Q4 2021 Sanmina Corp Earnings Call
Good day, and thank you for standing by and welcome to the Sun Nina Corporation fourth quarter and fiscal year end 2021 earnings conference call.
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After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
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I would now like to hand, the conference over to your Speaker today Speaker Paige Melching Senior Vice President of Investor Communications. Thank you. Please go ahead Madam.
Thank you Laura good afternoon, ladies and gentlemen, and welcome to Sanmina as fourth quarter and full year 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 is Jerry Sola, Chairman and Chief Executive Officer, Good afternoon, and Curt Athena Executive Vice President and Chief Financial Officer. Good 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 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 or the future financial performance of the company. We caution you that such statements are just <unk>.
<unk> the company's actual results could differ materially from those projections in these statements as a result of a number of factors set forth in 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 in this earnings release the earnings presentation. The conference call by the Investor Relations section of our website, whether as a result of new information future events or otherwise unless otherwise.
As required by law.
Included in our press release and slides issued today, we have provided you with statements of operations for the quarter and fiscal year ending October 2021 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 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 results Accordingly, unless otherwise stated in this conference call. When we refer to the gross profit gross margin operating income operating margin taxes net income and earnings per share, we're referring to our non-GAAP information.
I would now like to turn the call over to Yuri Sola. Thanks, Paige good afternoon, ladies and gentlemen, and welcome.
Thank you all for being here with us today.
Agenda, we have Kurt <unk>, our CFO to review the details of our financial results for you all.
Follow up with additional comments about <unk> results and future goals.
Curtains open.
Open for question and answers and now I would like to turn this call over to Kurt.
Thanks theory.
Please turn to slide five in the fourth quarter. Our team did an excellent job of managing through the impact of supply chain constraints, and delivering solid margins and profitability as well as cash generation.
Q4 revenue of $1 64 billion was slightly below our outlook of 165 to 1.7 part.
Demand was strong however, the impact of supply chain constraints continued.
We expected an impact of about $150 million in Q4, consistent with Q3.
However, we believe revenue was ultimately impacted by more than $200 million in Q4.
Okay.
Non-GAAP gross margin was eight 2%.
The decline in gross margin relative to Q3 was primarily due to slightly lower revenues and incremental costs due to supply chain constraints.
Non-GAAP operating margin was four 8% inline with our outlook, but slightly lower than the prior quarter.
Primarily due to lower revenue and lower gross margins, partially offset by lower operating expenses.
Non-GAAP fully diluted earnings per share of 95 was in the range of our outlook of 93 to $1 three.
Finally, Q4, GAAP EPS was <unk> 84.
Now please turn to slide six.
This slide shows the quarterly trends of our financial results.
You can see our team has done an excellent job of managing through this dynamic period.
Non-GAAP gross margins have exceeded 8% for the last six consecutive quarters now.
GAAP operating margins have been 5% or greater for four of the last five quarters.
We expect to return to non-GAAP operating margin at 5% or higher in the future as revenue grows and the supply chain constraints ease.
We've learned a lot over the last 12 months and the hard work and the focus of the team has demonstrated in our results.
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 seven.
Q4, <unk> revenue was $1 three 2 billion.
The slight decline in revenue from Q3 was primarily due to the increased impact of supply chain constraints.
Non-GAAP gross margin for IMS declined to six 8% from seven 6%.
This was primarily due to slightly lower revenues and incremental costs due to supply chain constraints.
As a reminder, Q3 gross margin reflected a onetime release of a $2 2 million dollar customer.
Specific inventory reserve, which favorably impacted Q3 gross margins and did not which did not occur again in Q4.
Components products and services revenue increased to $357 million.
Non-GAAP gross margin for Cps increased relative to Q3 to 12, 8%.
As a reminder, Q3 gross margin was unfavorable impacted by costs associated with the ramping of several new defense related programs, which had less of an impact in Q4.
Again overall non-GAAP gross margin was eight 2%.
In summary, we believe revenue will increase and our margins will improve in both our IMS and Cps segments is supply chain constraints resolved.
Now please turn to slide eight so we can talk about fiscal 2021 financial performance.
We had a strong fiscal 2021, despite the challenges associated with the supply chain constraints.
Fiscal 2021 revenue of $6 8 billion was relatively flat compared to fiscal 2020. After adjusting for the fact that fiscal 2020 had 53 weeks compared to 52 weeks in fiscal 2021.
Non-GAAP gross margins improved 70 basis points to eight 4%, primarily due to operational efficiencies and a favorable product mix.
Non-GAAP operating margin improved from four 2% to four 9% primarily due to improved gross margins and lower operating expenses.
Non-GAAP earnings per share were up 30% year over year from $3 five to $3 97.
Primarily due to better margins.
I am proud of the exceptional performance.
The team delivered during this year in what was a challenging environment and despite revenue being relatively flat due to COVID-19 and supply chain constraints.
Now please turn to slide nine.
Let's talk about the balance sheet cash and cash equivalents increased to $650 million.
Between cash and availability under our revolver and other debt facilities, we have $1 $4 billion of liquidity.
At the end of Q4, there were no borrowings outstanding under the revolver.
We believe we have a strong cash position to manage through these current market dynamics.
Inventory increased due to an increase in the level of unconstrained part, resulting from a bigger than expected impact of supply chain constraints during the quarter.
The inventory increase was driven based on conversations with our customers. We expect this inventory to be consumed in the balance of the inventory to normalize as supply chain constraints are resolved.
Despite the increase in inventory, we were able to manage working capital such that cash cycle days remained steady at approximately 58 days.
Non-GAAP pretax ROIC was 23, 8%.
Now please turn to slide 10.
Our cash flow generation remains consistently strong we generated $92 million of cash from operations and $65 million of free cash flow in Q4.
And $338 million of cash from operations and $274 million of free cash flow during fiscal 2021.
We continue to remain very focused on cash generation and expect to continue to generate cash going forward.
Now please turn to slide 11.
We could still take a very disciplined approach to cash utilization.
Our primary use of cash relates to the internal investments to drive organic revenue growth and improve the efficiency of our operations.
Net capital expenditures for Q4 were $29 5 million and depreciation was approximately $27 million.
Fiscal 2021, net capital expenditures were $72 million as we continue to leverage our existing manufacturing capacity.
FY 'twenty, one depreciation was approximately $109 million.
Please turn to slide 12 now.
During Q4, we repurchased 827000 shares for a total cost of approximately 32 million.
For the full fiscal 2021, we repurchased approximately one 5 million shares for a total of $54 million.
At the end of the quarter, we had remaining repurchase authorization of approximately $81 million.
We announced today that the board of directors approved an increase of the current authorization by an additional $200 million.
This additional authorization will allow management the flexibility to continue to opportunistically repurchase shares.
As I previously mentioned, our primary use of cash relates to internal investment to drive organic revenue growth and improve the efficiency of our operations.
Please turn to slide 13.
Let's talk about the outlook for Q1.
Overall customer demand is very strong.
But there continue to be supply chain challenges.
We expect Q1 revenue to be slightly up and be in the range of one six to $1 7 billion.
Non-GAAP gross margin to be in the range of eight to eight 6%.
Non-GAAP operating expenses in the range of 56 million to 58 million and non-GAAP operating margin in the range of four 6% to five 2%.
Non-GAAP other expenses are expected to be approximately $4 $4 million to $5 million.
Non-GAAP tax rate is expected to be approximately 17%.
And non-GAAP fully diluted share count is expected to be approximately $66 5 million.
When you consider all this guidance our outlook for non-GAAP diluted earnings per share is in the range of 90 to one dollar.
We expect capital expenditures to be around $30 million driven by growth of new programs and the depreciation to be about $28 million.
In summary demand remains strong across our customer base.
We're confident that our lean manufacturing business model positions us well and we expect the company to deliver strong operating leverage and cash flow generation over time as the supply chain constraints are resolved now I will turn the call back over to Gary.
Thanks Kurt.
Ladies and gentlemen, let me add few more comments about our financial highlights for fiscal year 2021, and the fourth quarter.
I'll also review with you the market outlook for our first quarter and fiscal year 2022, Please turn to slide 15.
First I would like to take this opportunity and say thank you to our employees for managing daily challenges around <unk>.
Material shortages and navigating around Covid.
Our management team has done an outstanding job in this very difficult supply chain environment.
And with all this constraints, we delivered strong financial results for fiscal year 2021 by focusing on what we control.
The key for US was driving margins deliver that growth in earnings per share and delivered a strong cash flow. So as you look at our margins.
Especially operating margins they went from four 2% to four 9%.
Up 70 basis points.
Earnings per share increased 30.
Percent.
And deliver the EPS of $3 97.
Strong cash flow up $274 million. So overall, a good year, Unfortunately material shortages affected our revenue growth.
But I can tell you today to Sanmina is well positioned for the future.
Please turn to slide 16 16.
Yeah.
Let's look at our revenue for the fourth quarter by end markets.
We had a strong demand for our fourth quarter.
As I mentioned material shortages impact that the fourth quarter revenue by approximately $200 million plus.
Communication networks and cloud infrastructure was 44% of our revenue that was slightly up quarter over quarter.
And industrial medical defense, and automotive was slightly down quarter over quarter.
Our top 10 customers for the fourth quarter were 48, 4% of our revenue.
Bookings for the fourth quarter continued to be strong.
Book to Bill for the fourth quarter was 1.14 to one.
Please turn to slide 17.
Let me review for you the first quarter of fiscal year, 'twenty, two and market outlook.
We are continuing to see strong demand across all market segments.
So for communication networks and cloud infrastructure for the revenue for the first quarter. We are forecasting the revenue will be slightly up.
Given by a strong demand.
From optical networking and <unk> products.
For industrial medical defense and automotive.
For industrial we see a strong demand driven by security and safety products semiconductor products and alternative and renewable energy product.
For medical overall, we see stable demand across all product lines.
For defense business with strong demand across all product lines.
Well automotive.
We also see strong demand driven by electrical vehicles business for us.
So overall revenue growth for the first quarter will be impacted by material shortages.
As you please turn to slide 18, as you'll hear from Kurt the outlook for first quarter is one six to $1 7 billion, we have upside potential here, but today, it's limited by component constraints.
But if we look at the physical year 2022, we expect to see nice growth nice growth, but it's all about the supply chain.
We are forecasting that approximately 60% of revenue will be from industrial medical defense and automotive markets and 40% from communication networks and cloud infrastructure markets.
At this time, we are seeing strong business demand across all of our customers sectors.
And we have a strong pipeline of new opportunities.
I am personally optimistic that all of these opportunities will translate into margin expansion and EPS growth for.
For cash will continue to generate healthy cash.
Cash flow from operations.
Please turn to slide 19.
Let me talk to you about management priorities for fiscal year 2022 and beyond.
Number one for US is to continue to provide industry, leading end to end technology solutions for our customers.
Built on our strong customer partnerships and continue to expand with industry leaders and mission critical high complexity heavily regulated markets.
We are working closely with our customers and suppliers to resolve supply chain shortages and.
And logistics challenges.
We expect supply chain constraints to continue through physical year 2022.
We will continue to work around these constrains to deliver consistent and profitable growth.
Our end goal is to maximize shareholders' value.
We are focused on investing in talent and technology as we continue to deliver competitive advantage to our customers.
Turning to slide 20.
In summary.
Physical year 2021 was a good year with delivered nice financial results.
Non-GAAP margin expansion non-GAAP EPS growth of 30% plus and strong cash flow from operations.
Our future is exciting.
Sanmina is well positioned to deliver profitable growth and physical year 2022.
We have industry, leading diverse portfolio of leading technology and solutions.
Operating with a lot of agility and successfully navigating.
These market dynamics.
And we have a strong balance sheet.
<unk> us financial flexibility to drive future profitable growth for physical year 2022 and beyond.
So ladies and gentlemen, now I would like to say thank you.
To you for your time and support operator, we.
Now ready to open the lines for question and answers.
Again.
As a reminder to ask a question you will need to press star one on your telephone answering a question.
Okay.
Your first question comes from the line of.
No, but the <unk> with Bank of America. Your line is open hi, Thank you for taking my questions.
I wanted to ask you about the fiscal 2002 outlook I think when you were talking about revenue growth Todd you said like strong revenue growth.
Consensus right now is modeling, 6% to 7% year on year growth based on the fiscal 'twenty one reported revenue.
Given that most people think that component shortages with last well into 2022 do you think that that's a reasonable estimate or.
How would you phrase.
Just if you can qualify.
Do you mean by revenue growth and 22, yes excellent.
Excellent let me first of all I'll go back to what I just said in my prepared statement, but I would say that we expect to see nice growth based on strong backlog today and opportunities that we have on Toronto US did qualify that it's all it's all.
All dependent on what goes on in materials.
As you know we've been in this material shortages now for for Us anyway.
Third quarter in a row.
We don't have that.
It's a crystal ball to tell you exactly when it's going to end, but based on all the forecast stock into our suppliers and customers. We think is going to allow us.
Definitely maybe even for the rest of the calendar year 'twenty, two I say to our fiscal year 'twenty two.
I think we're in a better shape.
Today than we were three.
Months ago, Im sorry, three quarters ago understanding what we are working with so we are learning to work with it.
We are expecting to see some improvements during the year, if we get the improvements we have a plenty of backlog our customers today.
Take lot more.
Then what we can ship so.
And Thats, what we operating operating with.
I expect still to see some growth.
Next year, it's very hard for me to say in the short term and short term to me next 12 months.
Not much but internally we are driving is how do we get to that $2 billion a quarter.
And it's all about materials for us.
<unk>.
Okay. Okay. That's.
Thats helpful.
If I can ask.
Inventory it looks like.
You end up 16% sequentially.
And I guess you are facing material shortages, but the guide for the first quarter is flat sequentially. So I mean I guess the question is how quickly do you think that that inventory gets worked off and related to that how should we think about working capital and free cash flow over the next 12 months.
Sure. This is Kurt so so first of all you know as I mentioned in my prepared remarks, I mean part of the reason the inventory went up last quarter is because we brought in a lot of unconstrained parts.
Assuming we were going to get a certain level of delivery of constrained parts and it ended up being more challenging than we expected.
I think that being said I expect inventory levels to remain high over the next couple of quarters and over time as the supply chain constraints ease that obviously will become more efficient and get back to a more normalized level, but I think in the near term.
The amount of inventory and inventory turns are going to be.
Higher than normal and that's just part of the business.
That being said in terms of your question about cash generation I still feel very confident that we'll be able to generate cash.
During this coming quarter and the fiscal 2022, so we're doing a lot of things to make sure. We operate the working capital efficiency efficiently working with our customers.
We will continue to generate cash just like we have the last couple of years I think that's what are the things that separates us is our consistent cash generation, whether it's you know COVID-19 or supply chain constraints or other factors.
Okay. Okay. That's helpful. Curt if I can also ask you about the margin dynamics in IMS and Cps for Cps. It didn't look like in the third quarter that revenue was up that much sequentially, but you had 170 bps of margin improvement in <unk> on the other hand also didn't seem.
To have that much of revenue decline, but it declined 80 bps. So if you can just kind of go into a little bit more detail on each segment and what impacted the margins there.
Sure. So let's start with IMS first as I mentioned in my prepared comments you have to first of all remember that Q3 gross margin for ion mass was favorably impacted by a $2 $2 million reversal of a reserve and so that's why Q3.
<unk>.
One is higher than the prior quarters.
So I think that that's a big part of it I think the second part of it is.
As we've seen materials come in materials are not coming in linearly throughout the quarter and so what youre seeing is a lot of variability in the arrival, which means at various points in time, we're just not operating as efficiently as we would like to we have to incur you would get a bunch of parts, we have to incur overtime and then we've got.
People.
Not fully occupied when the parks aren't there so there's a bit of inefficiency associated with that on the IMS side. So I'd say those are the two biggest factors on IMS as we look at Cps again last quarter Q3, we talked about the fact that the reason the Cps margin was lower.
We incurred a bunch of cost and some of our new defense programs that we're ramping.
And so that is why Q3 margin went down to 11 and change percent last quarter and as I mentioned in my prepared comments in Q4, we had less of those.
Cost plus Cps revenue went up.
A little bit and so the combination of those two factors got us back kind of in that 12 12 to 13 range, which is in more in line with what we had been performing.
In Q4 of last year in Q1 of last year. So hopefully that's helpful.
Yes.
Thanks for the details on that.
Let me sorry, let me add one more thing to that in this environment.
Curtis said when you have a lot of material shortages, our operational efficiencies are not very good at Luke and once we improve that.
We know we can deliver to the bottom line. So a combination of growth and steady output on daily basis will drive our margins substantially. So we did a lot of awards this year and.
And that's very important to understand on.
What I call internal processes.
Processes to improve the cost.
Long term.
<unk>, that's going to start showing up as we get a better how do I say handle a material shortages.
And we start growing a little bit.
Great. Thanks for all the details can I, just if I can just squeeze one more in for Uri.
You guys are strong in <unk> and on the communications side can you just let us.
Give us some more details on what you saw in the networking optical and wireless side and how do you see that progressing into the next quarter.
Yes that business as I mentioned.
With my prepared statement, we have a very strong demand there are customers today in that segment will take everything I can ship.
So the optical.
Optical networks.
Demand is very strong.
<unk> continued to do well and expanding for US that's doing wall and then networking product. The IP routing et cetera also very strong again demand is there I think is just getting this material shortages are resolved.
Okay. Thanks, Thanks for all the details appreciate it.
Your next question comes from the line of Jim Suva with Citigroup. Your line is open Hello, Jim.
Hey, good afternoon, and the supply constraints are pretty well known and that's unfortunate.
And everybody is dealing with it my question is does it make sense longer term.
To like just with your clients, where you're manufacturing and the relationship of how much inventory whether it be components or work in process of finished goods to hold structurally and I'm. Just wondering if those are discussions already in place or what's happening.
Because it seems like whether it be trade wars, whether it be power outages or water shortages or now COVID-19 or shipping containers and such it seems like it's one thing after the other I'm just wondering if there's some structural things that maybe you're talking with your customers about for risk mitigation going forward longer term.
Yes, Jim Thats excellent question and not because you asked that question, that's something that we're really being working with our customers that is really talking about.
All global Sup.
<unk> supply chain as you know you've been around.
Long long as IV 40 years ago, everything when east East now customers are definitely concerned about the safety supply.
Logistic costs et cetera, So we're really putting a lot of programs for one of our key customers today to improve that and minimize the impact.
Fortunately this.
Material shortages I never seen anything like this Jim. This is a very unique time I wish I wish this was it skews it will be at least <unk>.
Year to to.
To find a solution for Florida, but we are dealing with the real world in which is a lot of shortages from raw materials to finished product.
But it also as you know we have a lot of geopolitical issues around the world. So all those things today or our customer base is very concern, which longer term is really been it's going to benefit our industry to be able to play a bigger role and have a better solution and closed.
Is it a relationship with our key customers. So we are excited what's in front of us as just a frustrating in the short term because we are taking a lot of cost out and I think if we had a better supply chair on daily basis, I think we delivered a lot better financial results. So there are a lot of work.
And but thats the exciting part of our job I think I'd add to that Jim I think.
If you look at our manufacturing footprint, we have a very diversified manufacturing footprint, we're not focused in any one particular area and I think thats something thats quite appealing to our customers.
And our partners.
You undergo these challenges I think in terms of long term are people going to hold more inventory of key components.
That certainly seems to be the case, but given the fact that we're not going to you know everybody predicts that it's going to take another year plus to kind of get through this.
That's something that will not happen until 2023, but certainly I think people are expecting to hold more at least critical components.
In the future.
And then as my follow up question can you give us a little bit of details in your communications network and cloud infrastructure, a little bit about.
The trends youre seeing in say networking versus routing versus optical it seems like everyone's shifting to go from 40 gig to 100 gig and eventually 400 gig is.
Is that going well or is there a pause there for supplies and kind of what's going on on how we should think about those.
Thanks, Jim from our point of view, we will position this industry, especially right now is a lot of our customers are going to more to that.
400 gig and so on.
All out with every one of our key suppliers I mean, sorry key customers. We're in being involved in last year or so, bringing a new product to the market so for us.
Thank you you're going to see.
Better demand in the higher end.
Systems in next.
What we delivered in them today, but I think youre going to see more of that in next 12 months definitely shortage.
Materials is there too.
Chasing it ever there with dealing with Sanmina, because we're dealing with we will get a lot of custom products.
And lot of unique products and a lot of.
Components are in some cases, a single source is affecting us a little bit more but we are working on it together with our customers.
I expect to see.
Light end of the tunnel and hopefully a little bit easier couple of quarters from now.
Thank you so much for the details and clarifications. Thanks.
Thanks, Jim.
Christian.
We got the best for the loss.
Yes.
Yes.
Your next question comes from the line of Christian Schwab with Craig Hallum. Your line is open.
Thank you. Thank you. So just all my questions have been answered just a quick clarity.
No.
What constrained components.
Surprised you this quarter.
Or materials that surprised you this quarter when you kind of thinking it was going to be a typical $150 million and it ended up being greater than $200 million.
<unk> became less available or what became tighter can you give us any clarity on that.
I'll definitely semiconductors has continued to be a problem I think the biggest issue is decommit. When you think you're going to get the products today and then they come two weeks later or three weeks later.
So semiconductor continues to be a problem.
And also it depends on our customers, we have a lot of different customer different requirements.
Even for a defense, where we can put a lot of pressure on suppliers to make sure they put priority on desktop.
Military programs that we can't we have a stop sign getting the assortment component. There also so semiconductors to meet number one, but all the way down to raw materials.
<unk>.
Aluminum.
As to fiber fiber optics material et cetera.
It just crossed all the sectors.
Right now yes.
Christian I am sorry, Christian I would also add I think.
Prior quarters, there were some there was some inventory out in the Disney channel and now we're able to access that and help mitigate.
Some of the problem because I think once that stuff got eaten through then we kind of had to wait to the normalized channel. When we saw a lot of stuff get delivered in the back part of the quarter.
So I like.
It was a combination of those two things but to your point.
Semiconductor is clearly the leader in terms of impacting us.
And then as you guys look to Q1, you guys kind of gave guidance for the next fiscal year, but.
A lot of the trip constrained by one of the largest bottleneck.
The series of chips.
Started.
February of last year.
A little bit earlier in January for bigger customers pushing things the 52 week. So a lot of those customers should see.
Increased supply going into Q1, I guess, if they predicted their business right a year ago.
Are you not seeing.
Is any reflection of that.
Well definitely.
Our customers are giving us a lot more visibility I will say in last nine months.
The inevitably for so we've been planning that that out in some cases longer than a year one customers looking stockpiles for two years.
So definitely the customers that have a better planning, especially on these costume.
Products that take logged onto manufacturer.
We're getting some relief.
So.
Last question is we don't.
Currently I believe there was any lost demand so I mean, we have over.
Over the last few quarters, hundreds and hundreds of millions of dollars of.
Incremental loss revenue so if we get any help in the.
Supply chain are loosening up at the end of 'twenty, two we're going into 'twenty three that would suggest that there should be.
A material increase in top line growth at some point.
If somebody's component shortages in particular semiconductors become more available if that's fair that's fair right now.
Christian its short term, we don't see any orders going away.
Yes, we definitely believe that as we resolve these shortages.
Our revenue will go up.
Yeah, Great spectacular no other questions. Thanks, guys. Thanks question, ladies and gentlemen, that's all we have for you today hopefully we answered most of your questions if not give us a call at all that thank you very much.
Bye bye.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Sure.
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