Welcome to the Sanmina's Second Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the conference over to Paige Melching, Senior Vice President of Investor Communications. You may begin.

Thank you, Paul. Good afternoon, ladies and gentlemen, and welcome to Sanmina's second quarter fiscal 2023 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 and Kurt Adzema, Executive Vice President and Chief Financial Officer.

Good afternoon.

Good afternoon.

Our agenda for today's call is Kurt will review the details of our financial results and Jure will follow up with additional comments on the results and our future goals. Then we will open the call up for questions. Before I turn the call over to Kurt, 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 three 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 projections in these statements as a result of a number of factors set forth in our 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 the earnings release, the earnings presentation, this conference call, or the Investor Relations section of our website, whether as a result of new information, future events, or otherwise, unless otherwise required by law. Included in our press release and slides issued today, we have provided you with statements of operations for the quarter ended April 1st, 2023 and 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, 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'd now like to turn the call over to Kurt.

Thanks Paige. Before I discuss the Q2 results, I'd like to discuss a mention of the restatement of historical results in our press release. One of our divisions accounts for approximately 3% of total revenue and is part of our CPS business, primarily entering into long-term fixed price customer contracts on a project basis. GAAP requires that the estimated amount of revenue and profit expected to be realized upon completion of a profitable contract is recognized over the life of the contract. However, if a contract is expected to be unprofitable upon completion, 100% of the loss must be recognized in the period in which it is initially estimated that a contract will result in a loss upon completion. To the extent a contract has any actual or anticipated overruns, the company may seek the ability to recover from its customer. During the preparation of our Q2 FY 2023 financial statements, the company determined that certain personnel in the division had failed to properly substantiate and update cost estimates for materials and other costs over the life of certain contracts. Primarily as a result of these findings, revenue was overstated by approximately $10.2 million and $18.3 million for FY 2020 and FY 2021 respectively, and also understated by $29.1 million in FY 2022, overstated by $5.6 million in Q1 FY 2022. I'm sorry, I should have said $29.1 million in FY 2022, I apologize. GAAP EPS was overstated by approximately $0.09, $0.23, and $0.25 in FY 2022, 2021, and 2022 respectively, and understated by $0.06 in Q1 FY 2023. For more details on this, please see the 8-K we filed today. Now, on to the second quarter. Please turn to slide five. Our team did an outstanding job delivering strong financial performance. Q2 revenue of $2.32 billion exceeded the high end of our outlook of $2.2 billion to $2.3 billion despite Q2 typically being a seasonally down quarter. This was primarily due to continued improvements in the supply chain. Non-GAAP gross margin was 8.4%. Non-GAAP operating margin was 5.8%. Non-GAAP fully diluted EPS was $1.59 at the upper end of our guidance range of $1.50 to $1.60. Finally, Q2 GAAP fully diluted EPS was $1.33. Please turn to slide six. If you compare our Q2 FY 2023 results with Q2 FY 2022, revenue grew 21% from $1.92 billion to $2.32 billion. Operating margin improved from 4.7% in Q2 FY 2022 to 5.8% in Q2 FY 2023, and finally, EPS grew over 50% from $1.05 in Q2 FY 2022 to $1.59 in Q2 FY 2023. Please turn to slide seven. This shows the strong annual trends of our financial results including revenue, operating margin, and EPS. We're off to a strong start in the first half of fiscal 2023. First half of fiscal 2023 revenue was $4.7 billion and is on track for the full year to grow in the mid-teens relative to the prior year. Non-GAAP operating margins have continued to improve over time with the first half non-GAAP operating margins of 5.9%. Finally, continuation of our current run rate for EPS for FY 2023 for the rest of the year would result in FY 2023 EPS over $6 compared to FY 2022. Now please turn to slide eight. In the first half of FY 2023, IMS revenue was $3.9 billion. This is primarily due to the continued improvements in the supply chain. First half FY 2023 CPS revenue was $889 million. First half non-GAAP gross margin for CPS improved to 13.2% compared to FY 2022. Now please turn to slide eight. We continue to have a very healthy balance sheet that provides our company a competitive advantage. Cash and cash equivalents at the end of the quarter was $718 million. There were no borrowings under our $800 million revolver at the end of Q2. Cash flow from operations for the quarter was $65 million. Capital expenditures were approximately $63 million. At the end of Q2, we had approximately $164 million of authorization for share repurchases, and the Board recently approved an additional $200 million of authorization. The company will continue to be opportunistic as it relates to repurchasing shares. Turning to slide nine. We continue to remain focused on efficient cash management. Cash cycle days were approximately 50 days in Q2 and non-GAAP pre-tax ROIC was 33.9% for Q2. Finally, please turn to slide 10. Let's talk about the Q3 outlook. Coming off of a very strong Q2 and given the continued uncertainty related to supply chain as well as the macroeconomic and political environment, we expect Q3 revenues to be in the range of $2.2 billion to $2.3 billion. We expect non-GAAP gross margin in the range of 8.2% to 8.7% dependent on product mix. Non-GAAP operating expenses are expected to be in the range of 60% to 62%, and non-GAAP operating margin in the range of 5.5% to 6%. We expect non-GAAP interest and other expenses to be approximately $15 million, driven by the continued increases in interest rates. In addition, we estimate an approximate $3 million non-cash reduction to net income to reflect our joint venture partners' equity interest in the net income of our Indian joint venture. We expect a non-GAAP tax rate of approximately 17.5% and non-GAAP fully diluted share count of approximately 60 million shares. When you consider all of this guidance, our outlook for non-GAAP EPS is in the range of $1.50 to $1.60. We expect Q3 capital expenditures to be around $60 million, driven by the growth of new programs and the support of future growth. We expect Q3 depreciation of around $30 million. Overall, we are very pleased with our recent results. That being said, we continue to believe that there is an opportunity to further improve our business model over the long term. And with that, I'll turn it over to Jure.

Thanks Kurt. Ladies and gentlemen, first of all, I got this bad cold and hopefully you can understand me, but I think I can get through it. So, again, thank you all for being here with us today. First, I would like to take this opportunity to recognize Sanmina leadership and our employees for doing a great job as you heard from Kurt. So to you, Sanmina team, thank you, and let's keep it up. Let me add a few more comments about financial highlights for the second quarter and I'll review the end markets and outlook for the third quarter and the rest of the fiscal year 2023. As you heard from Kurt, for the second quarter, Sanmina delivered strong results with great operational execution and our supply chain for semi components got a lot better and that allowed us to ship more. Our Sanmina team has done an outstanding job. Despite ongoing macroeconomic uncertainty, these results are a reflection of our continued focus and execution of our strategy. Now, let's discuss revenue for the second quarter by end markets. For the second quarter, demand for the products was stable across most markets. In industrial, medical, defense, and automotive, we delivered $1.362 billion, reflecting a quarter-over-quarter growth of 2% and a year-over-year increase of 18%. In communication networks and cloud infrastructure, we achieved $958 million, which is strong for the second quarter, although it was down slightly by 6%, with an impressive year-over-year growth of 27%. Typically, this quarter experiences seasonality and tends to be weaker, but we performed better than usual, delivering $2.32 billion. Quarter-over-quarter was flat, slightly down by 2%, yet year-over-year growth was robust at 21%. Additionally, we continue to diversify our customer base, as our top 10 customers for the second quarter accounted for 49% of our revenue. Please turn to slide 14. Let me talk to you about our third quarter outlook and fiscal year 2023. First of all, we expect to see nice growth quarter-over-quarter for the third quarter. As you heard from Kurt, our revenue forecast is about $2.2 billion to $2.3 billion. For industrial, medical, defense, and automotive markets, we expect to see nice growth year-over-year. And communication networks and cloud infrastructure, we also expect to see nice growth year-over-year. As you can see, Sanmina does not serve consumer markets at all; our focus is on high complexity, heavily regulated markets. Now, let me talk to you more about fiscal year 2023. We're on track to deliver year-over-year mid-teens revenue growth for fiscal year 2023, and we expect to deliver margin expansion and EPS growth. I can tell you that Sanmina has a well-diversified customer base and it's growing. We'll continue to invest in talent and leading technology to support the growth for fiscal year 2024 and beyond. Overall, we are expanding our capacity into more profitable projects. So, let me give you some examples. For medical, defense, and automotive, first of all, these markets are well established. At the same time, we have large opportunities as we look to the future, both in new programs and some programs that are in the pipeline. For industrial, we also see some more growth through renewable energy, grid management, and public safety equipment, along with a fair amount of what I call precision electromechanical systems across many industrial projects. For communication and cloud infrastructure, we focus on the new products around networking and storage products. These businesses should produce higher margin and long-term growth and stability. Let's talk about management through this challenging macro environment. We have positioned the company to be able to navigate any market dynamics. Sanmina's embedded resiliency in our focused market space and we have strong global management to do the job. Sanmina is well positioned for any economic environment, but we are continuing to monitor market conditions. Our focus today is on the quality of our customer base, building the right and lasting partnerships. We focus on continuing to diversify revenue growth with market leaders in mission-critical products. We continue to improve productivity. Yes, we are focused on the quality of earnings, and consistency for short-term and the long-term. Please turn to slide 15. In summary, for the second quarter, we delivered solid execution, both on top and bottom-line results. Our priorities have not changed. Our strategy is working, and it's delivering results. We'll continue to make investments for future growth and I can tell you that we are excited about the future. With that, ladies and gentlemen, now I would like to thank you all for your time and support. Operator, we're now ready to open the lines for questions and answers. Thank you again.

And our first question comes from Christian Schwab from Craig-Hallum. Your line is open.

Hey, this is Tyler on behalf of Christian. Thanks for letting us ask a couple of questions. I guess, first, inventories came down nicely sequentially quarter-over-quarter, about $1.5 billion. I guess I was wondering if you could help maybe level set us what you kind of think a normalized level as your business is larger than it was a couple of years ago and maybe any decisions you made about what level you want to manage those inventories going forward given the constrained environment we just went through.

Yes. Before I hand it over to our CFO, I want to mention that we believe our inventory turnover should be significantly better than it currently is. Due to the shortages we faced over the past two years, we had to respond to customer requests to increase our inventory. The positive aspect is that our customer is fully committed to these inventories, and we anticipate that they will continue to decrease over the next couple of quarters. Now, I'll pass it to Kurt.

Yes, overall, our inventory levels have significantly increased over the past couple of years. Our focus on inventory revolves around inventory turnover. Historically, we've managed to achieve turnaround rates of six to seven times over three years, and ideally, we aim to reach eight times. There are ample opportunities for us to improve this further, though it will not be an immediate process. As Jure mentioned, we should begin to see some benefits as we move through the fiscal year and into 2024. We are starting to see ongoing improvements in the supply chain, which should aid in normalizing our situation, but it will take several quarters to fully achieve that. Therefore, I would anticipate that normal conditions are more likely to be in place by the next fiscal year, but we will make progress along the way.

That's great color. I appreciate that. And then maybe following up on that then, regarding your cash balance, also very strong. And as you work that inventory down, it should only grow as well as continue to drive free cash flow. So, expanded your share buyback, which looks great. I guess how much excess cash do you have or rather what's a comfortable level of cash that you'd like to run your business with?

We have the strongest balance sheet in the industry and are pleased with our cash position and low leverage. However, we plan to be cautious and selective when it comes to share repurchases. By increasing the authorization, we gain flexibility for the upcoming months while prioritizing what is best for our shareholders. Cash flow can fluctuate significantly throughout a quarter, with substantial expenditures at the beginning and collections toward the end. Therefore, determining the ideal cash level is challenging. Nevertheless, we are very comfortable with our balance sheet, which I believe is the least leveraged in the industry.

That sounds great. That’s all for us. Jure, hope you feel better as well.

Yes. Thanks.

Thank you. And our next question comes from Anja Soderstrom from Sidoti. Your line is live.

Hi everyone. Congratulations on the good quarter. And Jure, I'm sorry, I'm feeling with you, running on my second week of cold myself. In terms of the revenue guidance for the third quarter, it sort of indicates a slight decline, right, the question?

Again, we finished at $2.32 billion. The guidance is $2.2 billion to $2.3 billion.

I would say it's flat, slightly down, the guidance.

Okay. And in terms of the communication networks, you had a decline in that as well. What are you seeing in terms of that? I'm hearing from others that there are some delays and things are getting pushed. Are you seeing the same? Are you seeing something else?

Well, as I mentioned earlier, we are currently operating in a shifting macro environment. There are numerous changes occurring. The positive aspect is that demand appears to remain steady, although there are some aspects that are being delayed here and there, particularly in certain communication projects. However, we had a solid performance in the second quarter, and the last two quarters in communication and cloud were very strong, as evidenced by the results. Personally, I am satisfied with where we stand in this environment. I believe we can still achieve strong financial results, but we will see. We will continue to strive for maximum performance each quarter.

Thank you. In terms of the cash cycle days, what are you aiming to reduce that to on a normalized basis?

If you examine how we manage cash cycle days over time, we've generally been in the 50 range, plus or minus. With the decrease in inventory, that's advantageous, but accounts payable are also decreasing. Looking at our history, we've managed to keep it pretty consistently in the 50s over the last three years, despite challenges. I would expect us to remain in that range, but we are always aiming for greater efficiency.

Okay. And a follow-up on Craig-Hallum regarding your expected improved balance sheet. Are you considering a dividend?

We've considered that at times and will continue to evaluate it, but we have no plans for it at this moment.

Okay. That was all from me.

Thanks Anja. Hope you feel better too.

And seeing no further questions, I'll turn the call back over to management.

Paul, thanks a lot. First of all, ladies and gentlemen, thank you very much. I'm sorry that I can't yell today. Hopefully, I'll get a lot better for the next quarter. So, with that, I appreciate your support. Thanks a lot.

Thank you.

That concludes today's conference call. Thank you for joining and have a pleasant day.