Sanmina Corporation (SANM) Q4 2011 Earnings Report, Transcript and Summary

Good afternoon, my name is Michel and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI Fourth Quarter and Fiscal yearend Earnings Conference Call. (Operator Instructions) Thank you, Ms. Paige Bombino, Director of Investor Relations; you may begin your conference.

Thank you, Michel. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI’s Fourth Quarter and Fiscal Year end 2011 Earnings Call. A copy of today's release is available on our website in the Investor Relations section. You can follow along with our prepared remarks and the slides posted on our website. Please turn to page two, the 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 of operations may differ significantly as a result of various factors, including the state of the economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change. We refer you to our quarterly and annual reports filed with the Securities & Exchange Commission. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements. You'll note in our press release and slides issued today, that we have provided you with a statement of operations for three months and 12 months ended October 1, 2011 on a GAAP basis, as well as certain non-GAAP financial information. Reconciliation between the GAAP and non-GAAP financial information is also available 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 infrequent or unusual items to the extent material. Any comments we make on this call as they relate 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 our gross profit, gross margin, operating income, operating margin, 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 Sola, Chairman and Chief Executive Officer.

Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome. Thank you again for being here with us today. Joining me on this conference call is Bob Eulau, our Executive Vice President and CFO.

Hi, everyone.

For today’s agenda we have Bob Eulau will review our financial results for the fourth quarter of fiscal year 2011. Then I will follow with additional comments relative to Sanmina-SCI’s results and future goals. Then Bob and I will open for question and answers. And now, I would like to turn it over to Bob. Bob?

Thanks, Jure. Please turn to slide three. Overall the fourth quarter results were better than we had expected. Revenue of $1.7 billion was up 1.3% on a sequential basis and up 0.6% over the fourth quarter last year. This was at the high end of our guidance of $1.65 billion to $1.7 billion. Our gross margin came in at 7.8% which is down 20 basis points from the third quarter. P Operating margin improved by 20 basis points from last quarter to 4.1%. Non-GAAP EPS was $0.47 per share. This was based on 82.7 million shares outstanding on a fully diluted basis. Non-GAAP EPS was above the range of our guidance which we set last quarter. Finally, cash generation was strong in this quarter with cash flow from operations was $79; I’ll discuss cash in more detail in a few minutes. Please turn to slide four. Revenue was up 1.3% or $23 million from Q3 to $1.7 billion. From a GAAP perspective, we reported net income of approximately $18 million which resulted in earnings per share of $0.22. This was up relative to last quarter primarily because of a debt extinguishment cost which was incurred last quarter. For the year, revenue was $6.6 billion up to about 4.5% from $6.3 billion last year. EPS for the year was $0.83 versus $1.48 last year. The major difference is on an annual basis was a favorable litigation settlement in FY ’10 and the debt extinguishment cost in FY ’11 that I just mentioned. Restructuring cost totaled $14 million for Q4. Restructuring was higher than normal for reasons. First, we incurred about $4 million in catch depreciation for real estate that we are planning to sell. It is a technical accounting issue, but since we did not sell the assets within a year,…

Thanks Bob. Ladies and gentlemen despite a lot of headwinds in our global economy Sanmina SCI delivered a strong fourth quarter. Our fiscal year 2011 is a second year of good results and continuous improvements. So we are pleased with our accomplishments that we made in the fiscal year 2011 especially the future new opportunities that we created as we go on. Sanmina SCI is in a great position. Our new strategy is working. I believe we are well aligned with our key customers. These are the leaders in the market where we have a strong leadership position with each of them and continue to be more involved in their future growth. So in summary just to add to what Bob said, fiscal year 2011, EPS, non-GAAP EPS was $1.64, it grew 26%. EBITDA grew 9.3% and this is mainly driven by our focused strategy what we are focusing the quality of the customer, quality of the revenues, better margin businesses and focusing on the businesses that will return to us a fair sustainable returns on our investment. We have a nice continuous improvement that’s why we have a nice continuous improvement in last two years. Our EBITDA grew 98% in last two years. We’ continue to lower our debt and improved balance sheet. So things are definitely moving in the right direction. Now pleased turn to slide 10, I’d like to talk to you about our end markets. As you look at this slide, 10 you can see right away that revenues for the year grew 4.5%. We forecast that fourth quarter to be basically flat; it grew approximately 1.3% on a quarterly basis. We also in the quarter have in terms of customers at 53% of revenues and we also for a year we had a one customer…

Okay. (Operator instructions) We have a question from the line of Sean Hannan from Needham & Company.

Yes good afternoon.

Hello Sean.

Hi, Sean.

I had a quick question around your guidance Jure I wasn’t sure if I heard specifically what you are looking for the next quarter but I think from your broader guidance it seems to imply that communications will probably be down double digits next quarter and just looking to see if we can get a little bit more color behind whether within networking wire line wireless infrastructure where exactly we are seeing the inventory corrections to push outs in anymore information be appreciated?

Well first of all, we believe and let's specifically talk about communication as far as the short term definitely there is some push outs and something into recorrection. I don’t think I can talk too specific about one market segment or in the group but I can tell you it’s really more across multiple customers I think it’s across the whole industry now and on the parties are Sean we are not seeing cancellation what we are really seeing there is more push outs. So we think that’s just a temporary adjustment and we still believe that our communication network infrastructure business will grow in 2012.

Okay and to clarify, we are expecting growth in the aggregate for fiscal ’12 we still are optimistic around that based on this December guidance. That would imply a pretty significant growth in the back half of the year.

Well let me tell you why we are confident, we have, we are involved in a really new programs. Most of our revenue in that’s coming from the new programs that we won in last 12 months or 18 months. These are all new programs. We are well positioned with all the key players and there are a lot of other opportunities that we are working on. So yeah this is the area that I believe that we can win as long as these customers grow and if you watch, if you listen to them and watch their forecast they are expecting to grow in a calendar year 2012.

Okay and then last question now that you’ve completed fiscal ’11 when you look at those wins that you just referenced Jure, through the year versus a fiscal and realizing you don’t specify a dollar number. First can you share with us whether you actually won a higher level of business it sounds like perhaps you had and then second can you provide color on the segments that perhaps may drive that mix of wins to contribute more meaningfully in fiscal ’12?

From utilization standpoint, is there a way if you can provide a little bit of color around that?

It didn't change much from the last quarter. If you strictly look at the – based on the factory – based on people about 85% to 90% utilization, based on equipment about 75%.

You've certainly talked for a while around de-leveraging your business. As we're now entering the new fiscal year and you've talked a little bit around some of the thoughts you have on cash flow, and of course, your CapEx expectations, is there a way if you can provide a little bit more around how you see taking out a little bit more of your debt and a degree, you can bring down some of the substantial interest payments?

Yes, well, first of all definitely our larger segment the communication infrastructure will continue to grow for us. As I mentioned in my prepared statements enterprise computing we got lot activities going on including our own ODM products that has a lot of potential. I think our defense aerospace industrial medical segments will continue to be stable. Defense was a tough business for us in 2011. We don’t expect defense business to recover fast in 2012. But we believe the other businesses will have growth in their segments. I think multimedia for us that group of customers also put a solid overall I think it will be a more all our customers – unless this whole economy goes down but we are lot better positioned today. We won more new programs in 2011 than let’s sway in 2010. So I think the future is brighter. The question is just when does this demand is going to be there?

Okay, thank you very much. I’ll jump back in the queue.

Thanks Sean.

And your next question comes from the line of Jim Suva from Citi.

Thank you. Hey Jure, it’s Jim Suva, how are you?

Hey, great. Jim, how are you?

Great. Quick question, and maybe you can help kind of cross the gap here a little bit about your guidance on the gross margins compared to say a year ago in the same quarter. It looks like year-over-year gross margins are going down and you what kind of that you are out what that’s the case is, we kind of hope for gross margins post restructuring to be going higher?

Okay, well let me give you a couple of points and I’ll turn it over to Bob our CFO. First of all, it’s mainly driven by the revenue today. We do expect as the revenues come up to margins continue to improve. I think our model drives that even in the quarter that we just finished, the business was challenging especially at the component level we delivered higher margin at our component level than overall company but still demand for component level is down. We do expect that component level of demand to come back in hopefully in the second quarter. So that will help us out, but it’s really more revenue driven, Bob?

Yeah I think, I mean Jure hit the highlight and our margin is going to be very dependent on revenue and on mix and as you know the components business is very high contribution margin and so when revenues goes the wrong direction it has a disproportional impact on margins. So while we’ve enjoyed three quarters in a row of components being higher than the company average gross margin, we are planning for the December quarter that component gross margins are actually going to decline. So that’s probably the biggest issue in addition to just the pure fact Jure mentioned as revenues declining overall puts a lot of pressure across the board.

Great. And then my follow-up is, Jure on your prepared comments you had mentioned the last few weeks you saw some more volatility or lack of visibility or order cancellations, can you maybe help us isolate or figure out which end markets you saw the biggest change that kind of was a little bit under rings?

Okay, well first of all in the last, I’d say few weeks is really the last three weeks we’ve been seeing more push outs than what we expected. Of course with our communication infrastructure being almost 50% of our revenue percentage wise that was more push out there than other markets but we deal some push outs especially in the semi conductor side of the business, as I mentioned in my prepared statements our defense and aerospace business is not growing at this time/. But we are investing lot of money in that side of the business that’s why if you look at my model what we are doing we actually separate that business to make an independent as possible so that they can focus on new opportunities and that’s becoming a more a product company than just an EMS company. So overall, I would say the big impact we’ve seen in the communication infrastructure but we’ve seen across the other markets also.

I want to make sure they were clear that the problems aren’t just in communications.

Well we wish it weren’t the case and we are seeing declining revenues from September to December and nine out of our top 10 customers. So it’s pretty diverse it’s not any one area. Communications got a lot of attention because it’s almost half of the business but softens to pretty much across the board.

Great, thank you for your details. It’s always very useful gentlemen thank you.

Thank you.

And your next question comes from Wamsi Mohan from Bank of America.

Hi, yes good afternoon.

Hey, Wamsi.

Hey, bob, hey Jure. Can you help separate the impact of the component constraints from the Thailand flooding from the weaker demand environment and the push outs you noted and what components are you most worried about?

Well, definitely there is a couple key components, it’s some of the stuff that we have in our optical business we are worried about that and also some of the business that we have and there is some other some few semiconductor components. We are working around it, but right now we know there is going to be an impact it’s really hard to figure exactly what impact because often the customers are looking very close to finer ways to minimize the impact. And it's mainly from other suppliers as I mentioned, factories find some minor interruptions just for employees coming to work but we are – I think I got a report this morning 85% of our employees are there and so from that point of view I would say it’s our optical business.

And anyway this size that Jure for next quarter or like the $25 million, $50 million implied within your guidance that your thinking would be the4 hit from this.

I mean to me it’s really difficult because there are still lot of moving parts not in some of these cases both customers and us and I am not giving up on the revenues because they are our end-customer requirement. So that’s why we don’t like to put a number on it we still have two months to go and we are trying to find ways to satisfy all the customer needs.

Okay thanks, Jure.

Yeah, I’d just add. I think our team has done a great job in some cases we’ve shifted volumes to other factories in Asia and we’ve done I think a very good job of meeting demand thus far and so we just have to keep working through the issues day by day.

Okay, thanks, Bob. And can you perhaps provide some more details on the comments that you made at the end of your prepared remarks around the cost structure it seems like you are taking some steps to better preserves the margin structure going forward but can you be a little more specific about what those actions are and what the magnitude of cost savings we can expect from that?

Well, I can’t be real specific but I can tell you that we as a team have already been looking hard at every part of the business and we fortunately have flexible work force in many cases. So as we have lower demand we can react fairly quickly to that and we are going to take some time off around the holidays do the classic things you do when demand starts to decline a bit but in terms of specificities I really can’t offer much more than that and as I said also in my remarks there is only so much you can do in a short time horizon. So we are doing all the things we can do very quickly and then we do believe that the business will become back later in the year. So, we want to make sure we don’t do anything in the short term that jeopardizes the long term as well.

Okay, thanks a lot guys.

Okay, thank you.

Your next question comes from the line of Craig Hettenbach from Goldman Sachs.

Yes thank you. Just a follow-up on the end-market commentary, I know you said it was, you’ve seen a broad base decline, but any additional insight into inventory, because in looking at the guidance in the communications business down double-digits versus the other markets flat to slightly down, and looking back is that’s the bigger issue that those markets income got built up more and now they have to be worked on or can you shed any more light on that?

Well, Craig, Jure here. I don’t know if I can give, that much details but definitely you have a couple scenarios. None of these things seem like a consolation most of these things getting pushed out and there is more in some cases driven more by end customer and some cases it’s driven by inventory correction. So I think it’s more customer driven than our whole industry. But we believe that’s a short lived and because if you really look at deeper the pipelines are not overfilled.

Okay if I can follow up, then just as you look out to fiscal 2012 independent of the macro environment can you highlight any areas where you feel is the best in terms of the new program activity where you could drive some growth?

As already mentioned that I think communication infrastructure is definitely one for us because that’s almost 50% of our revenues we are well positioned with all the leaders in that industry. So we expect to grow there and I think we are going to see some nice improvements in enterprise computing and then in medical, industrial, defense is the only that we are not forecasting growth. I mean we are forecasting some growth from 2011 but that has not to be excited. So I think as we move across most of our customers.

Jure, you mentioned the uncertainty for some customer forecast. Can you just go by end market and talk about it between, industrial, the multimedia as well and just kind of see what you're seeing by end market?

Well, first of all, as I mentioned in my prepared statements, first of all communication networks for us seems like it's in a good position. Well I think in a near-term we see some adjustments in our forecast with our customer but the long-term we feel very comfortable there. On the industrial, medical and defense and aerospace again that industry similar I think we got a lot of new programs involved in that area. I think we've all positioned for the longer term, we expect to see the growth. In the short term, I think it's a similar thing, I think its adjustments some of our customers were driving inventories or demand pretty hard in last two, three quarters. So, we believe there are some adjustments going on, and at the same time, I think some customers are worried about the economy, I mean they are just looking and making sure that the forecast is going to be there. It's hard for us to – again to forecast economy, but we really feel comfortable based on the pipeline that we have especially organic wins that we already won during the 2010, and the programs that we're working today. On the multimedia to us I think it's more – it's mainly timing. There's a lot of talk going about seasonality, I mean, that business typically you can't predict it one quarter to another, but if you look at over the year that business grew for us. We believe it's – for us it's a temporary slowdown, maybe a quarter to quarter and a half, but we see that business coming back to just the strong numbers that we had this year and maybe even the larger numbers.

And your next question comes from the line of Sherri Scribner with Deutsche Bank.

Hi, this is actually Kevin (inaudible) in on behalf of Sherri. I may have missed this but did you say you saw sequential improvement this quarter in your components business? And then also just looking forward, are you able to improve margins there volume growth and volume or is volume really was dictating margin improvements there. Thank you.

Well Kevin in this environment when there is a natural disaster like that what we are trying to do is, to help out and we are involved with multiple customers and trying to help them out during these tough times. So those are services that we offer lot of times. These are the same customers that we have and we’ll continue to work and see how can we help them out and so they can satisfy their customer requirements.

Excellent, thank you.

And your next question comes from the line of Lou Miscioscia from Collins Stewart.

Yes, thanks, Jure. I guess, I could ask about the computing sector, obviously you mentioned in your remarks that that was down and one program went end of life, if you could just give some more color about that and it does sound like you are going to be replacing that business pretty soon.

Well, actually for a quarter that business was up 2.8% Lou. For the year, that was 14 plus percent. We talked about this in our previous quarterly calls that we have some programs that were end of the life and that’s going to come into the end. And lot of the new programs are picking up and I think that’s one of the reasons we see some growth in last quarter. We are forecasting kind of a stable flat stable growth. The good thing is that we are involved in multiple customers out there that could be a substantial amount of business especially in some of the high end enterprise storage products that we provide and also we are able to widen the customer base in the last six months.

And your final question comes from the line of Sean Harrison from Longbow Research.

Hi, good evening. I’ll try to make it brief. Bob, just on the comment of cash generation in December quarter. What do you expect inventory dollars to do? Would you expect it to decline sequentially?

We are certainly going to try and make that happen. We are a bit disappointed in the inventory turns this past quarter as I mentioned they dropped down to 7 from 7.2. Our longer term goal is to get them up to at least eight and one third of inventory is about $100 million in cash. So there is a big opportunity there. We are working with the accounts right now to really make sure we understand demand and that with we manage our own inventories as effectively as we can.

So, it sounds like I guess the shortfall this quarter was more volatility than anything else?

From an inventory standpoint you mean?

Yes.

Yeah, certainly we had expected to do a little bit better and now we’ll be burning off that inventory.

Okay and then the follow-up question. Just in the components business, given the weaker demand environment are you seeing any, I guess abnormal pricing dynamics within any of the components businesses or is it pretty normal versus what you’ve been saying over the past say 180 days?

So I think the pricing environment has been pretty stable. We are not seeing much of a change there. What we are seeing as I mentioned earlier is that business when you end up that with an economic headwind like this, the components business is the first to face pressure and that’s what we are seeing right now, is more pressure on the components side. We also believe that business will be the one that recovers the first as business picks up again. So, we haven’t seen much change in terms of the pricing environment but we definitely are facing some demand pressures there.

All right. Thanks, so much.

Thanks, Sean.

Well, first of all, I want to thank you to everybody on this call. Also want to again remind all you that we are going to have that Investor Analyst Day November 17. We are looking forward to seeing you there. We really like to hopefully see you all there. So we can go in details and talk a little bit more about the strategy. There is lot of exciting things here and we want to share that with you. Thank you very much.

Thank everyone. We look forward to seeing you in a couple of weeks.

And this does conclude today’s conference call. You may now disconnect.