Sanmina Corp (SANM) 2024 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Sanmina's second-quarter fiscal 2024 earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Paige Melching. Please go ahead.

Thank you, Jenny. Good afternoon, ladies and gentlemen, and welcome to Sanmina's second-quarter fiscal year 2024 earnings call. A copy of our press release and slides for today's discussion are available on our website at sanmina.com in the Investor Relations section. Joining me on today's call is Jure Sola, Chairman and Chief Executive Officer.

Good afternoon.

And Jon Faust, Executive Vice President and Chief Financial Officer.

Good afternoon.

Before I turn the call over to Jure, let me remind everyone that today's call is being webcasted 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, and take note of our 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 projections.

The company's actual results could differ materially from those projected in these statements as a result of factors set forth in the Safe Harbor statement. The company is under no obligation 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 or the Investor Relations section of our website, whether 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 second quarter ended March 30, 2024, on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between 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, 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 results. 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 Jure.

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome and thank you all for being here with us today. First, I would like to take this opportunity to recognize Sanmina's leadership team, our employees for doing a great job. So to you, Sanmina's team, thank you for your dedication and delivering excellent service to our customers, and let's keep it up.

Now let's go to our agenda for today's call. We have Jon to review details of our results for you. I will follow up with additional comments about Sanmina's results and future goals. Then Jon and I will open for question and answers. And now I'd like to turn this call over to Jon. Jon?

Great. Thank you, Jure, and good afternoon, ladies and gentlemen. Thank you for joining us here today. Before we go through the financial results, I want to acknowledge the entire Sanmina team for executing and delivering financial results in line with the company's outlook and continuing to do an excellent job.

Now let's talk about the Q2 results. Please turn to slide 5. Second quarter revenue was $1.835 billion at the low end of our $1.825 billion to $1.925 billion guidance range, which is down approximately 2% sequentially. We believe the business has leveled out from a revenue perspective, and we expect to see improvements in the quarters ahead as customer inventory absorption headwinds dissipate, which Jure will comment on more in his prepared remarks.

Non-GAAP gross margin was 8.9%, which exceeded the high end of our outlook and was up 10 basis points sequentially and 50 basis points compared to the same period last year. We're very pleased with this gross margin result, which is due to a combination of favorable mix, focused execution, and strong operating discipline.

Non-GAAP operating expenses were $63.6 million, slightly above our outlook of $60 million to $62 million, primarily driven by incremental expense related to our deferred compensation plan, which was completely offset by an asset gain in the other income and expense line item. Non-GAAP operating margin was 5.4%, which was at the midpoint of our outlook and down slightly at 10 basis points sequentially and 40 basis points compared to the same period last year. This operating margin result was also impacted by the incremental deferred compensation expense that I noted earlier, but is still solidly in the short-term range of 5% to 6% that we set earlier this year.

Non-GAAP other income and expense was $6.5 million, favorable to our guidance of approximately $12 million, driven by the asset gain that I mentioned previously, as well as higher interest income due to our strong cash generation results and less interest expense due to lower usage of our revolver. Non-GAAP earnings per share came in at $1.30 based on approximately 57 million shares outstanding on a fully diluted basis and at the high end of our outlook.

Please turn to slide 6 to talk about the segment results. IMS revenue came in at $1.46 billion, down approximately 3% sequentially. However, IMS non-GAAP gross margin was up 10 basis points sequentially to 7.7% due to strong operational execution and our continued focus on driving manufacturing efficiencies.

CPS revenue came in at $398 million, up slightly at about 1% sequentially. And non-GAAP CPS gross margin was down 10 basis points sequentially to 12.9% due to unfavorable mix. While we're pleased with these results, we continue to see opportunity for margin improvement in both the IMS and CPS segments going forward, further supporting our longer-term margin objectives.

Now please turn to slide 7 to talk about the balance sheet. Our balance sheet is a key advantage of the company and a pillar of our value proposition to investors and the team did a great job managing it again this quarter.

Cash and cash equivalents were $651 million. At the end of the quarter, we had no borrowings on our revolver, leaving us with substantial liquidity of over $1.5 billion. We ended the second quarter with inventory of $1.38 billion, down slightly sequentially, and inventory turns were 4.8%, up slightly sequentially. We continue to focus on improving our inventory position and increasing turns.

Our non-GAAP pre-tax ROIC was 22% for the quarter, well above our weighted average cost of capital. We continue to have one of the strongest balance sheets in the industry with a low leverage ratio of 0.57 times, which allows us to both navigate complex market environments and capitalize on the long-term opportunity in front of us simultaneously.

Please turn to slide 8, where I'll talk about cash flow and capital allocation. We did a great job managing cash this quarter, and I'm confident we are putting our cash to use in the right areas. To touch on a few highlights, cash flow from operations was $72 million for the quarter and approximately $200 million for the first half. Capital expenditures were $30 million for the quarter as we continued to make investments in the end markets that will support Sanmina's long-term profitable growth.

Free cash flow was $43 million for the quarter and $135 million for the first half. During the quarter, we repurchased 28,000 shares for approximately $1.4 million. And for the first half, we've repurchased 2.2 million shares for approximately $107 million. As of March 30, we have approximately $172 million left on our Board-authorized plan, and we intend to continue to repurchase shares on an opportunistic basis.

Our focus and execution on cash generation provides us with the flexibility to invest in the business. When making those investment decisions, we look for opportunities to drive shareholder value while taking a disciplined ROI-based approach, which is a practice we will continue to follow going forward. To conclude on the Q2 actual results, overall, it was a strong quarter as we delivered on what we said we would, and we continue to set up the company for future success.

Now please turn to slide 9. I'll now cover our outlook for the third quarter, which is based on what we are seeing in the market and forecasts from our customers. Our outlook it is as follows. Revenue between $1.8 billion to $1.9 billion, up slightly sequentially. Now in this type of market environment, we believe it's prudent to continue with our practice of only guiding one quarter at a time, but we are seeing signs that demand and revenue are starting to improve, which Jure will elaborate on shortly.

Non-GAAP gross margin of 8.3% to 8.9%, up slightly sequentially and dependent on mix. Operating expenses of $60 million to $62 million, in line with normal levels. Non-GAAP operating margin of 5.3% to 5.7%, up slightly sequentially. We expect other income and expense to be approximately $12 million, in line with normal levels; tax rate of 17% to 18%.

We estimate an approximate $3 million to $3.5 million non-cash reduction to our net income to reflect our India JV's partner's equity interest. Non-GAAP EPS in the range of $1.22 to $1.32 based on approximately 57 million fully diluted shares outstanding. Capital expenditures to be around $40 million to support new programs and future opportunities as we continue to invest where needed to support our long-term strategy. And finally, depreciation of approximately $30 million.

Overall, I'm very pleased with our performance this quarter as we delivered on what we said we would. With that, let me turn the call over to Jure to talk more about the business.

Thank you, Jon. Ladies and gentlemen, let me add few more comments about our second quarter, and I'll review our end markets and outlook for the third quarter and the rest of the fiscal year 2024.

Please turn to slide 11. As you heard from Jon, for the second quarter, we delivered good results. Overall, we met our outlook. We are seeing stabilization in some of our end markets and incremental improvements in demand. Recovery is slightly slower than expected beginning of the year. But we are working very close with our customers as they are burning through their inventory. I can tell you that macroeconomic uncertainty remains, but Sanmina's team continues to demonstrate resilience and deliver good financial results in this environment.

So what is Sanmina's advantage in the big market? I can tell you that we are well diversified in growth markets. Sanmina has strong customer base of market leaders to help us to get through this environment. We are working very closely with our key customers with existing and new projects to drive growth as market improves.

Our business is well aligned to adapt to present market dynamics. We have strong cost management in place. We have aligned our costs to present business demand. And as Jon mentioned, Sanmina industries' leading balance sheet gives us a lot of flexibility to maximize the shareholder value.

So please turn to slide 12. Now let me talk to you about revenue by end-markets. Revenue for second quarter was $1.835 billion, roughly, slightly down approximately 2% quarter over quarter, within our guidance. I can say the forecast were more predictable this quarter.

Industrial, medical, defense, aerospace and automotive was 67%. Our revenue slightly down 2.5% quarter over quarter. For defense, aerospace, and automotive, we saw good demand during this quarter. For communication networks, cloud infrastructure, that was 33% of our revenue, slightly down 1.5% quarter over quarter.

Also, I can tell you that we had a higher demand for new projects in communication networks and cloud segment, but we could not ship it because of material shortages and some testing capacity issues. These issues will be resolved in our third quarter.

For second quarter top 10 customers represented 48.5% of our revenue. We are well diversified company, and we have no customers over 10%-plus. I can also tell you that the bookings for second quarter improved nicely. Book-to-bill was 1.1-plus to 1. Newer products are driving demand.

Please turn to slide 13. Sanmina is continuing to invest in a faster-growing and higher-margin end-markets, such as cloud infrastructure, defense and aerospace, medical, automotive, renewable energy, industrial and optical advanced packaging. So let me make a few comments on each of them.

For cloud infrastructure, AI and ML is driving new opportunities for us. We've been driving -- it is mainly being driven by upgrades in our cloud networks to meet AI traffic needs. Sanmina is well positioned to benefit from growth in AI. We are benefit some right now and the rest of the '24, but we're expecting to see more benefits and bigger opportunities in calendar year 2025.

For defense and aerospace, we continue to see solid demand. New program wins are driving a long-term growth. For medical, our focus is on digital health and medical devices such as disposable, consumables, drug delivery, surgical, diagnostic imaging, and lab diagnostic systems. We have strong base of customers, and we are well positioned here. We see positive trends long term.

Automotive, we mainly focus on electrical vehicle and electrical chargers. Short-term demand is softer, but our new opportunities will drive the growth. We see a better forecast for September and December quarter, and we expect to see improvements in demand longer term as we enter calendar year '25 and beyond.

For renewable energy, we continue to win new projects. We've been focusing around generation and storage of power, power controls, and management. Here, same thing; new opportunities are driving growth for us.

For industrial, we have solid customer base. We see stable demand. We've been focusing on factory automation, tests and measurements and inspection equipment. For semiconductor part of the industrial, we focus on lithography. That business for us has been stable, but we should see more improvements in the second half of '24. Overall, we have solid new projects in the pipeline that will drive the growth longer term.

For optical advanced packaging, we're expanding this optical business for AI applications, mainly around 800 gig modules, and we are starting to do R&D and new product introduction of 1.6 terabytes. Again, good opportunities here. Growth in cloud and data center will drive the growth for this segment for longer term.

Please turn to slide 14. I just wanted to show you a few slides -- I mean, few pictures in this slide to see where Sanmina participates in AI and ML today. As you can see for AI and ML, for infrastructure such as communication, cloud infrastructure across multiple product lines such as the servers, I see hardware, software development, semiconductor capital, optical components such as optical modules, power controls, power management, networking equipment, and servers and storage.

Consumption of AI and ML is going across all markets such as automotive/transportation, safety/security, healthcare, and defense and aerospace. And then, of course, what we're doing internally utilizing AI and ML by automating our factories and machine learnings and back offices. So as you can see, we are heavily involved in AI, and I believe this will drive a better future for us.

Please turn to slide 15. In summary, for second quarter, we had solid execution revenue of $1.83 billion, in line with our outlook; non-GAAP operating margin 5.4%; non-GAAP diluted EPS of $1.30, high end of outlook. So overall, a respectable quarter for Q3.

For third quarter, our end-markets outlook, as Jon mentioned, is what we're seeing from our customer today is that third quarter will have a guidance of $1.8 million to $1.9 billion. Non-GAAP EPS will be at the $1.22 to $1.32. On positive side, our visibility is getting better, and we're starting to see more -- I should say, some normalization of supply chain.

For fourth quarter, we remain optimistic that we will see sequential improvements as we move into second half of the year. And we are starting to see stronger forecast for our September quarter as we are getting our forecasts in.

I can tell you that I'm personally excited about long-term growth for Sanmina. As I said before, fiscal year 2024 is a transition year for us. We are navigating these market dynamics pretty well. Short term, our operating margins are holding, and they're stable in the range of 5% to 6%. At the same time, longer term, we are positioning the company by making changes and improvements to drive operating margin to 6%-plus.

We expect that the fiscal year '25 will be a growth year for our end-markets. And our focus is to drive the growth in a heavy, regulated markets. We believe that's where we have competitive advantage, and we're well positioned there. So in summary, for short term and long term, Sanmina is well positioned to manage through this dynamic markets.

Ladies and gentlemen, now I would like to thank you all for your time and your support. Operator, we are now ready to open the lines for question and answers. I'd like to say thank you again.

Thank you. (Operator Instructions)

Ruplu Bhattacharya, Bank of America.

Hi. Thank you for taking my questions. Jure, the communications and cloud segment was down 36% year on year. Can you help us parse that? How much was communications down, and how much did cloud grow? And can you give us some more details within that segment? I mean, how are you seeing inventory correction (technical difficulty) in that segment? And how did optical versus networking versus wireless -- how did the different end markets within communications -- how did they pan out this quarter, and how do you see it trending over the next couple of quarters?

Well, Ruplu, thanks for the question. First of all, there's no surprise that communication market has been down now in my opinion, for the last three quarters, mainly driven by inventory adjustments and some softer demand in certain segment.

But you asked the question, when it's going to end. I believe we come into the bottom of it. As I said, we're starting to see some normalization when it comes to supply chain, and we are starting to see some more predictable forecasts. And most importantly, as I said, I think as we go forward, I think our visibility is better and so on and so on.

I think back to -- I think that cloud itself is doing better for us. That's about -- today, if you look at it, 33% of the revenue, about half of that is cloud and half of it is communication networks. A lot of the business that we do is around the networks and optical networks, Rublu. But the whole communication demand has got affected, especially around 5G and so on and so on. But it's -- on a positive side, we're starting to see the light end of the tunnel, and it's not a trend anymore.

Got it. That's helpful. Maybe as a follow-up Jure, I can ask you, on slide 13, you talk about Sanmina's expertise in optical packaging, and you've talked about 800 gig and 1.6 terabytes. Can you give us a little bit more detail on what type of stuff -- what are the projects that you're working on and when you think these technologies will become mainstream? Like are you shipping 800 gig now, or is that in testing phase? So any timeline for these technologies to become more adopted?

Yeah. We've been in optical business for a long time, especially optical networks. That business, for us, is pretty strong overall with a strong customer base. We started getting involved in optical modules, I would say, last five, six years. We've been investing a fair amount in the last couple of years into optical advanced packaging. We've been doing 400 gig type of product. We're starting to do 800 gig and making some shipments across our optical product line on 1.6 terabyte; that's in development with a couple of partners of ours and midst designs in and NPI process.

Okay. And maybe a last one question to Jon. So inventory was down sequentially a little bit this quarter. Can you give us your thoughts on the overall cash conversion cycle, and how you see free cash flow trending? And just remind us on your uses of cash. How should we think about how you prioritize uses of cash in this environment?

Yeah, sure, Ruplu. Thanks for the question. So in terms of the cash conversion cycle, we're in the mid-70s right now. But if you look back at the history of Sanmina, we're closer into the 50s. And so that's certainly what we're going to be striving towards, right?

And if you break that down between DOI, DSO, DPO, I think we've got a little bit of room to improve across the board. Inventory itself is quite a bit elevated. Several days beyond what our historical levels have been. DPO is not quite as high. So we're definitely going to be focused on working capital initiatives to bring that back down into line, which should help us generate more cash.

And in terms of our priorities for capital allocation, those haven't changed, right? And we've got four of them, just to reiterate for you and everybody else on the call. So number one, is in organic growth in the business; two, strategic transactions or inorganic growth; three, paying down our debt, which is at pretty low levels already; and then number four, share repurchases, which as I mentioned, will continue to do opportunistically.

Just to add to that, cash flow was pretty strong for six months, about $200 million, and we expect to continue to generate strong cash flow the rest of the year.

Yeah, absolutely, yeah.co

And do you expect strong free cash flow to continue for the rest of calendar '24?

Yeah, as you know, Ruplu, we guide one quarter at a time, but we are guiding cash flow to be positive in Q3. And as Jure mentioned, very pleased with the performance that we saw here in the first half, in the first two quarters. And then we expect to generate cash going into Q3 as well.

Operator, our next question, please.

Steven Fox, Fox Advisors.

Hi, good afternoon. A couple of questions, if I could. In terms of just -- you mentioned some test capacity issues and some supply chain constraints during the quarter. Can you expand on that and make sure -- I just want to make sure what sort of markets we're talking about, and how you're solving that problem (multiple speakers)

Yeah, Steve, that came from communication/cloud customer base, where we won a pretty good size of a project that should go on for the next three, four, five quarters. And this mainly is driven around our customer design and also top customer design of a test fixturing.

With just some of that modification -- as we got involved in production, we realized some modification needed to be made. We have some shortages of materials at the same time we're changing. On a positive side, these things will be resolved sometime this quarter. And then we should start continue to make shipments hopefully sometimes end of this quarter and next quarter and should be a pretty good program for us going forward.

Got it. That's helpful. And then as you mentioned, your gross margins were a little bit better than expected. And do you still see room for gross margin improvement from here? Can you just walk through some of what you see as the gross margin opportunity, say, over the next -- I don't know -- two to four quarters?

So Steve, I think we are working to improve the mix of our business, driven by the some of the technologies that we offer into our customers and creating a lot more value in especially the new market with some of the leading technologies that are coming out. So Sanmina's goal is not to sell just the price but to sell the value that we provide to our customers.

And I believe that what we're providing all the way from our high technology printer circuit boards -- if you look at AI market here and ML, it require some more advanced printed circuit boards. It requires a mechanical rocks, cooling, and so on that goes around the integration of server storage.

So that's the area that we move into, an area I mentioned earlier, talking about optical, expanding our optical business -- we always were very strong in an optical networks, optical systems. But now we're starting to -- we've been investing into optical components and optical modules. So basically, there's a huge demand going to be going on in next few years, and I believe that we'll be able to participate in that and drive the margin up.

We also focus on expanding our defense and aerospace business. Demand for that business continues to be strong, and we want to expand that all the way from high technology printed circuit boards to the board assembly to the system assembly and so on.

Renewable energy, that's another area that fits our model, providing end-to-end from mechanical electronics, heavy power and so on. Because especially around the AI upgrade the cloud, it requires a lot of the technology and capabilities that we deliver. Industrial business for us has been solid. I think we are investing in the right things there, too.

So overall, I would say the margin will be driven by the capabilities that we're providing to our customer number one and are providing more end-to-end solution for our customers in a markets that we have competitive advantage that I said, more mission critical type of products.

And then tuning things internally. I think as we went through this morning call, as I call it transition year. We invested a lot in '23 for our growth, and we positioned the company for our growth. Unfortunately, '24 demand went down because inventory correction, what we went, because of COVID and then slower the main. Combination of those two things is a transition year.

But what do you do in this type of environment? You'll basically look at your company and tried to tune things up so that allows us to do a better job as the market comes back and also most importantly, to take care of our customers better and deliver the better results for our shareholders. So combining all of that -- Jon, I don't know if you have anything else to add.

I think you said it very well. You're -- I think the only thing I would add on top, Steve, to add to what Jure said, which is all about driving value for our customers within the businesses and driving better segment or mixed results, but as we return to growth, we should get some natural operating leverage as well. Right? So if you add that on top of everything that Jure was saying, that's why we still believe that there's margin upside in both segments and for the company overall.

Operator, our next question, please.

Anja Soderstrom, Sidoti.

Hi. Thank you for taking my questions. So I'm just curious, you came in on the lower end -- sort of the lower end of the guidance range for revenue this quarter, and you expect sequential improvement next quarter. What gives you confidence in that? Is that due to those shipments that we're pushed out in communications, or are there other things driving that growth as well?

Well, first of all, Anja, thanks for the question. Yeah, if we had a little bit extra we could have shipped, our revenue would have looked a little bit better than what we delivered. But confidence is really what we are seeing from our customers, what they are telling us right now, based on today's information. As we said, we will take one quarter at a time in this environment.

I believe that what we've seen through forecast, visibility is getting better. I think (technical difficulty) burned down with a lot of our key customers. A lot of us -- a lot of our customers are telling that the second half of the calendar year will get better, and the forecasts are looking better. So combination of all of those things and some of the new programs that we have coming up should allow us to move in the right direction. Jon, anything else?

Yeah, I would just add, Anja, to Jure's point that the market is still pretty dynamic as customers and end markets to his point turning the corner on demand and inventory absorption. But if you look at our guide for Q3 in the midpoint, we are expecting to see some modest sequential improvement. So we're staying close with our customers on that and looking on, delivering as much as we can.

Okay. Thank you. And the joint venture in India, how is that trending? It seems like you had a lower payment for that this quarter.

Yeah, let me just give you from the business point of view and Jon, you can make a comment on that. First of all, India joint venture is going well. We're running the same way as we run it ever before. We have a lot of interest from our customers, and we expect a lot of growth in India. So from that point of view, I'm very happy where we're at and more happy about the future. Jon, any comments?

Yeah, I think it's executing well, to Jure's point. And if you look at what we guided, Anja, we said about $3 million in the distribution, and we did just shy of that. So pretty much right on target, right where we want it to be.

But a lot of upside potential especially if you look at the next 12, 18 months.

Operator, we have time for one more question.

Christian Schwab, Craig-Hallum Capital Group.

Hey, Jure, I just have one quick question that hasn't been asked. On the AI and machine learning product that you laid out, what percentage of total revenue is all of that?

Well, in a cloud, we did -- communication/cloud is about 33% last quarter. About half of that comes from cloud. We don't break it down at that, but definitely it's more this quarter than the last quarter. It will be more next quarter than we did last quarter. So definitely it's going the right direction, and it's really driven with a lot of our customers' new products that are required for upgrades of the data centers.

Okay. I guess we have other things in there that I thought you were including in your AI and machine learning, but that's okay. So I guess just a follow-up. You said that you kind of thought that the optical business would follow both the cloud and hyperscale strong spending. I guess just a follow-up to an earlier question. When would you expect optical spending to show meaningful improvement from current levels?

I would say, let me kind of make a comment on the whole communications sector. I personally believe that we come in end of that bad cycle, if I can (technical difficulty) I would expect to see some nice improvement in our fourth quarter. We're going to see some this quarter but really a lot more in our fourth quarter. And like I said, September and December quarter of this year, we definitely -- forecasts are looking up from -- in that segment. And then help from cloud will help move that in the right direction.

Okay, great. Thanks for all the questions. Thank you.

Thanks, Christian. Ladies and gentlemen, I want to again thank you for your time and your support. If you have any more questions, please get back to us. Otherwise, appreciate everything, and we'll see you or talk to you 90 days from up. Bye-bye. Thank you.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining you may all disconnect.