Ladies and gentlemen, thank you for standing by, and welcome to the Sanmina Second Quarter Fiscal 2022 Earnings Call. At this time, all participants are in a listen-only mode. 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, Ren. Good afternoon, ladies and gentlemen, and welcome to Sanmina’s 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.com in the Investor Relations section. Joining me on today’s call is Jure Sola, Chairman and Chief Executive Officer. Good afternoon. And Kurt Adzema, 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 webcasted and recorded and will be available on our website. You can follow along with our prepared remarks in the slides provided on our website. Please turn to Slide 3 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. The company’s actual results could differ materially from those projected in these statements as a result of a number of factors set forth in the company’s annually 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 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 2, 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 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 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 Jure Sola.

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome and thank you all for being here with us today. First, I'd 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 a second quarter. So, to you, Sanmina team, thank you and keep it up. For the agenda, we have Kurt, our CFO, to review details of our results for you. I will follow up with additional comments about Sanmina's results and future goals. Then Kurt and I will open questions and answers. And now I'd like to turn this call over to Kurt.

Thanks, Jure. Please turn to Slide 5. 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 $1.7 billion to $1.8 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's distinct internal capabilities enabled by a singular unified IT platform. Non-GAAP gross margin was 8.1% compared to 8.5% in the prior quarter, primarily due to higher direct material costs, as well as the impact of annual salary increases, the annual 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 105 by $0.09. Finally, Q2 GAAP EPS was at $0.83. Now, please turn to Slide 6. This slide shows the quarterly trends of our financial results. We continue to deliver consistent financial performance over the last 2 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 7. 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. Component 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 8. We have a very healthy balance sheet that provides our company a competitive advantage. Cash and cash equivalents were $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 and 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 please turn to Slide 9. Our strong balance sheet and cash flow generation allow the company to continue to opportunistically repurchase shares and return capital to our shareholders. As you can see from the chart, we purchased over $1 billion of shares in the last 8.5 years, including almost $400 million in the last 2.5 years. During Q2, we repurchased approximately 2.8 million shares bringing the total through the end of Q2 to 4.3 million shares. 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 10. 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 ROIC continued to improve to 27.9%. Finally, please turn to Slide 11. Let's talk about the Q3 outlook. Overall customer demand is strong, but there continue to be supply chain challenges, including uncertainty of the impact of COVID lockdowns in China and the overall global supply chain. We expect Q3 revenue to be in the range of $1.825 billion to $1.925 billion. We expect non-GAAP gross margin in the range of 8% to 8.5% depending on product mix. Non-GAAP operating expenses in the range of $60 million to $62 million and non-GAAP operating margin in the range of 4.8% to 5.3%. 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 $1.05 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 Jure.

Thank you, Kurt. Ladies and gentlemen, let me make a few more comments about the business environments in the 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. Sanmina is delivering consistent and strong results as you heard from Kurt. It was broad-based market demand. The key drivers in the second quarter were excellence 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 in a short cycle time. Through this operational flexibility, we're able to deliver critical customer requirements. I can tell you that our Sanmina team has done an outstanding job as we continue to differentiate our industry-leading capabilities. Overall, we delivered nice organic growth, quarter-over-quarter growth of 9% and year-over-year growth of about 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 across all end markets. The top 10 customers were 50% of our revenue. Communication networks and cloud infrastructure accounted for 40% of the revenue, driven by growth in optical systems, 5G networks and cloud infrastructure. This segment grew around 8%. Industrial, Medical, Defense, and Automotive made up the remaining 60% of our revenue, 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. The book-to-bill was 1.1 to 1. I can also tell you that the pipeline of opportunities is solid, 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 have continued to be strong. We see upside potential across all end market segments. Our third quarter forecast is based on component constraints that will continue, and it is based on what we are seeing today in the markets. We have a 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 of Sanmina is more exciting. Sanmina mainly services mission-critical, high complexity, heavily regulated markets. In these markets, Sanmina is well-positioned with a healthy backlog for the 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, 5G networks, cloud networking and enterprise storage systems. And we're also forecasting that approximately 60% or more of revenue for the third quarter will be from industrial, medical, defense and automotive markets. Now let me talk to you about growth for the calendar year 2022 and beyond. Based on present market visibility and customer forecast, fiscal year 2022 will be a strong growth year for Sanmina. The pipeline, our new growth opportunities remains very healthy. We are investing a lot more in talent and leading technology to support the growth for fiscal year 2023 and beyond. Now let me talk to you about long-term growth. I can tell you today that Sanmina has a well-diversified customer base, and we expect to continue to diversify end markets as we grow. We have a lot in the pipeline driven by our medical business, well-positioned there. Defense continues to expand, well-positioned and automotive focusing on electric 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, we always have strong position and continue to see nice expansion in the future. Overall, we are expanding to more profitable projects by providing industry-leading technical engineering solutions from R&D to build to order, configure to order and other services. All of these opportunities in these markets are translating into growth and margin expansion for Sanmina. Please turn to Slide 15. In summary, our second quarter revenue exceeded our outlook, driven by strong demand. We delivered solid non-GAAP operating margin of 5% and non-GAAP diluted EPS of $1.14. That's $0.09 above the guidance, and strong free cash flow of $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 $1.825 billion to $1.925 billion. We expect to deliver non-GAAP diluted EPS of $1.05 to $1.15. I can also tell you that we remain very confident in our fiscal year 2022 profitable growth objectives that we set at the beginning of the year. Ladies and gentlemen, now I would like to say again, thank you for all your time and support. And operator, we are ready to open these lines for questions and answers. Thank you.

Your first question comes from Ruplu Bhattacharya from Bank of America. Your line is open.

Hi. Thank you for taking my questions.

Hello, Ruplu.

Hi, Jure. My first question relates to margins. I was wondering if you can just provide some more details there. It looks like your revenue came in higher than your guidance range. 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 IMS seems to have declined 50 basis points sequentially. And related to 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 were the margin dynamics in the second quarter?

Yes, Ruplu, let me just add, and I will turn it over to our CFO. First of all, margin is a lot driven by the mix itself. We have what I would say in this environment good overall margin in what we call 8% plus gross margin. And we feel that as long as we keep it at the 5% in this environment, it's respectable. But the longer term, we believe there is a fair amount of upside. And I will turn it over to CFO.

Thanks, Jure. Yes, Ruplu. So, as Jure pointed out, obviously, mix is always a factor. But the other things that I mentioned on the call, first of all, we had higher direct material costs, and while we are able to pass it on to customers, that does impact 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 the 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 those things played into margin for this quarter. But again, for the outlook for next quarter, we do think it will be somewhere between 8% and 8.5%.

8% and 8.5%, you're talking about gross margins?

Yes, gross margin, which obviously then falls to the operating margin because we are expecting relatively flat OpEx.

Okay. Thanks for that. Can I ask for my second question? Just some clarification on the guidance on revenues, Jure. I think you said communication networks and cloud infrastructure should be about 40% of your fiscal 3Q revenue. At the midpoint, your revenue guidance is $1.875 billion. So 40% of that would be about 7, would be slightly lower than what you reported this quarter in terms of revenues. And I'm just wondering, you said you have a strong backlog, looks like the communications market is strong with the networking and optical and these things doing well. So, I was just curious if I misunderstood that or if you can just clarify how you should think about the revenue growth because the 40% of the midpoint is like $750 million, which is slightly lower than the $757 million you reported in the second quarter.

Let me clarify that again. As I mentioned earlier in my prepared statement, we are experiencing very strong demand for the third quarter and for several previous quarters as well. The demand is indeed there. I believe, as I stated in my prepared remarks, that our growth will be influenced by the component constraints present in the industry. Our team did an excellent job last quarter, and we managed those constraints effectively. We anticipate continuing to manage them, and how successfully we secure these components will significantly impact our growth. There is considerably more potential for growth than there are risks, although the risks primarily relate to components.

Got it. No, that makes sense. And then for my last one, Kurt, 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? It was positive this quarter. And I was just wondering if you can give us your thoughts on how that trends over the next few quarters?

Sure, absolutely. So yes, absolutely, our inventory has gone up. That is a result of working very closely with our customers and suppliers to forecast what we think their future demand is going to be. And so I think that's a big part of what we're trying to do. On the cash flow side, I would say we continue to generate positive cash flow. I expect to do it again next quarter. And 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.

Thanks, Ruplu.

Your next question comes from the line of Jim Suva from Citigroup. Your line is open.

Hello, Jim.

Hey, good evening.

Good evening.

Thanks so much for the details so far. I wanted to ask, strategically, it seems like we are hearing of customers shifting their production closer to end destinations to reduce shipping costs, COVID, trade wars, customs issues, boat issues, undocking, all that. Have you seen that start to materialize, or is it more discussions? And if it does, am I correct because your cost-plus model that could actually help out your margins because labor costs may be potentially higher in those near onshore destinations?

First of all, you're correct that customers are shifting to locations that make more sense for their businesses to be nearer to their end markets. In this market, we are moving towards a regional supply chain. In the past, everything was oriented in one direction, but now it is becoming more regionalized. Sanmina has always operated in this way. We are definitely witnessing growth in the Americas and Europe as these changes occur, but it is a gradual process. The world is more interconnected than many realize. However, I believe that in the next 12 to 18 months, we will see more of this regional shift, and I expect us to see positive margin benefits in the long term. Additionally, in the markets we are targeting, we are concentrating on mission-critical products. These products will remain closer to home, and I believe we can achieve better margins with them. This is a key part of our growth strategy. So far this year, we have seen solid growth, and as long as we can secure materials, we expect that trend to continue. However, it is crucial that we work on improving our bottom line.

Great. Thank you so much for the details and clarifications, and congratulations.

Thanks, Jim.

Your next question comes from the line of Anja Soderstrom from Sidoti. Your line is open.

Hello, Anja.

Hi. Thank you for taking my questions, and congratulations on the great quarter.

Thank you.

I’m curious about the state of the supply chain on your end. Is it stabilizing or improving? What insights can you share on this?

I would say it's still very challenging. Some weeks, everything looks good, and we have everything we need, but it varies week to week. I’m not an expert on it, but based on what I see from our suppliers and customers, I think this situation will continue through definitely 2022 and 2023. Let's hope for improvement, but right now, I would describe it as stable, with no major short-term improvements in sight.

Okay. Thank you. And you mentioned the gross margin was impacted by the materials cost increase. But we also mentioned in Q&A that you could pass those on to customers. So how should we think about that? Is there a lag between there and that's why the gross margin was negatively impacted and that should benefit during the coming quarters or ...?

Yes. First of all, we worked closely with our customers to minimize the impact on them in this environment, especially as we seek critical components worldwide. We collaborate closely with both our suppliers and customers to address these challenges. Our business model is built on transparency and genuine partnership with our partners. Therefore, we work very closely with them. However, we cannot absorb these cost increases ourselves. Regrettably, it falls on our customers to manage these increases, but we strive to reduce the impact on them as much as possible.

Okay. Thank you. And then in terms of your end markets, were there any sort of surprises there considered in that?

No major surprises. Right now, we are in a phase of growth and expansion in critical markets that I previously mentioned. This focus extends beyond just 2022 as we look a few years ahead, concentrating on areas where we have significant strength such as medical, defense, and automotive, particularly with electric vehicles. Our position in industrial is very strong and will continue to grow. We have always maintained a solid footing in communication and cloud infrastructure, and we are also expanding our component businesses. I believe major opportunities lie within our component sectors, and we are actively pursuing significant growth there in the next 18 months. We expect these efforts to enhance our margins.

Okay. Thank you. And then also, I have two more questions. In terms of China and the lockdowns there, have you seen any impact from that indirectly or ...?

Well, definitely, we’ve seen some impact there. Our plant was shut down for, I think, 3.5 weeks. We are working around it. As much as I like to use it as excuses, we are getting used to it, COVID, material shortages. Kurt and I and other managers were talking about it last week, and it's just a normal environment that we have to survive in.

Yes. I think the key thing you touched on, Anja, is it's not just about the plants that are just in China or 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's a lot of uncertainty about how that all gets unwound and the logistics of getting stuff out of China kind of gets backed up.

Okay. And then sort of what kind of risk does that impose to your third quarter guidance? Then, what kind of visibility do you have?

Yes. As Jure mentioned, I believe the guidance we provided considers the uncertainties we are currently aware of. In these dynamic environments, it is prudent to adopt a cautious approach, and we have factored this into our guidance.

Okay, great. Thank you. That was all for me.

Thank you, Anja. Operator, we have time for one more question.

Sir, your last question comes from the line of Christian Schwab from Craig-Hallum Capital. Your line is open.

Hello, Christian.

Hey, Jure. Congrats on the great quarter. Your commentary regarding long-term growth rate in '23 and beyond, one of your competitors recently had an Analyst Day and they kind of talked about their belief that the broader EMS industry is said to be kind of a 5% to 7% growth type of industry, and they expected to outperform that themselves given kind of a lot of the same things you stated. So, is that the type of growth rate in '23 and beyond that we should be thinking about for Sanmina? There wasn't a clarity on exactly what numbers you want to put behind that?

Well, yes, if you look at this year so far, just in the first two quarters, what we delivered and what we are guiding will put us for '22 above those numbers. At this time, I think if I look at the opportunities in front of it, Christian, growth is not going to be a problem. I think the challenge for us, we need to see this more visibility resolution to these material shortages before I like to put a big number out there. But internally, we are investing into the right technologies, right products in these key markets to drive not just the growth itself, but to really expand our margins for the long-term.

Great. Perfect. Then my last question is, Jure, do you guys have an idea of how much end customer demand that you under shipped over the course of the last 12 months due to supply and material constraints?

Yes. The only thing that I can tell you is most of my customers, I could have shipped a fair amount more in some cases, a lot more if we could get those critical materials. We stopped counting on it because we just operate in this environment that our customers are changing schedules just trying to meet the most critical demand what they need and to service their most critical customers. So, we have to be very flexible, and our efficiencies today are not very good because it's a stop and go. As we stabilize materials and so on, I expect better margins just on the revenue that we are shipping today.

Great. No other questions. Thank you.

Well, 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 to talking to you in the next 90 days.

Thank you.

Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.