Good afternoon, and welcome to the Sanmina Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Paige Melching, Senior Vice President of Investor Communications. Please go ahead.

Thank you, Cole. Good afternoon, ladies and gentlemen, and welcome to Sanmina's fourth quarter fiscal year 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 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 a number of factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission. The company is under no obligation 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 in 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 and fiscal year ended October 1, 2022, 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 information excludes restructuring costs, acquisition and integration costs and non-cash stock-based compensation expense, amortization expense and other unusual or infrequent items. Any comments we make on this call as they relate to the income statement measures 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're referring to our non-GAAP information. I would now like to turn the call over to Jure Sola.

Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome. Thank you all for being here with us today. Please turn to Slide 4. First, I would like to take this opportunity to recognize Sanmina leadership team and our employees for doing an exceptional job. So to you, Sanmina team, thank you for delivering strong and consistent results for the fourth quarter and fiscal year 2022, and now let's keep it up. For the fourth quarter, Sanmina delivered strong and consistent results. We had a strong broad-based revenue growth, margin expansion and EPS growth, we delivered solid cash flow, again, exceptional job by Sanmina's team. Despite ongoing supply constraints in this macroeconomic uncertainty, these results are a reflection of our continued focus on execution of our strategy. Now let me give you a quick overview of our new joint venture in India, which closed on October 3. Please turn to Slide 5. We are very excited about joint venture with Reliance, one of our leading companies in India. Sanmina has been operating in India for 12 years. We established state-of-art manufacturing technology center of excellence. This joint venture is focused on high-technology mission-critical markets and servicing customers around the world. We are leveraging Reliance expertise in the Indian business ecosystem and Sanmina's technology in manufacturing expertise. This venture is capitalized with over $200 million of cash to fund future growth. The goal is to accelerate growth in India by focusing, Make in India strategy. We are planning to build a world-class engineering, technology and manufacturing company in India. So for the rest of 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 for question-and-answers. And now I'd like to turn this call over to Kurt. Kurt?

Thanks a lot, Jure. Everybody could turn to Slide 7. As Jure mentioned, in the fourth quarter, our team did an outstanding job delivering strong revenue and profit growth as well as cash generation. Q4 revenue of $2.2 billion grew substantially by approximately 9.1% from the prior quarter and exceeded the high end of our outlook of $1.95 billion to $2.05 billion. This was primarily due to strong customer demand and excellent coordination with suppliers and customers to mitigate material challenges. Non-GAAP gross margin was 8.3% compared to 8.4% in the prior quarter, primarily due to product mix. Non-GAAP operating margin was 5.6% compared to 5.5% in the prior quarter, primarily due to operating expense leverage. Non-GAAP fully diluted earnings per share grew significantly by approximately 15% to $1.50 compared to $1.30 in the prior quarter and exceeded the upper end of the outlook of $1.27 to $1.37 by $0.13. Finally, Q4 GAAP fully diluted EPS was $1.08. Now please turn to Slide 8. This slide shows the quarterly trends of our financial results. We continue to deliver improved financial performance despite the challenges associated with the supply chain constraints. Non-GAAP gross margins have ranged from 8.1% to 8.5% over the last five quarters. In addition, non-GAAP operating margins have been 5% or greater over the last four quarters and 5.5% or greater over the last two quarters. Earnings per share grew from $0.95 in the fourth quarter of fiscal '21 to $1.50 in the fourth quarter of fiscal '22, a 58% improvement. Please turn to Slide 9. Q4 IMS revenue increased to $1.8 billion, an increase of 10.8% over the prior quarter, primarily due to strong customer demand and excellent coordination with suppliers and customers to help mitigate material challenges. Non-GAAP gross margin for IMS was 7.2% compared to…

Thanks, Kurt. Ladies and gentlemen, let me add a few more comments about our financial highlights for '22 and the fourth quarter. I will also review with you our end market outlook for the first quarter and fiscal year '23. As you heard from Kurt, we delivered strong and consistent results for fiscal year '22. Revenue grew nicely of 16.8% to $7.89 billion. Operating income improved to 5.3%, and we did exit the fourth quarter at 5.6%. Diluted earnings per share were at $4.99 and that grew nicely of 25.6%. We did exit the fourth quarter EPS of $1.50 per share. Our Sanmina team has done an outstanding job as we continue to differentiate our industry-leading capabilities. And all of this is translating into growth and margin expansion for Sanmina. Please turn to Slide 16. Let me talk to you now about revenue for the fourth quarter by end markets. For Industrial, Medical and Automotive, our revenue was at $1.288 billion grew quarter-over-quarter of 5.7%. Communication Networks and Cloud Infrastructure was $915 million, and that growth was quarter-over-quarter of 14.2%. For Industrial, Medical, Defense and Automotive, we saw a nice growth of 21.2% to $4.7 billion for the year. And Communication Networks grew 10.8% for the year and revenue of $3.175 billion. We continue to diversify our end market successfully. For fiscal year '22 top 10 customers were 48.7% of our revenue. Book-to-bill continued to be strong for fiscal year '22 was 1.05:1. Overall, strong demand and solid backlog for the future. Please turn to Slide 17. Now let me talk to you about competitive advantages in the markets that we serve. Some of the key differentiators, Sanmina is a customer-centric company. Sanmina is build around our customer needs, it is in our culture. We are a critical partner to…

[Operator Instructions]. And our first question today will come from Ruplu Bhattacharya with Bank of America.

Maybe this time, I'll start with a couple of questions for Kurt, and then I'll come and ask you a question. Maybe, Kurt, I'll start with Slide 12, which is the capital allocation priorities that you laid out. And the share buybacks, you said the priority hasn't changed and share buybacks are the lowest on the list. But if we look at this year, it looks like you spent $317 million on buybacks and -- but that compares to free cash flow of only $200 million, right? So I mean, if I do the math correct -- if I'm doing it correctly, it looks like share buybacks have added more than $0.55 in earnings this year. So I'm just trying to understand how sustainable is this allocation strategy of you invested 150% of your free cash flow and share buybacks. And even if you can, you have net cash on the balance sheet. But does that -- maybe -- do you think that's a good use of cash? Or is it -- if you have all of these 5G and other opportunities, I mean, does it make sense to maybe invest in organic growth. So just trying to understand what the -- how you're thinking about capital allocation in fiscal '23? And if this is sustainable, this level of buybacks versus free cash flow?

Yes. So first of all, I don't think -- as I mentioned, I don't think our capital allocation priorities have changed. It's always been focused primarily on funding organic growth. I didn't really number the last three, I said each of the other three strategic transactions, debt reduction and share repurchases, we would do opportunistically. To me, given the volatility in the market that we saw over the last year, I do think it created a good opportunity to buy back more shares than we typically have bought back. That being said, if you look back from FY '14 to FY '22, we bought $1.2 billion in shares. So our business generates a fair amount of cash. Like I said, our first priority is always to invest that in the business, and we did do that. We invested about $130 million of CapEx last year and intend to do more this year, so that's our priority. But we'll continue to look opportunistically at share buybacks, depending on how the markets are.

Okay. Maybe another question for you. The margins have been good on the operating margin level. And one of the things that has helped Sanmina, it looks like is even though in fiscal '22, you grew revenue 17% year-on-year, but OpEx only grew less than 2%, like 1.7%, essentially, you kept it flat at $239 million of OpEx. So I mean, if you're guiding for fiscal '23 revenue growth, how should be -- what are the puts and takes in terms of OpEx growth for this fiscal year, I mean, given labor costs and given inflation? How are you thinking about OpEx? And what are the levers you have to keep OpEx again flat, if that's possible?

Yes. We -- again, I think as Jure mentioned when he was talking about the FY '23 outlook, we expect to get leverage in OpEx. That does not necessarily mean the nominal dollar amount of OpEx will stay flat. But as you look at OpEx as a percent of revenue, I would expect that to continue to go down. I think we have -- as Jure mentioned, we have the infrastructure to support a much larger business. And, so we do expect to get a fair amount of leverage there as well as ultimately leverage at the gross margin line, which gives us confidence over time that our overall margins will expand.

Okay. Let me ask Jure one question. Jure, in the outlook for both the first quarter and fiscal '23, you said that the company can grow revenues year-on-year. When I look at the first quarter guide, $2.15 billion at the midpoint, that's pretty strong growth. I mean that's like 22% year-on-year compared to the first quarter of fiscal '22. But when we look at the year-on-year compares as we go into the second quarter, third quarter or fourth quarter, they get progressively more tough, right? So I mean it looks like every quarter, the compares are 12% or so tougher because you had strong growth in the second half of this fiscal year. So how should we think about this growth? Is there any way that you can quantify or qualitatively tell us how much growth do you think fiscal '23? Because you're guiding 22% growth for the first quarter. Is that something sustainable for the rest of the year? And then first half versus second half, how should we think about growth rates moderating as we go through the fiscal '23?

Yes. Ruplu, let me -- I will definitely answer every one of your question. But I want to add to the questions you asked Kurt earlier. I think key for Sanmina and as you look at -- how can we maximize the shareholder value. We still believe that our stock is a great volume. And as we look at opportunities, we're there, as you know, we have a very strong balance sheet, and we have a lot of option to maximize the shareholders' volume. We just need to be smarter buyer. And we believe the smarter things for us was last year is to continue to buy the shares. And as Kurt said, we're going to be very opportunistic to maximize the shareholder value. So back to your question. First of all, I'm not really concerned about year-over-year growth. I'm more concerned about this quarter and next quarter and quarter after. Our company is in a good position, we believe that we have a good visibility in front of us. I think if anybody grows in a market out there, I think Sanmina will do just as well, if not better. And we're still operating with lot of shortages. Once we resolve all these shortages in industry, I believe there is more opportunity for us, especially when it comes to productivity. As I said earlier, I think we can do a lot better than what we're doing today. And that's my personal focus, it's not just a comparison. But we don't know what's going to happen. If you look at the 12 months out, but what we see in front of us, we're very optimistic what we can do.

Yes. Ruplu, I mean we tend to take one quarter at a time, right? I mean this is -- well, certainly, our business and our demand, as Jure mentioned, the customer demand is strong. We realize -- we read the headlines like everybody else. And so I think we're going to just take one quarter at a time here, but we do feel good about the business, and we do see strong customer demand that's very broad-based at this point. And as Jure pointed out, we don't do a lot and we didn't do anything in the consumer side, which is where you're seeing the impact of some of the things going on in the economy. So...

Yes. Let me -- thanks for all the details there. I'd like to follow -- I have a follow-on with Jure in terms of the revenue growth. But I mean, thanks for all the details on the share buyback program. I mean I understand that if buying back shares held, because I mean the share count also is relatively low. But I'm just thinking if -- you have so many growth opportunities and maybe doing other things like inorganic growth or other things to grow organically and maybe that would also help. But I understand what you're saying. Can I just follow-up on my question to Yuri. Just in terms of the growth from the various end markets, it's a little hard to quantify, because you've got all of these end markets that are grouped together. So when we look at like IMDA, like the Industrial, Medical, Defense and Automotive segment versus Communication Networks and Cloud Infrastructure, which segment do you think has more chance of growing faster in fiscal '23? Because I think you're seeing strong growth in 5G, but also you have opportunities in industrial. So can you help us quantify like just qualitatively, even if you can talk about the relative strength for EB's end markets as you see them today?

Yes, Ruplu, as you've seen it last year, we grew our industrial, medical, defense and automotive business at the higher rate than communication networks and cloud infrastructure. So we're very optimistic in the group of industrial, medical and defense and automotive, as I mentioned, we're well positioned in those four key markets, we're very strong in communication networks, especially for new products. As I said in my prepared statements on cloud networks, we expect to see a fair amount of growth. And by the way, in that group, we don't -- I don't like to break it down at this time, but we have a lot of business in the cloud networks, and we expect a fair amount of growth.

And our next question will come from Anja Soderstrom with Sidoti.

Congratulations on the good quarter and outlook. So I'm just going to delve a little bit further into this year-over-year revenue growth. So do you think you're going to be grow sequentially throughout the year. So the guidance you gave for the first quarter is starting stepping stone for the year?

As we said in our prepared statements, Anja, if we look at the first quarter, we have a strong backlog, strong demand, it's all about getting all the components. So we feel very confident, we'll take one quarter at a time. But we do expect to have a better year on top line and the bottom line in '23 than we did in '22.

Okay. And could you just speak a little bit about the backlog and sort of quantify that and how you're able to backfill that with new orders?

Well, today, we can ship even more if we can get all the critical components in the first quarter. And if we look at our forecast from our key customers, they look good for '23 and new programs that we have that we already want that we're basically waiting for equipment to install for the growth, and we'll be spending few more extra bucks for -- that we are investing for the growth. So we're pretty optimistic about the future. But we'll take one quarter of time, Anja.

Okay. And what I hear from your peers is that the supply chain challenges are sort of more deepen their customer relationships and their sort of order visibility and lead times with their customers so they have better visibility into their sort of planning? Do you see the same for your...

Well, we have a very good visibility. Our customers has been very nice to us and giving us a lot of forecasts. There are 12 months, 18 months, some cases, two years long. But we are still suffering a little bit on shortages and it's getting better, as I said, and we expect to see some better improvements in '23. But for this quarter, definitely, we continue to see similar challenges as we had last quarter, but it's getting better.

Okay. And then have you seen any sort of changing sentiment among your customers? I know you are in very solid end markets, that's probably more favorable from cyclical tailwinds. But have you seen any sort of changing sentiment?

As I mentioned in my prepared statement, we don't do any consumers, the markets that we're in like medical, defense, automotive, industrial cloud and things like -- looking good. We had a couple of customers that were building COVID projects, that's low slow down, but that's about it.

Okay. And have you seen any sort of changes in the competitive environment?

There's always competitive environment by only what we do. I don't spend a lot of time what my competition does.

Actually I have one more on your CapEx, it was a little bit higher this quarter and you're guiding for the same -- for next quarter, is that something specific on? Or is that going to be the run rate for next year?

It's always hard to predict taxes. I think, again, if you look for the overall year in FY '22, I think it ended up being about $17.4 million, and we're forecasting $17.5 million for fiscal '23. But the tax rate always comes down to the mix.

Sorry, I'm [indiscernible] CapEx.

Okay. I'm sorry, I thought you said tax rate, not CapEx, my apology. Well, now you learned about tax rate, too. Bonus question. Yes. I mean, look, I think as Jure talked about -- last year CapEx is about $130 million this quarter we're forecasting about $50 million. We are seeing growth, we think there is opportunities both in terms of new programs and as well as expansion with existing customers. So our CapEx was $48 million last quarter, we expect it to be about $50 million this year. And I'd expect it to be in that similar ballpark as we move forward, but it will all depend on demand and program wins.

Our next question will come from Jim Suva with Citi.

Congratulations to you and your team for just a really strong year of performance. In your prepared comments and then a follow-up on the Q&A, I can't remember one of you mentioned that 2023, the fiscal year should be stronger than '22. There's two ways to interpret that. One means sales growth, but another way to say that is some people may view that as revenue growth to be even higher or better than the growth that you just had. And just had a remarkable year of up 16% or 17%. So can you help us understand when you say a stronger year in '23, are you just meaning dollar amount or actually the growth rate even being stronger?

So Jim, let me -- I said that, and let me kind of interpret that in a simple English. First of all, to us, most important is profitable growth. Number one, we expect to improve our financial results for the '23 over '22, and we expect to see the growth. We know it's there, and that's one of the reasons we are spending a little bit more money, bringing new equipment in some of the new processes that will need us for growth, not just for '23, but also for '24. These are the right customers that we have a very strong partnership with and so on and so on. But definitely, we do expect to have a better year, both on top line and a bottom line in '23 over '22.

Right. And Jim, that's measured in dollars, we're not talking about growth rates, right? So he is saying higher revenue, higher EPS and earnings, we're not necessarily comparing growth rates year-over-year.

Yes. And then on the new joint venture in India, congratulations. How will that be accounted for on your books? Is it consolidated or a minority interest line? And then what about CapEx funding for? Is it now fully funded? Or will there be CapEx flowing out of your statement of cash flows we should be thinking about?

Yes. Let me handle this. So we are consolidating financial results. So you will see above the line, all the revenue and all the profits. But as I mentioned in the guidance, then we have to back out below the net income line, the -- our partner's share of the net income. So in this case, we estimated that to be a reduction of about $2.5 million. So as I said in the guidance, because of the cash that came in, we expect approximately $2 million more of interest income. But we do, based on the accounting treatment have to back out 50% of the net income for the JV, which we currently estimated for that quarter at $2.5 million, and that happens after the net income line, but before you calculate EPS.

Right. And then on the CapEx, does it all show up 100% on your books or...

Yes. So it's consolidated. So it will show up on our books. But back to your other question, as Jure pointed out, based on the investment, the Indian entity is now capitalized with over $200 million of cash. And so that cash will be used to expand the operations there as necessary as that business grows, which is certainly our vision for the JV.

Yes. We have a high hopes for India and both companies are committed to make something very big.

And then strategically, at that side of facility, are there certain end markets/products that you think are on the early innings of ramping that we should just be mindful of? Because I assume that there are certain whether it be communications or whether 5G rollout or something that's probably a lot earlier than maybe other things like medical devices. But I just may be backwards to it.

Yes. We diversified, Jim, this operation very good. We got over 35 customers. They're really well diversified in a medical, industrial, definitely some telecommunication that I say medical, having a medical and alternative energy. But definitely, we'll be expanding some of the 5G networks and optical networks there.

And our next question will come from Christian Schwab with Craig-Hallum Capital Group.

Congrats on another great quarter and guide. On the joint venture in India, obviously, focusing on complex mission critical stuff, 100 acre campus. That seems to me that, that should be a large revenue number over time. I mean, could this -- I assume that you did this joint venture to become an India-based company, which makes it a little bit easier to do any type of business there. Correct me if I'm wrong. But number two, could this be like $1 billion-plus revenue business over time?

First of all, yes, we -- this joint venture has made under one goal, is to be Indian company that can really -- as you know, Indian place is not the easiest place to do. We believe there is a lot of upside in the India market, especially if you look three, five, 10 years out. So yes, we have plenty of space in this 100 acres, and we expect to expand in other parts of India. So yes, this better be big Christian or this was a bad move.

Right. When is it logical that it becomes easier for investors to understand that the business is beginning to scale at a high level?

Yes, since we are putting these numbers out, I'll turn it over to Kurt, but definitely, we'll communicate it, and you'll have all the information. But Kurt, do you want to add?

Yes. I mean, what I would say is, as Jure said, we're very optimistic about the opportunity here. Again, we just closed the transaction on October 3. So I think we'll have a lot more, I'll say, disclosure related to it as we progress and develop where we're going to take that business with our joint venture partner. So I think at this point, all we can say is it's early innings, but we think that there is a lot of opportunity there. And as Jure said, over the next three to five years, we expect this to become a very -- a big part of the revenue.

Great. That's fair. And then in fiscal year '22, Kurt, did you have any 10% customers?

Yes. In fiscal '22, we had two 10% customers. We will disclose that in the 10-K when we file it in a couple of days.

Perfect. And then just a little bit more color on the supply chain getting better. I know you guys talked about it still impacting December, kind of slightly impacting potentially the beginning of the year. As we get through the middle of, say, calendar '23, do you believe the vast majority of the supply chain problems or headaches that you've been dealing with for quite some time now that the majority of those will be over?

Well, if you look at the data, it should be by middle of -- hopefully most of it, a big percentage result as you never know. We'll see all -- what happens with the market. But we do definitely expect better conditions when it comes to material next year than what we experienced in '22.

And then is that supply chain loosens well, becomes more available for backward. Is that when we're going to really probably have a significant opportunity to meaningfully reduce the aggregate inventory dollars that we have? I would assume the vast majority of that stuff is sitting out waiting for a few components to come arrive. So next year could be potentially a very substantial cash flow year.

Yes. So definitely, that's a purpose Christian next year, and that's what we are driving to and we're putting the systems in place to accomplish that later. First of all, I'd just like to thank all of you for joining us today. And hopefully, we answered most of your questions, if not, please give us a call. Otherwise we'll be talking 90 days from now. Thanks a lot.

Thank you.

Bye, bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.