Q2 2022 Sanmina Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Sanmina second quarter fiscal 2022 earnings call.
This time, all participants are in a listen only mode.
Presentation that will be a question and answer session.
A question during the session you will need to press star one on your telephone.
You require any further assistance. Please press star zero. Thank you I would now like to hand, the conference over to your Speaker today, Paige Melching Senior Vice President of Investor Communications. Please go ahead ma'am.
Thank you Ron good afternoon, ladies and gentlemen, and welcome to Sanmina second quarter fiscal 2022 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 Joy.
Joining me on today's call is Youri, Sola, Chairman and Chief Executive Officer, Good afternoon, and Kurt and FEMA 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 future financial performance of the company. We caution you that such statements are just projections.
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 Securities and Exchange Commission.
The company is under no obligation to expressly disclaims any 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 in our press release and slides issued today, we have provided you with statements of operations for the quarter ended April 2nd 2022 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 financial 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 they relate to the income statement measures 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 Yuri Sola.
Thanks Paige.
Ladies and gentlemen, welcome and thank you all for being here with us today.
First I would like to take this opportunity to recognize our leadership team and our employees for managing successfully around material constraints and navigating in this market environment.
As you can see we delivered strong results for the second quarter.
So to you Sanmina team. Thank you.
And keep it up.
For agenda, we have Kurt our CFO to review details of our results for you.
I will follow up with additional comments about sanmina as a results and future goals.
Thanks, Kurt and I will I'll take questions and answers and now I'd like to turn this call over to Kurt Kurt.
Thanks, Jerry please turn to slide five.
Our team did an outstanding job delivering strong revenue and profit growth as well as material cash generation in the second quarter.
Q2 revenue of 1.91 billion grew substantially by approximately 9% from the prior quarter and significantly exceeded the high end of our outlook of one seven to one 8 billion.
This was primarily due to strong customer demand and excellent coordination with suppliers and customers to help mitigate material challenges.
Our supply chain and operations team did an excellent job leveraging sanmina is distinct and terminal capabilities enabled by our singular unified it platform.
non-GAAP gross margin was eight 1% compared to $8 five in the prior quarter.
Primarily due to higher direct material costs as well as the impact of annual salary increases and.
Youll resetting of employer portion of payroll tax and no benefit in the second fiscal quarter for a holiday shutdown.
non-GAAP operating margin was 5% comparable to the prior quarter.
non-GAAP fully diluted earnings per share grew significantly by approximately 6% to $1.14 compared to $1.08 in the prior quarter and exceeded the upper end of our outlook of 95 to one O five by nine cents.
Finally, Q2, GAAP EPS was <unk> 83.
Now please turn to slide six.
This slide shows the quarterly trends of our financial results.
We continued to deliver consistent financial performance over the last two years, despite the challenges associated with Covid and the supply chain constraints.
non-GAAP gross margins have exceeded 8% for the last eight consecutive quarters. In addition, non-GAAP operating margins have been 5% or higher for six of the last seven quarters.
Now please turn to slide seven.
Q2, IMS revenue increased to 1.56 billion, primarily due to strong customer demand and excellent coordination by our supply chain and operations team.
With suppliers and customers to help mitigate material challenges.
non-GAAP gross margin for IMS.
Was 7% compared to 7.5 in the prior quarter.
Components products and services revenue grew significantly by approximately 6% to $390 million due to stronger customer demand.
non-GAAP gross margin for Cps increased by 50 basis points to 12, 1%.
In summary, we believe our revenue will grow and our margins will improve for both segments as supply chain constraints abate.
Now please turn to slide eight.
We have a very healthy balance sheet that provides our company a competitive advantage.
Cash and cash equivalents was $560 million.
Our total liquidity position is strong.
Between cash and availability under our revolver and other debt facilities, we have approximately $1 3 billion of liquidity.
There were no borrowings outstanding under our revolver at the end of Q2.
In addition, we generated significant cash flow during Q2.
Cash flow from operations was 79 million in free cash flow was $52 million.
We believe we have a strong cash position to manage through the current market dynamics as well as the support revenue growth with our new and existing customers now.
Now please turn to slide nine.
Yeah.
Our strong balance sheet and cash flow generation allows the company to continue to opportunistically repurchase shares and return capital to our shareholders.
As you can see from the chart, we've purchased over a billion dollars of shares in the last eight and a half years, including almost 400 million in the last two and a half years.
During Q2, we repurchased approximately two 8 million shares bringing the total through the end of Q2 to $4 3 million shares.
The remaining share repurchase authorization at the end of Q2 was $111 million.
In addition, today, we announced our board authorized an additional $200 million of share repurchases.
Please turn to slide nine.
Despite the higher levels of inventory, we were able to manage working capital such that cash cycle days remained relatively steady at 57 days.
non-GAAP pretax.
Oh I see continued to improve to 27 point in time.
Finally, please turn to slide 10.
Let's talk about the Q3 outlook.
Overall customer demand is strong, but there continues to be supply chain challenges, including uncertainty of the impact of Covid Lockdowns in China on the overall global supply chain.
We expect Q3 revenue to be a range of 1.825 billion to $1 95 billion.
We expect non-GAAP gross margin in the range of eight to eight 5% depending on product mix.
non-GAAP operating expenses in the range of 60 to 62 million and non-GAAP operating margin in the range of $4 eight to five 3%.
We expect non-GAAP other expenses of approximately 6 million.
non-GAAP tax rate of approximately 18% and non-GAAP fully diluted share count of approximately 64 million shares.
When you consider all this guidance our outlook for non-GAAP diluted earnings per share is in the range of $1 five to $1 15.
We expect capital expenditures to be around 30 million driven by growth of new programs and depreciation of approximately $28 million.
In summary demand remains strong across our customer base.
We are confident in our business model and expect the company to continue to deliver strong operating leverage and cash flow over time as the supply chain constraints abate.
And with that I'll turn it back to Europe .
Thank you Kurt so ladies and gentlemen, let me make few more comments about business environment in the <unk>.
Second quarter, and I'll talk to you about the outlook for the third quarter and the rest of the calendar year 2022 and beyond.
Yeah.
So I mean that is delivering consistent strong results as you heard a trump card.
It was broad based end market demand.
The key drivers in the second quarter were <unk>.
So in some of our supply chain by working closely with our customers and suppliers.
And great operational execution by creating the right flexibility to build a product and a short cycle time.
Through these operational flexibility, we're able to deliver critical customers requirements.
I can tell you that our Sanmina team has done an outstanding job as we continue to differentiate.
Industry, leading capabilities.
Overall, we've delivered nice organic growth quarter over quarter growth of 9% and year over year growth.
12, 7%.
Now please turn to slide 13.
Let me give you a few more highlights of revenue for the second quarter by end markets. As you can see on this slide we delivered quarter over quarter growth.
Cross OLED markets.
Top 10 customers were 50% of all revenue.
Communication networks and cloud infrastructure was 40% of the revenue.
By growth and optical systems, <unk> <unk> and <unk>.
Cloud infrastructure.
This segment grew around 8%.
Industrial medical defense and automotive was 60% of our revenue.
That was driven by growth in industrial around 13% and medical defense and automotive around 7%.
Now, let me tell you more about bookings.
The second quarter bookings continued to be strong.
Book to Bill was one one to one.
I can also tell you that the pipeline of opportunities is solid and.
And we can expect bookings to continue to grow quarter over quarter.
Please turn to slide 14.
Now, let me talk to you about revenue outlook by market segments for the third quarter.
Good news is that our customer demands as continued to be strong.
We see upside potential across all end market segments.
Our third quarter forecast is based on component constraints will continue.
And here is based on what we are seeing today in the markets.
We have strong supply chain team in place and we are working closely with our customers and suppliers to get critical materials as soon as possible.
We expect to manage successfully around these material constraints.
Even with these challenges the future Semina is more exciting.
So let me not mainly services mission critical high complexity heavily regulated markets in.
In these markets Sanmina is well positioned with a healthy backlog.
Our third quarter and beyond.
New project wins are driving the growth.
For the third quarter, we are forecasting that 40% of revenue will come from communication networks and cloud infrastructure markets.
Driving the growth in optical systems, five gene networks cloud networking and enterprise storage systems.
And we're also forecasting that approximately 60% plus of our revenue for the third quarter will be from industrial.
Medical defense and automotive markets.
Now, let me talk to you about growth for calendar year, 'twenty, two and beyond.
Based on present market visibility and customer forecast.
Physical year, 2022 will be a strong rate a strong growth year for sanmina.
The pipeline on new growth opportunities remains very healthy.
We are investing a lot more in talents and leading technology to support the growth for fiscal year, 'twenty 'twenty three and beyond.
Now, let me talk to you about long term growth.
I can tell you today that doesn't mean, it has well diversified customer base and we expect to continue to diversify and markets.
It will grow.
We have a lot in our pipeline driven by our medical business.
We're well positioned there defense continued to expand our position and automotive focusing on electrical vehicles.
We believe this segment will continue to be strong.
We are well positioned in industrial, but we see more growth in this segment also.
Communication and cloud infrastructure.
With a strong position and continue to see nice expansion in future.
Overall, we are expanding to more profitable projects Viper.
<unk> by providing industry, leading technical engineering solutions from R&D to build two.
To build to order configured to order and other services.
All of these opportunities in these markets translating into growth and margin expansion for Sanmina.
Please turn to slide 15.
In summary.
For second quarter revenue exceeded our outlook.
Driven by strong demand.
We delivered solid non-GAAP operating margin of 5% and.
And non-GAAP diluted EPS of $1 14, that's nine above.
Above the guidance.
Our strong free cash flow up $52 million.
For the third quarter, we are forecasting strong demand from our customer base, we expect supply constraints to continue.
And our revenue outlook at this time is 182 5 billion to $1 95 billion.
We expect to deliver non-GAAP diluted EPS of <unk> <unk> five to $1 15.
I can also tell you that we remain very confident in.
Our physical year 2022, perhaps the profitable growth objectives that we set beginning of the year.
So ladies and gentlemen, now I would like to basically say again. Thank you for all your time and support.
Operator, we are ready to open these lines for question and answers. Thank you.
Alright at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad again, that's star then the number one on your telephone keypad.
Your first question comes from the line of Oslo, but that sure Yeah from Bank of America. Your line is open.
Alright, Thank you for taking my questions.
No.
Hi, Yuri.
My first question relates to margins I mean, I was wondering if you can just provide some more details there it looks like your revenue came in higher than your guidance range. So I think it was up $155 million sequentially, but I mean, the margin stayed at 5%.
At the same level as last quarter, and just looking at the different segments IMS and Cps.
I was curious because I mean, it seems to have declined 50 basis points sequentially and many other components. Although it was up sequentially to $12, 1% I think year on year. Your revenues grew by 7% in that segment, but then margins declined 210 basis points. So I was just wondering if you can talk about.
What are the margin dynamics in the second quarter.
Yes, let me just add and I'll turn it over to our CFO first of all.
Margins, a lot driven by by a mix itself.
We have.
What I would say in this environment.
Good good to overall margin and eight.
What we call eight plus percent gross margin and we feel that as long as we keep that at a 5% in this environment is respectable but the longer term. We believe there is a fair amount of upside, but I'll turn it over to CFO .
CRE.
So as you already pointed out obviously mix is always a factor, but the other things that I mentioned on the call.
You know first of all we had higher direct material costs and while we pack be able.
Pass it onto customers that does impact Maher.
Margin and then the other thing is at the beginning of the year just like every year, we have the impact of the annual salary increases we have the resetting of the employer portion of payroll tax in the United States.
And you don't have the benefit in the second fiscal quarter for the holiday shutdown that you had in the prior fiscal quarter. So I think all of those things.
Play it into margin for this quarter, but again for the outlook for next quarter, we do think it'll be somewhere between.
It's an eight and a half.
And I don't know if youre talking about gross margins grow yes, gross margin, which obviously then falls to the operating margin because we're expecting relatively flat opex. Okay.
Thanks for that can I ask for my second question.
Just some clarification on the guidance on revenues UV I think.
You said communication networks and cloud infrastructure should be about 40% of your fiscal <unk> revenue.
At the midpoint of your revenue guidance is $1 87, 5 billion, so 40% of that would be about seven.
Would it be slightly lower than what you reported this quarter in terms of revenues and I'm. Just wondering you know you said you have a strong backlog it looks like the communications market is strong with networking and optical and and these things doing well. So I was just curious if I misunderstood that or if you can just clarify how we should think about the revenue.
Growth.
Because at 40% of the mid point is like $750 million, which is slightly lower than the 757, you reported in the second quarter Alright, So let me let.
Let me explain that again first of all as I said earlier in my prepared statement.
Overall, we had a very strong demand for the third quarter and actually many quarters behind that.
So demand is there I think for us.
You mentioned in the prepared statement I think it's going to be driven by the component constraints that are in the industry.
As we just did in <unk>.
Last quarter I think our team did a great job and we were able to manage it we expect us to continue to manage it and how well are we get those components thats overall, it's going to drive the growth. So there's a lot more upside to this than downside, but downside this mailing components.
Got it no that makes sense and then for my last one if I can ask you.
I think inventory grew 16% sequentially, but you guys held the cash conversion cycle days at 57 days. So can you give us some idea how should we think about that trending over the next couple of quarters and how should we think about free cash flow was positive this quarter and I was just wondering if you can give us your thoughts on how that trends over the next next few.
Quarters.
Sure absolutely. So yeah, absolutely our inventory has gone up that is as a result of working very closely with our customers and suppliers.
<unk> you know forecast, what we think their future demand is going to be in.
So you know I think that that's a big part of what we're trying to do on the cash flow side I would say you know we continue to generate positive cash flow I expect to do it again.
Next quarter and you know I feel very good about our balance sheet as I mentioned several times.
Okay. Thank you for all the details I appreciate the help thank you.
Yeah.
Your next question comes from the line of Jim Suva from Citigroup. Your line is open Hello, Jim.
Hey, good evening.
So much for the details so far I wanted to ask strategically it seems like we're hearing customers shifting their production closer to end desktop destinations to reduce shipping costs.
Covid trade wars custom issues bolt issues undocking all that.
Have you seen that start to materialize or is it more discussions and if it does come I correct. It because your cost plus model that could actually help out your margins because cost of labor may be potentially higher in those near onshore destinations.
Well first of all you're right that the customers are moving around too that makes business sense for them to be closer to their end markets. So we're going to Jim as you know this market we go into a regional.
Supply chain and other awards in old days haven't seen way of one direction is going to be more regionalized.
I mean, it was always set up like that and definitely we see more growth.
In Americas and in Europe for Us.
As these things.
Come up but it is taking time.
As you know the world lot more interconnected than lot of people realize so but I would say next.
12 to 18 months, we're going to see more of this moving to the regional and I expect us to benefit.
On the margin longer term at the same time in a market that we are driving Jim we are focusing on products that are more mission critical those products will stay closer to all and I believe in those type of products, we can drive better margin and Thats really part of our strategy and drive the growth as you can see what we see.
The growth so far this year.
As long as we can get the material, we're going to see a good growth and we expect that to continue but more important that we start bringing that down to the bottom line.
Great. Thanks, so much for the details and clarifications and congratulations thanks, Jim.
Your next question comes from the line of.
And you saw a very strong from Sidoti Your line is open.
Hello Lana.
Hi, Thank you for taking my questions and congratulations on the great quarter. Thank you.
Is that what you see in terms of the supply chain.
And is it sort of stabilizing is it improving or.
And what kind of color can you give us there.
I would say it's still.
Were very challenging.
In some cases it sound weekday leveraging looks good we've got everything we need and then you know.
Four deadweight looks good I think it's a week to week Anya.
But I see it and what I'm not an expert on it but what I see from our suppliers from all customers.
And this is going to continue through definitely 'twenty, two 'twenty, three and that's healthy improves but right now.
I would say stable, but I don't see major improvement short term.
Okay. Thank you and you mentioned that the gross margin was impacted by that by Dan materials cost increase but you also mentioned.
Q&A that you could pass this onto customers how should we think about that is there a lag between then that's why they have gross margin was negatively impacted and that should benefit you in the coming quarters.
Yeah first of all you know we work very well.
Close with our customers to minimize the impact on them.
In this environment as you know, especially when we chase these critical components set out in the world. We work very closely between our suppliers and our customers to minimize that but in our business model line.
The model is designed in a way.
A lot of these projects that we do with <unk>.
Our partners out there.
Put it what I call transparent relationship.
Call a real partnership so we work very close with them.
Our business model, where we can we can afford to.
How do I say for pay for these increases so definitely our customers are the ones.
Suddenly have the burden of disease.
Increases, but we worked very closely with them to minimize the impact on our customers.
Okay. Thank you and then in terms of your end markets.
So no surprises there.
So the demand.
No major surprises I think we are.
We were in a mall right now I need to grow to expand in these critical markets that I talked about not just for 'twenty. Two as we look couple of years out we're really focused in a market, where we have a lot of strength such as medical defense.
Automotive, especially around the electrical vehicles.
Industrial we have very strong position, but that for US has continued to grow and communications cloud infrastructure. We always wanted a strong position and we're growing our component businesses I believe for us.
Okay.
Some of the major opportunities in is in component businesses.
We are driving.
Major expansions add in next 18 months so.
And Thats hopefully not hopefully we expect those things to drive the margins up.
Okay. Thank you and then also.
I have two more questions and first of in China.
China under Lockdown.
<unk>.
Have you seen any impact from that indirectly arm.
Well definitely.
We've seen some impact there all our plant was shut down for I think three and half weeks.
We're working around it.
As much as I like to use it as excuses, but we're getting used to it COVID-19.
It material shortage.
Curt and I and other managers was talking about it last week and it's just a normal environment that we have to surviving.
Yeah, I think I think the key thing you touch on that and yeah. As you know, it's not just about the plants that.
And just in China, where our plants or factories that exist in China right. It's the potential implications of those lockdowns in China on the whole global supply chain. So I'd say, there's still a lot of uncertainty there I can't say that we've seen tremendous impact yet, but there is a lot of uncertainty about how that all gets unwound in the law.
Just takes of getting stuff out of China kind of gets backed up.
Okay, and then sort of what kind of risk that that impulse.
Well the guidance then what kind of visibility do you have.
Yes.
As you already mentioned I mean, I think the guidance. We gave takes into account the uncertainty that we are aware of at this time.
I think obviously I think in these dynamic environment, it's best to be Conservative and I think we've taken that into account in our guards.
Okay, great. Thank you that's all from me. Thank you operator, we have time for one more question.
Yes, Sir your last question comes from the line of Christian Schwab from Craig Hallum Capital. Your line is open Hello Christian.
Hey, Gerry congrats on a great quarter.
Your your commentary regarding long term growth rate.
You know in 'twenty three and beyond.
You know one of your.
Competitors recently had an analyst day, and they kind of talked about their belief that the broader EMS industry. As you know is that to be kind of a 5% to 7% growth type of industry and they expected to outperform that themselves given kind of the a lot of the same things you stated.
So is that the type of growth rate in 'twenty, three and beyond that we should be thinking about.
<unk> been out there there wasn't a clarity on exactly.
What numbers you wanted to put behind that.
If you look at the.
This year, so far and Justin.
First two quarters, while we are while.
While we delivered and while we guiding will put us.
For 'twenty two yeah, Bob Dole's numbers at this time.
I think if I look at opportunities in front of it Christian growth is not going to be.
The problem I had a challenge for us we need to see is more.
Visibility resolution to these material shortages.
What I'd like to put a big number out there, but internally we are investing in the right technologies drive product in these key markets to drive that not just the growth itself, but to really expand our margins.
Margins.
Great.
And then my last question is is eerie do you guys have an idea of how much.
And customer demand that you under shipped to over the course of the last 12 months.
Due to supply and material constraints.
Yes, the only thing that I can tell you most of my customer that I put a ship.
Fair amount more in some cases, a lot more if we could get those critical materials, we stopped commenting on it because we just operating in this environment.
Our customers are changing the schedule just trying to meet their most critical demand what they need to service their most critical customers. So we are we have to be very flexible.
Our efficiency. So they are not very good because it's a stop and go.
We stabilized materials and so on that you know I expect better margins just on the revenue that we're shipping today.
Great no other questions. Thank you.
Thank you first of all I'd like to say, thank you to all of you today for listening to us and giving US your support hopefully we answered most of your questions. If not please get back to us and looking forward talking to you in next 90 days. Thank you bye bye.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
Sure.
Okay.
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Okay.
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