Q2 2021 Sanmina Corp Earnings Call
Good day, and thank you for standing by and welcome to the Sanmina Corporation's second quarter fiscal 2021 earnings conference call at the.
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I ask a question during the session you will need to press star one on your telephone.
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I would now like to hand, the conference over to your speaker for today, Ms. Paige Melching Senior Vice President of Investor Communications. Thank you Ma'am. Please go ahead.
Good day, Thank you for standing by and welcome to the Sanmina Corporation's second quarter of fiscal 2021 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
You should require any further assistance. Please press star zero I would now like the hand the conference over to your speaker for today, Ms. Paige Melching Senior Vice President of Investor Communications.
You. Please go ahead ma'am.
Thank you Catherine good afternoon, ladies and gentlemen, and welcome to Sanmina second quarter fiscal 2021 earnings call a copy of our press release and slides for today's discussion are available on our website at Sanmina Dot com in the Investor Relations section.
Joining me on today's call Gerry Sola, Chairman and Chief Executive Officer.
Afternoon, and Kurt of female executive Vice President and Chief Financial Officer, Good afternoon Biff.
Before we begin our prepared remarks, let me remind everyone that today's call is being webcast and recorded and will be available on our website you.
You can follow along with our prepared remarks in the slides provided on our website.
Please turn to slide three of our presentation or the press release Safe Harbor statement.
During this conference call, we may make projections or other forward looking statements regarding future events for 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 projected in these statements as a result of a number of factors set forth in the company's annual and quarterly reports filed with the fear.
Charities and Exchange Commission.
The company is under no obligation to and expressly disclaims any such obligation to update or alter any of the forward looking statements made in the earnings release the earnings presentation. The conference call or the Investor Relations section of our website, whether as a result of new information future events or otherwise unless otherwise required by law.
Included on our press release and slides issued today, we have provided you with statements of operations for the quarter ended April three 2021 on a GAAP basis as well of certain non-GAAP financial information a.
A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website.
In general our non-GAAP information excludes restructuring costs acquisition and integration costs non cash stock based compensation expense amortization expense and other unusual or infrequent items.
Any comments, we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial information occur.
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 now like to turn the call over to hear of Sola. Thanks.
Thanks Paige.
Ladies and gentlemen, welcome.
Again, thank you all for being here with us today.
I'd like to make a few comments, but first I would like to say that I'm very proud of all either for the team and our employees for managing through challenges the challenges around COVID-19 and material shortages.
Despite these challenges Sanmina team delivered strong results for the second quarter fiscal year 2021.
Definitely this was a great team effort and most importantly, we are able to meet the needs of our customers.
For the agenda, we have is that the current who'll review the details of our financial results for you Bob will follow with additional comments about so I mean, as a results and the future goals.
The Kurt and I will open for question and answers.
And now I'd like to turn this call over to Kurt Kurt.
Thanks, Harry Please turn to slide five.
In the second quarter, our team did an excellent job of managing through the challenges related to the supply chain constraints and COVID-19 is.
As well as the typical seasonality leading to strong financial results.
Q2 revenue of $1 7 billion met the midpoint of our outlook of 1.65 to $1 75 billion.
Q2, non-GAAP gross margin improved to eight 6%, primarily due to a favorable mix and the Cps segment.
Q2, non-GAAP operating margin at 5% was consistent with the prior quarter, despite lower revenues due to strong gross margins.
Finally, Q2, non-GAAP fully diluted earnings per share of the dollar one exceeded our outlook of 76 to 86 cents, primarily as the result of the favorable mix in the PFS segment and management's focus on driving efficiencies.
Please turn to slide six.
This slide shows the quarterly trends of our financial results.
You can see the excellent job our team did managing through the challenges related to the supply chain and COVID-19.
Non-GAAP gross margins have now exceeded 8% for the last four consecutive quarters.
Non-GAAP operating margins have been 5% or greater for the last three consecutive quarters and finally non-GAAP fully diluted earnings per share has exceeded the dollar for the last three quarters.
Now please turn to slide seven.
Here, you'll see our IMS revenue was 1.3 dollars 7 billion.
The decline of revenue was due to the impact of the typical seasonality and supply chain constraints.
Non-GAAP gross margin for IMS declined to six 9%. This was due to the lower revenue level as well as the less favorable mix.
Components products and services revenue grew to 361 million from 319 in the prior quarter.
Non-GAAP gross margin for Cps improved to 14, 2%, primarily due to the higher revenue level and favorable mix.
Again overall non-GAAP gross margin for the quarter improved to 8.6%.
Please now turn to slide eight.
Let's talk about the balance sheet.
Our balance sheet remains strong.
Cash and cash equivalents increased by 59 million to $575 million at the end of the quarter.
We continue to maintain a low debt to cash ratio of 0.6.
Between cash and the availability under our revolver, we have approximately $1 3 billion of liquidity.
We generated 81 million of cash from operations in Q2 and have generated a 143 million year to date.
Free cash flow for the quarter was $67 million and we generated 117 million.
On a quarter to date.
Net capital expenditures were 14 million compared to depreciation of 27 million.
Overall, our balance sheet gives us the flexibility to support our long term objectives.
Please now turn to slide nine.
Here, you'll see our balance sheet metrics continued to be strong inventory was down approximately $34 million.
Our team continues to do an excellent job focusing on inventory management, which continues to be challenging given the uncertainty around the supply chain in COVID-19.
Cash cycle days were 58 point too.
Non-GAAP pretax return on invested capital was 27, 6%.
We believe this high rate reflects our focus on operational efficiency of the business.
Finally, please turn to slide 11.
We'll talk a little bit about the outlook.
We expect Q3 revenue to grow and the be in the range of the $1 $6 75 billion to $1 775 billion.
Overall customer demand is expected to be stronger, but there is uncertainty related to the supply chain constraints and COVID-19.
We expect non-GAAP gross margin will be in the range of seven 8% to eight 4%.
We expect non-GAAP operating expenses to be within the range of 59 to 61 million and non-GAAP operating margin to be in the range of $4, 4% to 5%.
We expect non-GAAP other expenses to be approximately $6 million and our non-GAAP tax rate to be about $18 five per cent.
We expect non-GAAP fully diluted share count to be about 67 5 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 <unk> 84 to 90 for Sox.
We expect capital expenditures to be around $20 million, and depreciation and amortization to be around $27 million.
Okay.
Demand is expected to be stronger. However, there is currently a lot of uncertainty related to supply chain constraints in COVID-19.
I am confident that our team working closely with our customers, we'll navigate well through this challenge and that the company is well positioned to benefit from the ultimate economic recovery.
I'll now turn the call back to Europe.
Thank you.
Ladies and gentlemen, let me tell you more about the business environment for the second quarter and the outlook for the third quarter and the rest of the color on that are you.
As you heard from Kurt Sanmina delivered strong financial results for the second quarter. Our performances in this quarter is a testament that hard work is paying off.
Key drivers in this quarter, where we had a stable demand. It was a broad based end market demand, we had a favorable business mix driven by growth in components products and services.
We have great operational execution.
As we are continue to drive efficiencies.
I think our supply channel did excellent job.
I will say management executed well and this despite some of the supply challenges that we're still wrestling with.
And excellent cash management, we delivered strong cash flow.
So I mean, it is executing well in this dynamic environment.
During the second quarter, we expanded our.
Band It and grew our leadership with our strategic customers in the key markets that we serve.
In summary.
We are building for the better future.
Please turn to slide 13.
Now let me tell you more about second quarter revenue by end markets, we have stable demand by material shortages impacted revenue by approximately 50 to 75 million this quarter.
Our top 10 customer were 53, 6% of our revenue.
Communication networks and cloud infrastructure was 42% of our revenue and industrial medical defense and are more of them and automotive markets were 58% overall.
Overall revenue was down slightly about 3% comparing to the first quarter of our fiscal year 'twenty, one mainly driven by material shortages and some seasonality.
And I also can tell you that the book to Bill for the quarter was strong all of our 1.1.
Please turn to slide 14.
Let me give you a few more comments on the third quarter and markets outlook.
Overall, we have seen improvements in demand to continue.
For the third quarter today, we're seeing relatively stronger demand.
We are forecasting that approximately 60% of our revenue will be from industrial medical defense and automotive markets.
And 40% in communication networks and cloud infrastructure markets.
For the industrial will be forecasting overall, good demand the upside potential for medical we are seeing some slower demand for Q3, while we see pickup in the second half of calendar year.
For defense continued to have strong demand and we are winning long term projects. So I can tell you. The backlog is continues to grow on that segment.
Automotive, we starting to see stable demand and improving.
For the communication networks, which includes the networking advanced optical systems IP routing for <unk> mobile net for us.
Overall in the segment, we're seeing stronger demand going.
Going forward.
For cloud computing high end computing and storage, we starting to see nice positive improvements.
Yeah.
While there are still challenges around the supply chain in COVID-19. We are very focused on continuous improvements as we talked about both the my presentation and Kurt.
We have a lot of opportunities in this market.
The key drivers for margin improvements going forward are continuing to drive efficiency and continuing to improve the mix of the business.
And number three is to drive profitable growth.
I can also tell you that the pipeline remains healthy and visibility is improving.
Based on our present customer forecast and pipeline of the growth opportunities.
We feel that we feel very positive about the rest of the calendar year 2021.
The goal is to deliver solid financial metrics for the rest of the calendar year of 2021.
And we are positioning sanmina for the bed of future. Please turn to slide 15.
Let me tell you more about management priorities for fiscal year, 'twenty, one and beyond.
The key to our success.
<unk> is delivering competitive advantage for our customers and we do that by providing industry, leading end to end technology solutions.
The continued to differentiate our industry leading capabilities.
We continue to build on our strong customer partnerships and we're expanding into new customer partnership by partnering with the market leaders.
Management is focused on driving profitable growth.
And I believe that we're well positioned as market recovers.
As I mentioned pipeline is strong.
We expect to see a nice growth.
And the next one to two years.
Short term of focuses on supply chain and logistics.
We're experiencing material shortages at Cros, all the electronics components.
We have strong supply chain the supply chain group, we have one global IC assistance based on on the hours structure. We believe we have on right capabilities to be able to communicate with all of our key suppliers and customers around the world instantly.
But more important I believe we have the right management team they'll be able to manage through this and the and deliver the right results.
So back to financial metrics, we're driving sustainable financial metrics by improving profitability.
And I still believe there's a lot of room for margin improvements.
With all of this our job still on a lot. The total volume of sudden munis capabilities by maximizing the operating leverage of each business group, what I call internally back to basics.
And I believe that the strong and consistent financial results with delivering industry, leading share holders volume. Please.
Please turn to slide 16.
In summary.
As you heard already we delivered respectable results for the second quarter revenue of one 7 billion at midpoint of our outlook non-GAAP operating margin of 5%.
Exceeding the outlook now.
Non-GAAP diluted EPS of $1.01 exceed the outlook.
Strong free cash flow strong free cash flow of 67 million and non-GAAP pretax auto IC of 27, 6%.
So for the third quarter.
As I mentioned, we have strong demand the key for for the third quarter is the continued to manage supply chain and work around COVID-19 daily challenges.
As the management, we remain focus on financial metrics, because we still believe there's a lot of leverage in <unk> business model.
So for revenue outlook as Curt mentioned, we plan to deliver $1 $67 billion to $1 775 billion.
And non-GAAP diluted earnings per share outlook of 84 to 94 cents.
So in summary, overall, we feel good about all the future.
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 answers. Thank you again.
Good day, ladies and gentlemen, just as a reminder, if you'd like to ask a question. Please press Star then the number one on your telephone keypad once again, the star and the number one.
Yeah.
Our first question comes from the line of revenue <unk> with Bank of America.
Hi, Thanks for taking my questions.
Urea during the prepared remarks, you said that visibility has improved I was wondering if you can give us your thoughts on the second half of the fiscal year versus the first half do you think the second half can be stronger in terms of revenue than the first half.
And then when we look at the full year fiscal 'twenty one day.
You think you can grow revenues. This year I mean can we do you think low single digit of year on year of growth as possible. So just any thoughts you have on the second half and full year revenue outlook.
Puts and takes what are what are you seeing.
Well first of all of the definitely.
As I mentioned the visibility is improving.
You know right now our biggest challenges is the around the materials, it's not about the demand I think if we can get all the materials definitely where we can see the growth year over year and you know like you said the small percentages as we look at the colander year for us debt will be of first quarter of 'twenty 'twenty.
Two again, it's all about materials demand is there what we've seen today the good thing.
But the customer base that we have ruble is the they are planning to add more now than I've seen for a long time, so we have enough.
Visibility in some cases as much as for quarters out.
So as I said, it's all about managing the material we have a good team in the place both in purchasing and operations and planning as I said, we we have a I think one of the best IP systems in the world.
With globally connected.
We see.
When look at everything what's going on in real time. So we believe that we have the right systems in place to be able to get through this thing, but the only way we're going to get through this Israeli working very closely with our customers and the key suppliers. So I'm very optimistic but a lot of work left.
Yes, no that makes sense. Thanks for the details on that.
Can you also of drill down a bit into the communications end market.
What are you seeing in optical versus networking versus wireless any any details you can give us on that end market well.
Well first of all let me make a comment on the <unk> mobile net for US you know that starting to pick up nicely as as we taught that day. It will the starting in the third and fourth quarter and rest of the year. So that that's moving the right direction of.
Our net for Ken as I said the network in our optical which is a lot of it the driven without advanced optical systems and optical module.
All of that part of the business I.
It's a very healthy our customers are giving us the op side now it's just filling the orders up the honest with you so of especially short for a lot of demand and debt markets.
I also had a couple of questions for Curt if I can the gross margins in Cps the components products and services.
Improve the Hell need 200 bps sequentially can you just drill a little bit into that what drove debt or are there any one times and do you think that level of margin of sustainable going forward.
Sure of Blue So I think obviously the biggest contributor was the growth. So we grew on a revenue perspective, you know basically over 10% quarter over quarter going from 319 day 361.
That's the biggest part and then obviously inside of C. P. S. I think you know the the.
Alex that we were selling there or some of our or better products. So we had did have a favorable mix. So I think it's the combination of those two but certainly a volume or revenue level.
Always helps.
In terms of you know what the cheaper on the long term I mean, we're continuing to as you already talked about we're continuing to drive efficiencies.
There's going to be ups and downs in quarters, depending on revenue level on mix, but.
But we're not satisfied and we'll continue to drive operational efficiencies and certainly as that business grows.
Of that revenue growth will help us continue to improve margins over time.
Got it and for.
For the last one Curt if I can ask you can you give us your priorities for cash in this environment.
How would you balance of you know.
Reducing any more debt or taking on debt to do acquisitions share buybacks. So any thoughts on uses of cash on thanks sure absolutely. So our first priority is always investing in the business.
You know, we have plenty of opportunities with our customers and looking at how we can expand those relationships and investing capital on to serve our customers' needs. So that's all of what he is priority number one.
Again.
You've seen our cash continues to increase and so we've been able to lower our leverage so we'll continue to do that.
In terms of M&A, you know, we have a pretty high hurdle will continue to opportunistically look at that and certainly of the right deal came along where we're going to look at that but our priority is really focused on on organic growth of at this point, but we don't rule anything out.
Okay, great. Thanks for all of the details of appreciate the color on everything. Thank you thanks for Blue.
Your next question comes from the line of Jim Suva with Citigroup, Inc.
Hello, gentlemen, thank you for Hello, and thank you so much for the details.
It's been a tough year to for the entire world and Sanmina on your customers suppliers and employees as you look back whether it be component shortages now for previously airplane shipping shortages in before that shortages do day.
Geopolitical of sourcing and assembly and even COVID-19 is there a view that maybe footprint need to be changed or maybe the answer is working capital I'm wondering if there's a need to hold more chips now more than ever to meet demand because it seems like the demand is there so any strategic views of.
Is that kind of of the best use of working capital and should we kind of think about days of inventory kind of permanently changing would that be kind of a prudent or maybe some of their priorities.
Yeah, Jim those are all great questions say and I'm, not saying that because just to make you feel good but they had a great question that we wrestle average day with first of all.
Yes, you're right, there's more challenging years.
As you know for a lot of different reasons, but I will say the you know this pandemic was probably our biggest challenge at the to the.
The old management that out on the world and it was the biggest challenge to Sanmina as management.
But we also have learned a lot we learned a lot of.
You know how to maybe look at things differently, and we were able to tune things up.
And we got a lot of great ideas from our people around the world that made us a better company today.
And we had to.
Tighten things up to be able to get through this environment.
Yeah, you're right.
The material logistics of it both of those are still challenges back to your question regarding the global structure. Yeah. The worlds are the different today than they were.
You know 10 20 years ago, I think there'll be a different on the next five years. So we are tuned up for the wall in Semina case, I think we have a very lean structure today around the world. So we don't need to do anything crazy, it's really more of a tuning up if I look at our structure today, it's real.
The more going to be driven by the growth is the growth comes back we're going to be adding more and more capacity around the around the world.
Not too much space wise, but the just adding more capabilities to be able to meet our customers demand.
Back to the working capital I mean.
As you know you've been in this business long time of we all hate extra inventory of our customers hate it we hate it we can't afford to have too much while we like to have a perfect supply chain always on time never too much with no shortages are those days are gone.
So all of those things, yes, we are definitely looking into actually we're talking to our customers right now to maybe in some cases, we have to make a bigger.
<unk> two suppliers so that the we have the components not just for the third quarter and fourth quarter, but you know three quarters from now for quarters from now and I can tell you. They're all key customers that call on partners are working with us on debt and in our model of Jim as you know that has to be covered.
Our customers, we can't take a risk carrying on extra chips. For example on less there are 100% guaranteed by our customers. So we're working on all of these thing definitely.
There's going to be a lot of more focus on as I said in my prepared statement on supply chain, and then and definitely if we can get all the material, but we need a week, we can ship a lot more today. So these are good headaches to have.
The there definitely are the environment is changing for positive and I'm, hoping that this economy is going to continue to to improve and I believe if it does I think we'll do fine. So I hope I answered your question, but it's hard to really answer all of those details that you asked that.
This will be the at every minute.
Thank you so much for the details on clarifications.
Thanks, Jim.
Yeah.
Ladies and gentlemen, just as a reminder, if you'd like to ask a question. Please press Star then the number one on your telephone keypad.
Yeah.
We do have a question from the line of Christian Schwab with Craig Hallum capital.
Hey, congrats on the good execution, Gary and team.
This year, we always leave you for the loss because of the basket Beth best questions.
But the pressure I guess so.
You kind of about 50 to 75 million impact of component shortages in the most recent quarter.
What is the impact that you're guiding for in the most current quarter.
Well first of all of you know we already gave the guidance.
That's all calculated in data and hopefully we'll.
It will be you know hopefully what we plan on everything is gonna be there yeah definitely we discount debt and we'll see if we can get more materials. I think then the it'll be easier to ship it but yeah. That's all taken into consideration and I'm not trying not not to answer that directly but really.
Now the there's a lot of moving parts in the material. We are definitely planning we have a lot more on the floor that we are planning to bring the materially in debt what we are forecasting.
Certain things, we know will move out so we bring in everything else and to be able to fill in once we get the right component of tuned so fed him on the moving parts, but we feel confident.
Christian that the we'll be able to manage it then and delivering on our guidance.
So that's great.
Follow up on the here.
Should we assume that Theres, a long shelf life.
The type of products that are being impacted meaning that we kind of lost out on shipping $50 million to $75 million you thought to the component shortages.
Should we assume these are a lot of life products and this is it.
Forever lost revenue, it's revenue that happens as soon as the components can occur.
I wouldn't say the this is the specifically what what we Couldnt ship last quarter, we will be shipping debt. This quarter. These are the old costume made products for the infrastructure as you know we build all of these mission critical type of products that debt or need. It. These are long term programs.
I would say majority of this stuff just does not disappear.
Great. That's what I assumed my last question has to do on operating margins we have.
That's really navigated COVID-19 in the.
Component supply shortages and operated at a 5% of greater operating margin can you kind of give us the puts and takes to why we're not kind of add those type of levels of the midpoint being below that.
Could you repeat that question of the Guy I missed you there for us.
No I was just saying that you guys have operated at 5% operating margins for three quarters during the COVID-19 issues as well as supply chain issues now you're guiding a little bit below that at the midpoint is that every day.
Given the environment or is there some type of mix change in the business that we should all be aware of.
Yeah. So let me try and then Curt can take it over first of all of them.
The operating and I hate to repeat myself with a lot of uncertainties around the COVID-19 as you know right now if you look of what's going on in India of what's going on in South East Asia. Some of those countries. So we don't know what's going to hop on with COVID-19.
So there's a lot of stop and go in those region. So far we're being Lockheed will inevitably shut down we kept all of I think our management kept our people are pretty safe and we hope to continue with it but there's still risk in there.
We weren't trying to be the.
The real a go.
Goal is both credit and I set out the you know and maybe more of me then you've incurred I believe there's still room for improvement in the margin. We know that there is not everything is running perfectly. So we I think it's all about mix of the business I think if that comes in on the <unk>.
Growth, if we get the growth in the mix that margin will improve a lot faster correct anything else you want to add though I.
Echo that I mean, it comes down to you know given the uncertainty of the supply chain. It's hard to know what the revenue is much less of what the composition of the revenue range and so I think from a gross margin perspective, obviously, we wanted to try to be conservative there and then that obviously goes down to the operating margin level, but.
Certainly our goal is to continue to provide you know consistent financial results quarter to quarter on we're gonna do our best of.
To to do that again this quarter.
Great no other questions. Thank you guys. Thanks for question well, ladies and gentlemen, that's all we have today hopefully we answered the some of your questions. If not all of the please get back to us the other.
Otherwise, we'll be talking to you in next the I guess 90 days from now so thank you very much for your support bye bye.
Ladies and gentlemen, this concludes today's conference call. The thank you for your participation you may now disconnect.
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