Q3 2021 Sanmina Corp Earnings Call
Good day, and thank you for standing by.
And our Corporation's third quarter 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 1 on your.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over to page Melching. Thank you. Please go ahead.
Thank you Erika and good afternoon, ladies and gentlemen, and welcome to Sanmina third quarter fiscal 2021 earnings call a copy of our press release and the slides for today's discussion are available on our website at Sanmina Dot com and the Investor Relations section.
Joining me on today's call is youri, Sola, Chairman and Chief Executive Officer.
And Curt Athena Executive Vice President and Chief Financial Officer.
Afternoon.
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 can follow along with our prepared remarks, and the slides provided on our website.
Please turn to slide 3 of our presentation or press release Safe Harbor statement. During this conference call, we may make projections or other forward looking statements regarding the future events or future financial performance of the company.
We caution you that such statements are just projections the company's actual results could differ materially from those projected and these statements as a result of a number of factors set forth and the company's annual and quarterly reports filed with the Securities 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 on the earnings release and 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.
And by lot.
Included in our press release and slides issued today, we have provided you with statements of operations for the quarter ended July 3rd 2021 on a GAAP basis, as well and certain non-GAAP financial information a reconciliation between the GAAP and non-GAAP financial information is also provided and the press release and slides posted on our website and <unk>.
Our non-GAAP information excludes restructuring costs acquisition and integration costs noncash stock based compensation expense amortization expense and other unusual or infrequent items.
And he comments, we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial information.
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 Erie Sola. Thanks, Paige Yeah, good afternoon, ladies and gentlemen, and welcome.
Thank you all for being here with us today are low.
Make a few comments before I turn it over to our CFO first.
To take this opportunity to say, thank you to our leadership team and our employees for managing around Covid and component shortages and our team did a great job and.
And most important we're able to meet critical needs of our customers.
Despite all these changes or challenges so.
And I delivered a strong financial results for the third quarter fiscal year 'twenty, 1 and so for the agenda. Today. We have is that occurred on C. A full review on detail.
Q3 results.
And I will follow on with additional comments about Sanmina results and future goals, then Kurt and I will open for question and answers and.
I'd like to turn this call over to Kurt Kurt.
Thanks Yuri.
Please turn to slide 5.
And the third quarter, our team did an excellent job of managing through the increasing prevalence of supply chain constraints, leading to strong margins and profitability as well as cash generation.
Yeah.
Q3 revenue of 1.66 billion was slightly below our outlook of $1.67, and 5 to 1.7 and 7.5 billion.
Demand was strong however, we believe revenue was impacted by more than $150 million due to supply chain constraints.
Non-GAAP gross margin was 8.5%.
Non-GAAP operating margin was 5% consistent with the prior quarter.
Non-GAAP fully diluted earnings per share of 99 cents exceeded our outlook of 84 to 94 cents, primarily as the result of better than expected gross margin.
Finally, GAAP EPS was $1.74.
During the quarter, we had a gain of $43.4 million related to the release of certain foreign tax reserves.
Gain of $8.4 million related to the liquidation of 1 of our foreign subsidiaries and.
And other income of $15 million related to the sale of IP.
Each of these items have been excluded from our non-GAAP results.
Please turn to slide 6.
This slide shows the quarterly trend of our financial results.
You can see our team did an excellent job of managing the business during this dynamic period.
Non-GAAP gross margins have exceeded 8% for the last 5 consecutive quarters.
Non-GAAP operating margins have been 5 per cent or greater for the last 4 consecutive quarters.
If you compare our Q3 FY 'twenty 1 results to Q3 FY 'twenty.
You can see on approximately the same level of revenue.
Gross margin has improved from 8.1% to 8.5 per cent.
Operating margin has improved from 4.6% to 5 per cent and non-GAAP EPS has improved from 86 to 99 cents.
We've learned a lot over the last 12 months and the hard work and focus of our team as demonstrated by the year over year improvement.
Furthermore, we believe our revenue will increase and our margins will continue to improve as material supply chain constraints resolved.
Now please turn to slide 7.
IMS revenue was 1.35 billion.
The decline in revenue from Q2 was primarily due to the impact of supply chain constraints.
Non-GAAP gross margin for IMS improved to 7.6% due to favorable mix and a onetime release of a $2.2 million dollar customer specific inventory reserve.
Components products and services revenue declined to $349.45 million due primarily to the impact of supply chain constraints.
Non-GAAP gross margin for Cps declined to 11.4, primarily due to the impact of lower revenue.
Less favorable mix.
And costs associated with ramping of several new defense related programs.
We expect non-GAAP Cps gross margin to return to a more normalized level on Q4 and to subsequently improve.
Thereafter.
Again, our overall non-GAAP gross margin was 8.5 per cent.
In summary, we believe our revenue will increase and our margins improve continue to improve for both IMS and Cps segments is supply chain constraints resolved.
Now please turn to slide 8.
Let's talk about the balance sheet.
Our cash flow generation and balance sheet remains strong.
We generated 104 million of cash from operations and 92 million of free cash flow and Q3.
We have generated $327 million of cash from operations and $279 billion of free cash flow over the last 12 months.
During the quarter, we repurchased 300000 shares for a total cost of approximately $12.2 million.
At the end of the quarter, we still had remaining repurchase authorization of $113 million.
Q3, net capital expenditures were $17.2 million compared to depreciation of 27.1 billion.
Cash and cash equivalents increased by 49 million to $624 million.
Yeah.
Between cash and availability under our revolver and other debt facilities, we have approximately $1.4 billion of liquidity.
Overall overall, our strong cash flow and balance sheet gives us the flexibility to support our long term business objectives and to manage and a dynamic market environment.
Now please turn to slide 9.
Inventory was up approximately 108 million given the supply chain challenges.
We expect to use this inventory over time and to return to a more normalized level the supply constraints are resolved.
Yeah.
Cash cycle days were $58.4.
Non-GAAP pre tax return on invested capital was 25.9.
If you do please turn to slide 10, we can talk about the outlook for Q4.
Overall customer demand is strong, but there continues to be supply chain challenges.
We expect Q4 revenue to grow and be in the range of 165 billion to $1.75 billion.
Please note for comparison purposes Q4 of fiscal 2021 does not have 14 weeks like Q4 fiscal 2020 did.
Non-GAAP gross margin and we expect and the range of $8.1 to 8.6%.
Non-GAAP operating expenses and the range of 57 to 59 million and.
And non-GAAP operating margin and the range of 4.6% to 5.2%.
We expect non-GAAP other expenses from approximately $4.5 milligram.
As well as non-GAAP tax rate of approximately 17%.
And non-GAAP fully diluted shares of approximately $67.5 million.
When you consider all this guidance our outlook for non-GAAP.
Diluted earnings per share is and the range of 93 to $1.3.
We expect capital expenditures to be around $25 million, driven by growth of new programs and depreciation to be about $28 million.
Assuming we achieved the midpoint of the EPS outlook for Q4, FY 'twenty, 1 non-GAAP EPS would be approximately $4.
This would compare to FY 'twenty non-GAAP EPS of $3.5 this would be approximately a 30% growth year over year.
In summary demand remains strong across our customer base.
I'm confident that our lean manufacturing business model positions us well and I expect the company to deliver strong operating leverage and cash flow generation over time as supply chain constraints are resolved.
And with that I'll now turn it back to Europe.
Thanks, Kurt ladies.
Ladies and gentlemen, let me tell you more about the business environment for the third quarter and I'll talk about our outlook for the fourth quarter and outlook for fiscal year 'twenty 2.
Again as you heard from Kurt Sanmina delivered respectable results for the third quarter with strong margins and strong free cash flow.
Material shortages continue to impact revenue growth, both for IMS and Cps businesses.
Let me talk to you about some key drivers and a third quarter we.
We had a strong demand this was broad based and market demand.
And our supply chain team did an excellent job in this environment.
And we had a great operational execution.
Through our operational flexibility, we deliver critical requirements for our customers.
And the business mix was good driven mainly by new projects.
Now let me tell you about the new facility that we added in eastern Europe. During the third quarter Sanmina expanded eastern European operations by acquiring and state of art manufacturing operations and Bulgaria.
It's going to be extension of our Hungarian operations.
It is fully operational IMS facility with highly skilled staff and.
<unk> located to serve European customers.
This factory was formerly owned by a large European technology company.
I would like to take this opportunity to opportunity to welcome the Bulgarian team to send me and his family.
So in summary.
<unk> is executing well and this dynamic environment as we continue to work very closely with our customers and our suppliers. Please turn to slide 12.
Let me tell you more about the third quarter revenue by end markets day.
Demand for our products and services continues to grow.
Top 10 customers were 59% of our third quarter revenue.
Communication net force and cloud infrastructure was 42%.
And industrial medical defense and automotive.
And were 58% or revenue.
Material shortages did impact third quarter revenue by approximately 115 million plus.
Now let me tell you about the bookings book.
Bookings continued to be strong both from existing annual project book to Bill for the quarter was over 1.1.
Please turn to slide 13.
Let me give you a few comments for the fourth quarter and outlook by market segments.
Overall for our fourth quarter, and we're seeing a relatively strong demand.
Poor communication that force and cloud computing between walls networking advanced optical systems, IP routing and 5.5 G Mobile net force and high end computing and storage. We're forecasting for this segment to be up for the quarter.
For industrial medical defense and automotive.
For this group were forecasting flat to up and.
And let me give you more details for industrial and we see good demand during the quarter for medical and stable demand from call it flat for the quarter, but we see demand going up.
Defense strong demand and that continues to expand.
Automotive, we're forecasting for this quarter flat to up but its a longer term stronger demand.
Despite challenges around supply chain, we expect to finish fourth quarter strong as Kirk mentioned based on present customer forecast, we expect to finish our physical year 2021 strong by delivering non-GAAP EPS growth for the year to approximately 30%.
<unk>.
We will also deliver nice expansion on margins and strong cash flow.
I can also tell you that the pipeline of growth opportunities remains very healthy.
The key for US is to continue to manage the supply chain at work or on the Covid daily challenges.
I am very confident and our management team that we will manage through this successfully.
Please turn to slide 14.
Let me highlight a few things when it comes to elements of our long term margin improvement for fiscal year 'twenty 2 and beyond.
As you look at Sanmina and we are a lot of operating leverage left in semi and this business model.
I can tell you that sanmina.
Our strategy is working we are delivering competitive the competitive advantage to our customers around the world.
We are focused on driving sustained and sustainable and profitable revenue and growth.
For fiscal year 2022, we expect to see nice growth and IMS and Cps.
Growth and IMS and Cps, we were driven by ramp up on new programs and our targeted markets.
We also believe that will continue to improve margins and physical year, 'twenty, 2 and beyond beyond by improving efficiencies and.
Supply chain and improves we believe that efficiencies will go up.
Capacity utilization will go up and we can leverage.
Our opex and that will as we drive the growth again.
Again, we expect to see growth and revenue and margin inspection and physical year 'twenty 2.
Please turn to slide 15.
In summary.
Our third quarter, we delivered respectable results.
Revenue impacted by supply chain constraints as you heard from Kurt and myself.
We've delivered consistent operating margin around 5% non.
Non-GAAP diluted EPS of <unk> 99 cents exceeded our outlook.
We delivered strong free cash flow and a quarter of 92 million and non-GAAP.
Oh, I see up 25, 9%. So overall as I said very respectable quarter. So for the fourth quarter I can tell you that fourth quarter demand remains strong.
We are working closely with our customers and suppliers to meet critical requirements.
Revenue outlook will grow between $1.65, and $1.7 and 5.
And non-GAAP diluted EPS outlook.
At this time is 93 to 103.
Yeah.
So now ladies and gentlemen, and I would like to thank you all for your time and support operator now we're ready to open the lines for question and answers.
And again.
As a reminder to ask a question you will need to press star 1 on your telephone.
Your question press the pound key please standby, while we compile the Q&A roster.
Your first question is from <unk> <unk> with Bank of America.
And thank you for taking my questions.
You read most of the companies that we've heard from they're talking about component shortages lasting well into next year.
So can you give.
And give us an idea for fiscal for Q how.
How much of an impact on revenues have you baked into the guidance and what is giving the confidence in Cps margin improvement if if revenue constraints are still there than.
What is giving the confidence that next quarter. This EPS margins can be better.
Okay and ruble.
First of all.
When it comes to knowing what's going on hopper with material supply at this time is very hard to forecast.
We think definitely it's going to continue to be challenging to the rest of this calendar year, we hope to see some improvement after that.
So if you look at the fourth quarter.
We can definitely shape more than what we guide and if we can get the material. So.
Our forecast includes all the potential shortages that we have we talked to our customers supplier. So we feel very confident about our guidance, but we definitely good shape a lot more.
When it comes to the margin on Cps ruble is that.
And definitely if you look at the.
Let's look at our product services.
And those margins run around 20% plus potentially I think.
And the short term.
And we see nice improvements and our components businesses on our high technology circuit boards.
And we see and our optical components improvements, we expect to see nice improvements and our defense group and.
And as you put those together I believe youre going to see nice improvement and a fourth quarter.
And the longer term.
Spec those who continued to move in the right direction and inter.
Internal goal on that is to be over 15%.
Got it.
Thanks for the details on that.
In terms of just building on the on the component shortages can you talk about which components, you're seeing shortages and and is it impacting any 1 end market and more than and the other.
Well most of the products that we are doing is and look we do a lot of custom products and a lot of on a single sources. So the biggest issue is a custom and on semi.
And that's that's what has been a challenge for us and he has been a major impact and some of the high and <unk>.
Companies and our military side of our business and security and.
And you know.
Networking and optical side of the business. So that's been our biggest the biggest impact for us.
Got it and just talking on optical Judy can you give us some details on the communications and market last quarter. You had guide you had expected that that market would have strong demand and would be up sequentially can you just tell us what you saw and networking optical IP routing all of the different components within that was there any.
Strength or weakness and any of these segments.
Really for US it was a really strong demand across all those segments.
And we said earlier you know, we missed proxy approximately $150 million and revenue.
Cause a material so.
Across all our markets, but you know.
Fair amount was that our own debt segment.
And our communication networks.
Got it and maybe the last 1 if I can ask.
Kurt can you give us your thoughts on working capital management, you talked about inventory being sequentially up but then as he.
And look forward any guidance you have what is your target on in terms of cash conversion cycle for this year, how should we think about free cash flow for this year. Thank you.
Sure, let's focus on on inventory first I mean, I think the key to win.
<unk> said, we'd returned to more normalized levels of inventory when the supply chain constraints are resolved. So if if you look at what you've already talked about.
We expect that to go and to go into or early part of next year. So it's going to take multiple quarters.
And that being said.
We were we were running inventory turns and and the high Sevens and so I would expect it to get back in and that and that range.
And as supply chain constraints are resolved and that being said you know I think we do back to your cash I think you asked a question about cash flow and cash cycle days and our cash flow remains incredibly strong and.
And you know I expect that to continue.
We talked about capex being a little bit higher this quarter, just because we're ramping up some new programs, but still less than depreciation.
So I expect.
Cash flow generation to continue to be really strong and even with the challenges that we're seeing and then obviously.
As the supply chain constraints get resolved and therefore, we have higher revenue and and hopefully at better margins and it will get even better but I think we can continue to generate strong cash flow even at these levels.
Okay. Thanks for all the details appreciate it.
Thanks, a lot.
Your next question is from Jim Suva with Citigroup investment.
Hello.
And congratulations to your team and such a challenging environment.
Moving given that environment is quite challenging.
Are you having to like renegotiate price or putting cost adders I know you do also metal products and a lot of components, whether it's copper aluminum steel and plastic resins have gone up can you talk a little bit about your.
Contracts with customers or do they have like cost plus for the most part just trying to see how protected you are.
And in a component raising cost environment, Yes, Jim. It's excellent question first of all let me kind of I'll give you.
Summary answer on.
Most of those answer is yes that we get covered or income.
<unk> go up we are covered and most of our contracts we have few contracts that it's.
There is always possibility, especially on our products that we design and build on that.
Comps to Sanmina on now.
Our government contracts, it's cost plus so overall, we've all covered on desktop, but unfortunately, it takes time to to increase those out or as you mentioned.
And every team and comes to you know rod on the raw material to chemicals to semiconductors prices are up and but our customers being put at flexible day understand what's going on.
And I think.
Patterns are doing the same thing.
And then my follow up question is on your new facility. I believe you said it was Bulgaria I may have had that wrong. That's correct. It also come with <unk>.
Production agreements or equipment or what is it kind of set up for and again any revenue run rate that came with it or is it kind of starting from scratch.
Definitely let me just tell you a little overview. This factory was built about 3 years ago. It's the state of our factory is designed for high technology, IMS manufacturing and 2 and it does come with some business.
It's not material.
But it really helps us because we have approximately 700 people and the plans that are well trained.
So overall, we like this project, we needed expansion and eastern Europe, So it's a perfect fit.
Okay and my last question can you talk a little bit about what type of end markets. It serves so we can just kind of be.
Right now a fair amount is a high.
Automotive part of the business, but we are adding on other parts to it as I said earlier this will be expansion of our Hungarian operations. So we have a fair amount of business that we can be over flow into these factory and any future.
Thank you so much for the additional clarification and details it's appreciated.
Thanks, Jim.
As a reminder, if you would like to ask a question and at this time and simply press Star then the number 1 on your telephone keypad.
Your next question is from Christian Schwab with Craig Hallum Capital Group.
Hey, congrats guys on another good quarter and gross margin.
Thanks Christian.
And I just have 1 quick question regarding the cost and semiconductor.
Use it in a lot of your different.
Products that youre, making for people is there any 1 area that you guys are sitting here thinking might open up for you specifically.
Foster.
And you know some of your leading communication customers have multiple vendors for their for their chipset now or.
But I also know there's a lot of scrambling going on and in every area is there 1 area and another that you think opens up first or do you think it all kind of gradually improves at the same pace and first of all I like the award is a lot of scrambling going on around Christian and right now.
Depends on our customers some customers and save a lot stronger relationship with certain semiconductor companies.
<unk> customers.
And some of these things are long time ago. So we are getting better flexibility and.
Some of this we just have to chase every day, but overall.
I, just don't see major improvement and a short term.
We are hoping debt.
We're going to see some in the fourth quarter.
But we'll see how things shake out.
I think overall, we're getting a little bit better.
And because we've been chasing some of these spots for last 6 plus months.
And some cases.
You can see at least visibility is a little bit better at the same time, our customers are working with us and they've given us a longer forecast and Logan commitments, where.
There is some guaranteed contracts going on so we can go and make our commitments on these components.
And combining all of those so bad and planning that our commitments that the material overall will improve but as I said earlier a lot of the stuff that we buy that costume and.
And the single sources, so that it becomes a bigger impact.
Right and then I just wanted to clarify the 150 million debt that you kind of.
Loss and potential revenue this quarter due to material shortages.
And we shouldn't assume any of that is lost demand right that we're just waiting on on <unk>.
Opponents kind of given the fact that a lot of stuff Youre doing this sole source work is that fair, yes. That's a fair statement, yes, we don't expect that to US that's just been pushed out from last quarter to this quarter and hopefully.
I know there'll be some pushout and this quarter, because I'm not getting enough material, but all of them are we just kind of most of the next quarter at this time.
Great no other questions. Thank you well thanks.
And ladies and gentlemen, thanks for your time and I appreciate it.
Comments, if you have any more questions.
Please let us know and the meantime.
And we'll be talking to you in 90 days from now thank you very much bye.
Bye bye thank you.
This concludes today's conference call and thank you for participating you may now disconnect.
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