continues to show the confidence we have in our business model. Despite the challenges and uncertainty associated with cobot 19, and the overall economic environment.
Although operations on six continents said running with the vast majority of all employees back in L. facilities.
And strong execution by our supply chain supply chain team to secure the components needed to meet our customer demand was a key driver in our ability to ship product out and exceed our revenue expectations for the quarter.
While we still see some components with extended lead times. However, the vast majority of the supply chain has largely stabilized.
We also seeing some improvement in freight capacity in rates.
However, as long as passion to traffic is down and since passenger and cargo traffic is using the same equipment.
Go will remain constrained.
So we're working very closely with our customers suppliers and carriers to optimize votes and find new options to support our customers' needs.
As we continue to optimize operations and become more agile, but the changing dynamics, we believe it will become evident in our business model.
There is much more to be done however.
So many things we can be proud of.
Oh, the response and actions speak volumes about I'll, I'll organization, and our relationship with our customers and suppliers.
Now please turn to slide 13, as I walk you through what we see in our end markets for Q4.
Based on the most recent forecasts and dialogue with all customers.
We expect revenue for the fourth quarter, two being the main to a 1.73 to 1.83 billion.
In the aggregate.
For the industrial medical defense Aerospace and automotive segment.
We expect this to be up on a sequential basis.
Specifically, we are seeing demand improving automotive the strengths in the automotive because of recovery from the softness in the third quarter.
Automotive companies are coming back online.
And does it give you some perspective on what are we seeing and the overall medical equipment market, depending what products. We are producing there's some ups and some downs for example demand for product set us supporting Vivus testing lab diagnostics ventilation and no to us I don't have been up.
But other general hospital products have been down for surgical and large diagnostic imaging.
We believe those sometime elective procedures postponed and existing equipment can handle that reduced volume.
Overtime, I would think that market will come back stronger.
On the other side direct consumer facing products, such as daily diabetic treatments remain base stable and the outlook the is encouraging.
Communications networks is expected to be up on a sequential basis.
So customers continue to build out the infrastructure needed to support the increased need for more bandwidth as was out of the number of people working from home virtual learning and video streaming continues to be on the rise.
Cloud computing, we expect demand to be relatively stable in this market.
And overall, we see stable demand in the fourth quarter promote segments, giving us confidence in our revenue outlook.
Please turn to slide number 14.
Well, we're working through a very dynamic environment. It is important that we always position ourselves for the future.
We continue to focus on the following key initiatives.
First profitable revenue growth through a focus on key customers in high complexity mission critical end markets.
Second we have the balance sheet and operational capacity to take on new business.
We are focusing on market, leading onboarding processes for new programs.
I believe we have proven this too and cold it and I don't think it stops here.
Third in predicting this environment, we emphasize cash generation with a key focus on return on invested capital for the short and the long term.
And fourth I will continue to drive toward lean and flexible manufacturing processes will allow for more lab, which in our business model.
I believe we have started to see the benefits of this effort and this continues to be an important aspect of all future success.
Well this please turn to slide number 15.
I want to take a short step back and summarize the key points that we shared with you to date.
So first despite tremendous challenges in Q3, we executed on our strength and delivered good results revenue margins and EPS exceeded our expectations.
Free cash flow remains a priority and in Q3, we generated $54 million you to date, we generated $167 million and we expect to generate positive free cash flow in the fourth quarter as well.
For Q4, we expect revenue between 1.73, and 1.3 billion and non-GAAP EPS between 73 and 83 cents.
In summary, what I want to emphasize is that while we can't predict the market dynamics related to covert and the overall economic environment, we continue to take the necessary steps to control costs and improve efficiencies.
We Colette, we're collaborating even better and close it with our customers and I'm very proud of what our team has accomplishing under very difficult conditions would that be can open the call up for Q Nate.
Josh please.
At this time, if you'd like to ask a question. Please press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press the town Keith.
Your first question comes from.
With Bank of America. Please go ahead.
Hi, Thanks for taking my questions and congrats on the quarter and also on the strong guide.
I wanted to focus on the communications network segment.
Seems that came in much stronger than what you had expected so hard but can you give us some details on what you saw in the networking optical and wireless sub segments, which one was stronger which one was weaker and if you can touch on any any trends by region was broad based was it confined to a few customers or was it.
Broad strength that you sell crestor markets any details there would be appreciated.
Sure look like a great great to hear voice into thank you for the complements so.
What I would probably emphasizes that not because we are.
We are.
Working with a pretty much all the market leaders in this into segment.
We were bayberry, a happy what's with that let's see what the obviously with the actual performance, but also with the outlook. We know we I'm very happy about a public positions, but said with all these mark could lead us into space I'm, especially as it relates to a most recent program once I believe we broadly speaking on the on.
On the latest technology, and which gives us create a great confidence fall below Q4, Q4, Q3 actually labs and then the end to end the outlook for Q4 and and regionally. It's it's a pretty broad based you know footprint, but it's about lot of other broad based in this in this particular market.
And just a follow up to that question are you see any five key projects coming in or are they getting delayed or or is it as you had expected in terms of the timing for the fiveg projects.
We're still watching is very very closely and all we remember this this market that we're not just a.
Focus on Fiveg, but the MD the entire a generational spectrum and this was still Watson a baby closely but I don't think does a brand new opted since we spoke about the lost them.
Okay, Okay, and then on the industrial market, you've talked about medical defense and automotive. So you appreciate the color there on the industrial segment can you talk a little bit above what you saw there.
No you make the radios for.
Emergency services.
And other industrial end markets, so any any commentary on the industrial side.
Yes, so again that we it was super happy over working with with the market leaders in this space.
Revenue revenues is a stable and and supporting the supporting all to fulfil Q4, so via baby. Please tell their position there.
Okay, Great and pen for my last question, if I can ask.
Just your thoughts in terms of the use of cash.
You have a strong balance sheet, you've drawn on the revolver, but you don't need to use it. So so given you know you're expecting strong free cash flow.
At this stage of the cycle would it make sense to look at M&A for inorganic growth. So just your thoughts on buybacks versus M&A versus.
Other uses of cash thanks, Sheila good good replay know a have couldn't next to me who is watching ocas USA carefully. So a good will help with you a you take that question should sure. So again, we've talked about this before I mean, there's many different uses of cash we look at obviously, our first thing is to invest in the business and as we look at.
Somebody's new exciting opportunities with with customers then we want to make sure we have the balance sheet to support that and invest in that so that's our our number one goal.
Secondly, you know again, we've talked about or share repurchases, we did a box last quarter and the quarter before and again, we'll be can continue to be opportunistic about that.
Well you know, we're using our free cash part of our free cash flow to to fund those.
We do look at.
Debt retirement again every quarter, we typically have a our term loan has about 5 million that's a little under 5 million. That's due so our debt declined by 5 million.
And you know on the revolver, well reevaluate whether or not to keep that outstanding sometime during the quarter. My expectation is there's a good chance, we'll where pay that by the ended the quarter, but a it all depends on the circumstances.
In terms of your broader question about.
You know acquisitions, you know obviously, it's something that we're always looking at we've got a strong balance sheet that would allow us to do that but at the same time. We thank you know corporate and I believe there's a lot opportunity just to improve the business organically and so I would say given the challenging times, we're very focused on our existing.
Business and how we can improve our existing business.
But we're always looking opportunistically at that acquisitions as well.
Okay. Thanks for all the details and congrats on the quarter and thank you.
Your next question comes from Jim Suva with Citigroup. Please go ahead.
Thank you I asked two questions there unrelated softer again, one haven't signed.
First one is operating margins for this quarter were very impressive by my math correctly for the next quarter it looks like.
Hi, or revenues margins come in a little bit is that due to mix for the extra week in the quarter, that's more like administrative.
Overhead burden or why.
Revenues go higher yet margins come lower.
Sure. So I'd say, there's two parts to that and obviously, there's always a lot of moving pieces, but I would say first of all.
Again, even though revenues are higher we also have the extra week of costs associated with that and that's both on the manufacturing side and on the operating expense are so our operating expenses are going to be higher as I noted in our manufacturing expenses are going to be higher I'm. So I think thats one thing to take into account I think.
The second thing that I noted was that we received.
A fair amount of the subsidies from some foreign governments last quarter or that were contingent on maintaining certain employment levels.
And that benefited us last quarter, and we don't see the same or we see a minimal amount of that this quarter and so that's the other thing that I would say is different.
Between Q3 in Q4, so when you put those two things together, that's why we have at the midpoint slightly lower gross margin and get a higher opex and therefore, a little bit a little bit a little bit lower operating.
Margin, but again at Florida, Florida House percent I think that's still a you know a good place to be active in the economic environment that we're in doesn't mean, we're satisfied with that.
But as we talked about we're very pleased not only with the results of last quarter, but.
But more importantly, what we see as the outlook for this quarter.
Great. Good my follow up question is regarding the cloud can you talk about kind of what's going on there I think you sequentially saw some.
Revenue deceleration there isn't much program specific or inventory digestion.
Our pricing how should we start to think about what's going on the cloud with you which has been a great story.
Yes, yes. So so this is a this is predominantly a project driven business for us where we have a selective.
Which portion which customers we were choosing here.
And so no. It remains as I said remains connected niche business for us, it's an important business for us with them as future potential.
So it's a it's stable right now [noise].
Very happy, but the management team and the and the customers, who working with their and supporting our well Q4 hours because weve prestea. So a good good niche business for us to that we hope to figure out a little bit time, how to expand further.
Thank you so much for the details and qualifications and script you appreciate it.
Thank you.
As a reminder, if you would like to ask a question at this time. Please press Star then the number one on your telephone keypad.
Your next question comes from Christian slot.
Go ahead.
Yeah, I would like to echoes everybody else's congrats on the other great quarter guys.
On the communications network business.
Can you give a little bit more clarity of whether that strong sequential strength was more optical or wireless infrastructure related.
So you know we work they have a.
Successful here with the with with the lead us in the in the optical and the optical business. So we the unfortunate we don't have an opportunity due to break this down to those components, but.
Brought this speaking a it is it is a it is broad based where have they happy again would see with relationship we have with the strong collaboration we had with these customers here in a in Q3 in Q4, which which shows which was up in the in them and the results in the based on outlook for Q4, So that's pretty much a the type.
Bofa detailed that I can share with you, but again, we're super Super happy about that relationship we have the most recent program. So once we have and a that gives me a lot of confidence you for for quite some time to come.
That's great and then did you guys have any 10% customers in the quarter.
Well we.
We disclose our customer list no public filings.
And we have 110% customer for the quarter and to beyond that we don't make any additional disclosures.
Okay, No worse, and then as we get pass kind of the Uh huh.
Hopefully get passed the Cobra disruptions.
Do you think that you couldn't sustain gross margins and mix of business focused on you know leading customers with leading market positions and and potentially more complicated designs and structures that you're working with them to keep gross margins.
We'll be thinking that this is kind of going to be a sustainable you know, 8% gross margin for and a half percent operating margin business you know with growth on the back side of this at some point.
So.
Ah you know, we we're not really forecasting the development of coal that tier.
Into the future, where they have been happy with how we dealt with this oh, we improved manufacturing efficiencies.
And but now the focus is on its own Q4, because exactly because we don't know the macroeconomic and cold weather related challenges.
That are going to come here beyond beyond Q4, and you know obviously Q3 has given us a lot of confidence in what we can do in terms of cost containment and to bring leverage and a business model. So.
Confidence into into Q4, and when we when we connect on all the next call, let's see how do we have a chance to leverages also into into into future quarters, but that's our focus he left now for Q4.
That's great. Thank you I don't have any other questions. Thank you.
Perfect.
Josh I believe.
At this point a other any other questions if that no other questions.
No no no further questions at this time.
Excellent, but I want to thank everybody for joining todays call into interest and support in the Semina and we they have much look forward to providing an update on the business on our next earnings call have a great deal good evening.
This concludes today's conference call. Thank you very much joining you may now disconnect.
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