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spk01: Good afternoon and welcome to the FLEX first quarter fiscal year 2022 earnings conference call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At this time for opening remarks, I would like to turn the call over to Mr. David Rubin, FLEX's vice president of investor relations. Sir, you may begin.
spk09: Thank you, Rebecca. Good morning and welcome to Flex's first quarter fiscal 22 earnings conference call. With me today is our chief executive officer, Ray Withee at Byfee, and our chief financial officer, Paul Lundstrom. Both will give brief remarks followed by Q&A. This call is being webcast and recorded, and if you've not already received them, slides for today's presentations are available on the investor relations section of our flex.com website. As a reminder, today's call contains forward-looking statements which are based on current expectations and assumptions and are subject to risks and uncertainties, so actual events and results could differ materially. Also, such information is subject to change, and we undertake no obligation to update these forward-looking statements. For a full discussion of risks and uncertainties, please see our most recent filings with the SEC. This call references non-GAAP financial measures for the current period. The GAAP reconciliations can also be found in the appendix slides of today's presentation, as well as on the investor relations section of our website. Lastly, with regards to Flex's next track for business, as we previously discussed last quarter, on April 28th, we announced that we confidentially submitted a draft registration statement on Form S-1 with the U.S. Securities and Exchange Commission relating to the proposed initial public offering of its Class A common stock. The initial public offering and its timing are subject to market and other conditions in the SEC's review process. We made this announcement in accordance with Rule 135 under the Securities Act. We continue to look at the market conditions, and we will evaluate the right time to do the transaction, but we remain committed to doing so. Following SEC regulations, we will not make any further statements or answer additional questions on the next track or filing at this time. With that, I'd like to turn the call over to the CEO.
spk01: Thank you, David. Good morning, everyone, and thank you for joining us today on our Q1 earnings call. Of course, I have to start off by giving a shout-out to all my Flex colleagues across the world for once again staying focused and delivering on solid results. So let's turn to slide three to review our financials. We achieved a revenue of $6.3 billion, up 1% sequentially, a little better than typical seasonality, and up 23% year-over-year. Our total flex adjusted operating margin came in at 4.6%, and core flex operating margin ex-next tracker contribution was 4.4%. Similar to last quarter, our adjusted operating margin includes the absorption of costs related to a challenging component supply and logistics environment. Our adjusted EPS was 46 cents up from 23 cents in Q1 of last year, but also up from the pre COVID level of 27 cents in Q1 of FY 2020. Our adjusted free cash flow came in very strong at 219 million. Now moving on to the next slide, I'd say demand across the enterprise remains very strong, and as you can see, the team executed extremely well again this quarter. Global supply chain and logistics issue remain a challenge and add a layer of uncertainty to the near term. However, we continue to expertly navigate through the environment with an army of supply chain professionals, which is almost 10,000 people strong and, of course, decades of experience. all supported by world-class system and tools to provide the best visibility and agility. Now, this is a real competitive advantage for Flex and for our customers. Our ability to quickly adapt to global changes is unrivaled. And the proof, of course, is in the results, especially when you look at the improvements we have made across the organization over the last two years. The June quarter of calendar 2019 was my first full quarter with Flex. Our adjusted operating margin at that time was 3.4%. Fast forward two years, and it is 4.6%, which is after two previous record quarters. If you look at our gross margins, you'll see similar improvements. When I joined, our June quarter gross margins were 6.5%, and this quarter, it was 7.5%. So we're simply operating at a better level. I'm very proud of how well we are executing on our near-term and our longer-term goals. We continue to land, expand, and elevate our relationships with our customers. We're winning in the key areas we've talked about before, such as diabetes care, medical imaging, and throughout the electric vehicle ecosystem on ADAS and on premium durable goods, cloud, and renewables. The secular drivers for the next wave of outsourcing are now very clear with a need for more resilient and agile supply chain. The requirement for additional regionalized production and the demand for more sustainable approaches. We're winning new businesses as well as expanding our footprint with current partners. This performance is all a testament to our goals of deeper relationship with our customers and suppliers and a continual steady shift to higher value businesses. And all of this is leading to a higher quality of pipeline and bookings across both our segments. Now, while we've made good progress, we're certainly not done. With that, I'll turn the call over to Paul to walk you through our results in more detail, and then I'll come back with some closing remarks. Paul?
spk09: Okay. Thanks, Revati, and good morning, everyone. I'm on slide six. Flex revenue was $6.3 billion in the quarter, which was up 23% year-over-year and 1% sequentially, better than our typical Q4 to Q1 seasonality. Adjusted operating income was up 78% year-on-year to $290 million, with 140 basis points of margin expansion. Obviously, we're lapping COVID year comparisons, but I'll note we saw material sales and profit growth compared to the quarter two years ago as well. And the 4.6% operating margin rate was the highest Q1 margin rate we've seen here at Flex. Our profit growth came from drop through on significantly higher volume, continued improvements in the mix of our business and our constant push for productivity gains. There were some headwinds in the quarter. We continue to see COVID-19 disruptions, and industry-wide component shortages and cost pressure on logistics did affect our business in the quarter. Adjusted net income was 230 million, with adjusted earnings per share of 46 cents. Year on year, those were up 98 percent and 100 percent, respectively. Reconciling to GAAP, first quarter GAAP net income of 206 million was 24 million lower than our adjusted net income, primarily due to $20 million of stock-based compensation and 13 million in net intangible amortization, partially offset by a net credit in tax and other. On slide seven, our first quarter adjusted gross profit was 476 million, up 158 million year over year. Execution was solid with 130 basis points of adjusted gross margin expansion compared to last year. but also a full point higher in what we saw pre COVID in the June quarter calendar, 2019 in total adjusted SG&A spending came in at 186 million up 31 million from a year ago, but at 2.9% of sales down year on year and slightly below our targeted range of three to 3.2% of sales. So for the quarter, Adjusted operating income of $290 million led to a solid 4.6% margin rate. On slide eight, we saw better than expected top line strength in both reliability and agility in the quarter with both growing double digit year on year despite component shortages in the industry and logistics cost headwinds. I said last quarter, and I'll say it again, credit to the Flex Supply Chain Organization for solid execution in a very challenging environment. Flex reliability revenue was $2.9 billion in the quarter, up 30% year-on-year. Q1 performance for all three business units within reliability were up year-on-year. Automotive revenue was double that of a year ago, up 100% year-on-year, with strong execution against the industry's continued global recovery and, of course, aided by the easier comp from last year's shutdowns. These were strong results and better than what we saw in the June quarter of calendar 2019. Health Solutions revenue was up 9% year over year this quarter. Chronic care strength continued and coupled with improving elective procedures offset the normalization we are seeing in the critical care space as it returns to pre-COVID levels. We continue to win in Health Solutions and that lends confidence to our strong longer-term outlook in the space. Lastly, industrial grew 20% compared to the prior year, led by strength in core industrial and renewables. Industrial continues to be a bright spot for flex, up year on year, but up significantly for the two-year period as well, both with and without Nextracker. Looking at profits, the reliability business generated $170 million of adjusted operating profit and a 5.8% adjusted op margin rate. Margins improved by 70 basis points year on year, but were tempered by higher costs due to inefficiencies created by the current supply chain and logistics environment. As you see in the footnote, next track of margins were down in the quarter with logistics cost headwinds we view as temporary. Moving to agility, segment revenue of $3.4 billion was up 18% year over year. Within agility, CEC was flat year over year, but recall strengthened cloud infrastructure and 5G rollouts remained strong through COVID last year as data centers and networks had to quickly adapt to the changing workloads created by work and learn from home. Lifestyle was up 36% year on year with new ramps and current customer expansions driven by our strong value proposition, as well as an increase in customers looking to broaden their regional manufacturing presence. Lastly, consumer devices benefited from continued recovery in consumer spending in developing markets and grew 50%, that's five zero percent year over year. Turning to profitability, the agility segment generated 137 million of adjusted operating profit and a 4% adjusted operating margin rate for the third consecutive quarter. This is well beyond a COVID recovery. Looking back to pre COVID levels, our agility business historically operated at margin rates with a two handle. So I would say very nice to see the traction in that business. Agility is firing on all cylinders. Last year, agility margin expansion, or excuse me, year on year agility margin expansion was driven by a continued push for new business wins and renewals at accretive margins, as well as continued cost management, discipline, from our agility operating model. On slide nine, for the quarter, adjusted free cash flow of 219 million was up substantially compared to the prior year, which was severely affected by COVID and the shutdowns in global automotive production. Looking ahead to the full year 2022, we still expect adjusted free cash flow on a dollar basis to be roughly in line with 2021, albeit with some pressure in Q2. We closed Q1 with inventory of 4.4 billion, resulting in inventory turns of 5.6, down from 6.1 turns last quarter, but up from 5.3 a year ago. We continue to see component shortages in the supply chain, and although it was manageable in Q1, we do expect continued working capital pressure as we move through Q2. Our net capital expenditures for the quarter totaled $115 million. As I mentioned last quarter, capex of roughly 2% of sales is a reasonable expectation for 2022, and we remain committed to responsibly investing in strategic growth. Lastly, on share buyback, we stepped up our share repurchase program in the quarter. Spending on repurchases was 162 million, which amounted to 9 million shares. If you could turn to slide 10, and as you'll hear from Revathy in a couple of minutes, we're upbeat on the year. That said, we expect component shortages and logistics headwinds, as well as persistent waves of COVID-19, to remain a headwind in Q2. But the demand side is there, and all of our underlying demand signals remain strong. Looking ahead to Q2, we expect our reliability solution segment to grow low to high single digits year on year. As I mentioned earlier, the demand side is strong, but likely will be tempered a bit by constraints in the supply base. We expect automotive revenue to be up mid single digit to high teens year over year, despite continuing component shortages and OEM production disruptions. Looking back to last year, Q2 was our peak quarter for health solutions with strong demand from critical care products like ventilators. Moving into Q2 of this year, we're seeing normalization in critical care, and consequently expect revenue to decline mid to high single digits year on year. Please remember, we saw a significant COVID-related product bump in Q2 of last year, and now we're seeing the normalization period. Based on our very strong pipeline, we fully expect the strong growth to continue for years to come. And our industrial business should be up mid single digits to mid teens year over year as we continue to see robust demand in renewables, gaming in kiosks, metering, and a number of other areas. Looking at agility, agility solutions Q2 growth should be similar to that of reliability with revenue up low to high single digits year over year. Lifestyle should grow 10% to 25% year over year in Q2 with continued strong demand across multiple platforms and new business wins. CEC should be flat year over year in the quarter, but with continued pressure from Clear to Build. Long-term solid growth is expected in the second half for CEC. Consumer devices is expected to be flat to up low single digits year over year. Turning to slide 11, overall, we expect Flex Q2 revenue to be in the range of $6.1 to $6.5 billion. with adjusted operating income between $250 million and $290 million. Interest and other should be roughly $40 million. We expect our tax rate in the quarter to remain at the higher end of our 10% to 15% guidance range. We expect adjusted EPS to be in the range of $0.37 to $0.43 per share based on weighted average shares outstanding of $499 million. Our adjusted EPS guidance excludes the impact of stock-based compensation expense and net intangible amortization. As a result, we expect a gap earnings per share in the range of 29 cents to 35 cents per share. With that, I'll turn it back over to Revathy.
spk01: Thank you, Paul. Now, turning to slide 12, last quarter we wanted to provide you as much visibility as we prudently could and give our outlook for fiscal 2022. As Paul said, it's important to remember that there are still challenges and some uncertainties to overcome, but hopefully we'll all be soon through the worst of it. Now, based on the current situation, we're increasing our full year revenue guidance range to $25.5 to $26.5 billion, our operating profit range to 4.5% to 4.7%, and our EPS range up to $1.70 to $1.85. Now, on behalf of the entire leadership team, I want to thank my colleagues for their commitment and their hard work. Of course, our customers and suppliers for their trust and partnership and our shareholders for your support. With that, I'd like to turn the call over to start the Q&A. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. And your first question comes from the line of Matt Shearing with Stifel.
spk07: Yes, thank you. Good morning. I wanted to ask about the margin guidance for the September quarter, which is implied down sequentially, but still certainly up year over year. Are you seeing that pressure in both businesses? And is it some of the reasons that you talked about logistics, price costs, as well as maybe some lower utilization levels on the healthcare side?
spk09: Yeah, you're spot on, Matt. You know, as we move from Q1 into Q2, just like you said, you know, 4.6% out margins here in Q1. At the midpoint of our guidance at 4.3, that would be down a bit sequentially. I guess what I'll say is you're absolutely right. A little bit of pressure in both businesses. You know, we talked about it in the prepared remarks there about some pressure in CEC from clear to build. You know, we're doing everything we can to get components available so that we can ship because, as I mentioned, the demand side is certainly there. So a little pressure on the agility side, you know, namely in the CEC business. And then on the reliability side, you know, as you know, we have the automotive business in there, and that one is, you know, the whole industry is struggling a bit with clear-to-build and component shortages, and that does create a little bit of – of inefficiency. But again, that's the midpoint of our guide. I think it'll be a pretty good performance if we can nail that at 4.3. And as you mentioned, and I think very important point to our owners here, that's still up year on year. continues to be outstanding performance for Flex, particularly compared to the last several years.
spk01: And Matt, I'll remind you, at that midpoint, Q2 will still be the highest record for us in terms of operating margin for the guide we've given you. And we're very upbeat, and as you can see from how we have previously managed the company and how we've managed through supply chain logistics, they always flagged that Q2 would be somewhat tricky, and I think that's what we're seeing. But we're very positive and very bullish about how the year looks and how Q2 looks also. We're just being prudent in terms of our guidance.
spk07: Got it. Thank you. And I just wanted to also ask just about inventories relative to the supply issues that you're seeing. It was up quarter on quarter. What's the strategy there going forward in terms of working with customers, but also, you know, getting compensated, whether it be in deposits or other things so that you're still meeting your working capital goals?
spk01: Matt, I'll just start by saying one is we're absolutely doing that. That's why you see our cash flow is so strong. We are getting compensated for inventory that we're putting in the system. And we'll continue to do that. We have extreme discipline about this, amazing coordination between our supply chain teams and our commercial teams. And customers are very, very open to this. It's an industry-wide constraint that's going on. So we're seeing no issues in terms of translating what we're seeing in inventory to getting advances from our customers. But we also think that there is room to continue to improve inventory. a little bit more stable in the future quarter. So our goal is to still try to get inventory down, not just for us, but across the supply chain.
spk07: Thanks very much.
spk01: Your next question comes from the line of Ruplu Bhattacharya with Bank of America.
spk03: Thank you for taking my questions. I have two questions, both on margins. First one, you mentioned higher freight cost impacted Nextracker. Is there a way to quantify how much that impact was on Nextracker margins? And on the slide 10, I think you mentioned that you expect logistics challenges to bottom in Q2. What are some of the things that you're seeing that gives you that confidence? Because, I mean, from what we're hearing, freight costs should remain high. So just if you can just give us more color on your thoughts on logistics costs.
spk01: Yeah, absolutely, Rupal. I'm happy to go through this. First is, you know, I'll tell you that Next Tracker, as part of Flex, has really matured in terms of a supply chain company and having the right hedging practices, but also how they pass on costs to customers is very different than the rest of the industry. So I wouldn't let that cloud the judgment of how Next Tracker runs and operates. I'd say it really operates as a world-class supply chain company managing through that. And as you can see, most of the commodity inflation, as we talked about, has already been offset because their pass-through and how they manage contract pass-through on commodities is quite seamless. And that's pretty incredible given the environment and how significant commodity inflation has been. On the side of logistics, the reason why we're very comfortable that we lack that very soon is because it just has to run through the existing contracts and then it's priced into new contracts. And by the way, even in existing contracts, we are overcoming quite a bit of the freight increases with managing with customers in terms of renegotiating price so we see the logistics issue as being temporary even if the costs remain inflated how we pass that through in contracts you know will flush through the system that's why this is a very short-term temporary thing and we're very comfortable that we'll lap that very quickly in the next couple of quarters got it uh yeah gravity thanks for all the details on that that makes sense um
spk03: Maybe I'll ask you a different question then as my follow-up. You've outlined your growth strategies and you're focused on the longer life cycle in markets. At this point in the cycle, does it make sense to look at inorganic growth, your thoughts on just looking at acquisitions and what are you looking for if you are, and what end markets would you be thinking about expanding? Thank you.
spk01: Yeah, I'd say first is I'd say the most important thing, Ruplu, for I think every company, including ours, is to make sure we deliver really well in terms of the core and organic side of the business. And as you can see, we really are hitting on all cylinders, right? Every business is growing organically. Our growth rates are strong. you know our pipeline and bookings have been the best ever and you can see that in terms of not only the the quality of the bookings coming through but the segments that we're growing in is consistent and i've always said that i want every segment to be doing well on its own whether it's top line or bottom line and that's kind of what we're seeing right so organically i feel like the business is doing extremely well but i also feel that there's tremendous room for us to continue to grow organically and drive a continued growth strategy in the segments we participate because our end segments are so big. And there is so much room to just focus on where you deliver value. And we're seeing that that is the case, right? You can see that in our lifestyle segment, which is doing really well. Agility, which is doing really well because it's focusing on the right segments and delivering growth. If you look at how we are doing overall, even from a bookings and pipeline perspective, we're expecting our growth to to come in that's accretive to the margin levels and to our ROIC levels, which is around 20% right now this quarter. Really, we want to win in all segments organically, and we want to invest organically really well. That being said, I'd say our cash position is in the best that this company has ever been in. So that's fantastic, right? Because even with all constraints of supply chain and things like that, our cash flow is incredible in terms of how we have really managed this company. So we have tremendous optionality on how we use that. And, you know, whether we focus on buybacks, because I would say our stock is really trading at a low right now. We think it's very valuable right now to continue to invest in our stock. So we'll balance that between, you know, do we do more buybacks or do we invest in organic acquisitions? The fantastic news is optionality everywhere, right? Organically growing very strong, tremendous room in terms of our pipeline, our bookings. We want to invest more capital in terms of our growth strategy. And, you know, we think that our stock is undervalued and we need to, you know, focus on making sure that our buyback is strong and we'll continue to do that. And if we have great technologies to invest in, we will. So I think the good news, Rupal, is we have options everywhere.
spk03: Okay, thanks for all the details, and congrats on the strong execution in the quarter.
spk01: Thanks, Ruple. Our next question comes from the line of Mark Delaney with Goldman Sachs.
spk04: Yes, thanks very much for taking the questions. I was hoping to start on margins and think through the sustainability of margins over the intermediate to longer term. Margins, as you pointed out, a record high agility in particular is very good, and that's despite some of these temporary challenges around logistics and component bias. So maybe we could talk through some of the puts and takes to that. I think perhaps there's some parts of this that are more structural and sustainable around the mix and how the company is structuring its operations, but are there any potential offsets that we need to be mindful of going forward that are perhaps more cyclical components that are temporarily helping you in terms of where asset utilization is running or anything like that that we need to be mindful of as we're thinking about the longer-term margin potential of the business?
spk01: No, Mark, I'll start by saying one is if you look at kind of, you know, our margin guidance, right, for Q2, I mean, from the previous question that somebody asked, right, I think Matt asked that, you know, there's inefficiencies we've built into that, right, in terms of our current situation, particularly for chasing, expediting and supply chain issues. So obviously those are going to, you know, go away and we're going to continue to improve margins. If you look at our, you know, guidance for the year right now, You know, at a midpoint at 4.6%, that's a pretty significant guide, right, in terms of how we see the full year come through. And as you can see from our history of how we think about these things, we're quite thoughtful in terms of how we provide these guidance. I'd say first is from a margin perspective, inefficiencies are there today. From a supply chain perspective, we think that gets better. So if anything, there's upside more than anything else. But I think more importantly, the way I think about long term is, you know, we're a manufacturing company and we're kind of just started on this journey that we're getting really good at in terms of how we look at productivity and efficiencies across our factory. And I'd say that if anything, there's more room to continue to do that better and better. You know, I expect that. Flex will be in terms of lean and productivity and efficiency and using things like our Flex business system will continue to be world class in that. So if anything, I'd say there's more room just in terms of margin, driving more productivity and efficiency, managing our footprint better. But what's even better than all that will be, I would say, if you look at our growth and the mix of our growth, right, we're very focused on the right kind of growth. um and um and making sure that the mix is flowing through uh through our pipeline so i'd say mark i have nothing to point to that you have to be thinking about in terms of that you know goes down from here if anything i would say it's um you know what we have to focus on is i'd say our journey has just started you know it has to only get better from here You can see that, right, from where we were, like I said, a couple years ago at 3.4% to 4.6% gross margin and operating margin. So I'd say the tremendous room to continue to drive upside to this.
spk04: That's very helpful. Thanks. And for my second question, I was hoping you could provide some more details on what Flex's expectations are on the component supply environment through the back half of this calendar year and into next year. Any details you can share about how you see the supply hopefully improving when some of these semiconductor and other component shortages are alleviated? And any differences in terms of which end markets are perhaps currently most constrained and when various end markets could begin to be able to get the supply that they need? Thanks.
spk01: Yeah, so Mark, I'd say that, you know, there's nothing I'm going to add that you haven't read and seen and heard from all the other earnings calls that you got before us, right? I think we had predicted just a couple of quarters ago that, you know, we thought this particular quarter we're entering, which is Q2, would be probably the most challenging. And we had done that based on our intelligence of lead times, what we had heard from chip companies in terms of how their capacity would start coming in, particularly in the forms of assembly and test capacity. So I'd say we had called this a long time ago to say that we think that this quarter will be the most challenged and that you should start to see some recovery as kind of assembly test capacity starts coming in in the future quarters. You are kind of hearing that across the board. One is I'll say is we see this issue across every segment. You know, some like medical and auto, I'd say kind of gets better quicker. One is because their volumes are much lower compared to tech and industrial. And, you know, as Paul pointed out in his comments, right, CEC had constraints this quarter, and we think tech and industrial will have kind of a longer tail. But that's more because of the scale of those segments, right, and how the end markets in terms of the supply chain and the chip companies have volume associated with those end markets. But overall, right, I'd say this quarter is probably where we see some level of bottoming out. And then we start to see it stabilize kind of moving forward. And that's kind of where we're thinking this moves, I'd say. But will it continue through next year? I think there'll be some pushes and pulls through next year. I think we'll just have to work through that.
spk04: Thank you.
spk01: Your next question comes from the line of Shannon Cross with Cross Research. Thank you very much. I was hoping you could talk a bit about how your conversations with customers have been going as we're, in theory, exiting COVID, you know, with regard to how they're thinking about, you know, moving out of China or other geographies and just in general how they're looking at outsourcing. And then I have a follow-up. Thank you. Thanks, Shannon. I'd say our conversations with our customers are very focused on what can they do to make their supply chain more resilient, right? And whether you think about trade issues that drive regionalization or now the pandemic drives different thinking around bringing the supply chain closer to the end customer, and the end customer could be any part of the world, whether it's Europe, Asia, or North America, I'd say our customers are driving more conversations and more decision-making around that today than we've ever seen before. But what that has translated to already, Shannon, is that our pipeline of bookings, if you look at the focus on regionalization and what's driving some of our pipeline, it's pretty significant. And we're seeing those actions already come through. We have tremendous amount of product launches that are going on, I'd say across the world, which is driven by some of the supply chain resiliency trends that we're seeing. So I'd say the focus from our customers really is the conversation has gone into actions and the actions are driving our pipeline and bookings to be at this record level right now with a tremendous amount of program ramps going on across our organization. So I'd say, and that is across all sectors. I couldn't point to one sector where that conversation is not going on. Okay, thank you. And then, Saul, maybe you could talk a bit more about working capital. You know, on a historical basis, it was quite strong this quarter. Is there anything we need to worry about, you know, reversion to the mean or anything within the various components? And I know you mentioned getting some prepayments in. Is there anything else that you're doing that, you know, is driving this? Thank you.
spk09: Yeah, so appreciate the compliments on working cap in the quarter. Pretty good performance, very good performance. Cash flow, $219 million. We were quite pleased with that and perhaps even a little bit surprised to the upside. Had some inventory pressure in Q1. I think that will persist as we go into Q2. And we'll probably have a little bit of free cash flow pressure in Q2 because as inventory receipts came in at the back half of the Q1 quarter, you have to pay the bills for that as you move into Q2. That said, for the full year, you know, kind of hanging on to our free cash flow guidance, which was essentially in line with last year. And I don't think there's anything rolling over. A lot of focus on working capital management within the business. Our incentive programs are designed to drive strong working capital and cash flow performance. So I would say overall upbeat, no change there, perhaps a little bit of pressure in Q2.
spk01: Great, thank you. Your next question comes from the line of Stephen Fox with Fox Advisors.
spk02: Hey, good morning. A couple questions. First of all, I just want to make sure I understand the math around some of the supply chain assumptions. If sales are flat quarter over quarter, roughly speaking, and your profits are down at the midpoint, $20 million, is that $20 million all related to supply chain, or is there other stuff we should consider? And is it limiting your ability to upside to customer forecasts? And then I had a follow-up.
spk01: I would say, Stephen, one is, you know, it's all around supply chain. I think that's kind of a no-brainer. And I think it doesn't limit our ability at all, you know, in terms of upside, I think I would say with demand, right? This is all a question of not just whether we can find the, you know, components, but whether, you know, suppliers can find their other suppliers, customers can find other suppliers giving their components to come to final assembly. So I'd say, all around supply chain and kind of how we manage that and clear that will kind of drive all the upside, I'd say.
spk09: Yeah, and I'll just add, you know, I think, Ray, that you mentioned a couple of minutes ago as well, but at the midpoint of the guide at 4.3% out margin in Q2, that would be the best Q2 we've seen and up 20 basis points year on year, despite the challenges that we're seeing in the supply chain. So it is pressure. but still really good performance by the operating team.
spk01: And Steve, I would say that if you look based on the last quarter, our supply chain team is just incredible, right? I mean, the things they can do, what our customers rely on us in terms of finding components and dual sourcing and doing things like that, they can do things that nobody else can do. I'm pretty comfortable that, you know, we've got a very solid game plan, not just for Q2, but, you know, through the next few quarters. And, you know, we'll do an amazing job managing through all of that.
spk02: Great. I think I got it now. And then as a second question, you mentioned on the healthcare side that you continue to win during the quarter, I assume you mean new programs. I know you don't want to name customers or anything like that, but can you give us a sense for what that exactly means in the recent quarter? Any kind of color around what kind of programs you are winning or what kind of success you're having on the engineering front, et cetera? Thanks.
spk01: Yeah, I'd say, you know, I'd say in terms of health solutions, we've been driving this kind of focus around pipeline and bookings, you know, even just as COVID had started because we knew that it was an incredible area for us to grow and our capability was something we're consistently hearing from customers that, you know, hey, you know what, as anything you do to increase capacity in terms of your own commercial design capability, we're going to be able to fill that up. And that's kind of what we're seeing, right, with the health solutions business and what we delivered last year with customers in terms of ramping up for COVID care in such a short time, really tremendously also changed our credibility in the industry in a big way. And we're already such a significant player in terms of medical devices. So our wins that we're seeing is in every sector. We're seeing it in critical care. We're seeing in like we've talked continuously about kind of diabetes care. We have run several programs in that area. They were one of the largest suppliers in that space today. Everything around imaging, So all our key, we've picked our four areas around health solutions, and all of those were winning very, very focused large programs around. And actually, most of them are even ramping up right now. So the health solution segment really ticking in terms of all cylinders, in terms of the pipeline bookings, and then how we are ramping up all these programs.
spk02: Great. That's really helpful. Thank you.
spk01: Thanks, Steve. Our next question comes from the line of Adam Tindall with Raymond James.
spk02: Okay, thank you. Ray, you talked about the opportunity to get more efficient. When I look at the metrics, your SG&A to revenue is below your target range while your gross margin is healthy. When I look on an OPEX to GDP basis, I think it's at all-time lows. So the operational model is being pushed more than ever right now. And I wanted to ask first how specifically you can get more efficient. Should we expect more restructuring opportunity? What does the ultimate operating structure look like? And lastly, what does this do to growth as you pursue that structure?
spk01: Yeah, Adam, I'll start by reminding you that, you know, the first thing is that our gross margin has grown like 100 basis points, right, in the last couple of years. So, you know, we've done an incredible job in terms of making sure that gross margin is improving with growth. you know, driving the right kind of mix, but also driving the right productivity and efficiency in our factories. For me, OpEx efficiency, you know, we went through, of course, a correction period when we changed our revenue a little bit and adjusted our portfolio the last know couple of years but we want to continue to drive opex efficiency um you know across our business and whether you know that's in our back office or things like that because we do an incredible job of driving uh opex efficiency too but our potential is in our gross margin right that's where we'll continue to drive improvements because We think there's tremendous productivity efficiency through footprint optimization. We don't see kind of any major restructuring. We think all of these should be managed through the business cycle. If there is any, it'll be puts and takes, I would say, through our business cycle. But gross margin is where we think through mix and through productivity efficiency, we'll continue to see improvements moving forward.
spk02: Okay. And maybe as a follow-up for Paul, I just wanted to double-click on the margin ramp that's implied in back half guidance. Just the back of the envelope, it looks like if I compare revenue and operating profit in the back half versus the first half, it's about a low double-digit contribution margin, which is really healthy. I think you talked about an auto ramp that's coming that, you know, should be a little bit of a headwind in Q3 and Q4. Maybe help us with the buckets of the key tailwinds that drive that level of contribution in the back half of this year, since you guys sound really confident. Thank you.
spk09: Yep, happy to do that. So I think, as Revithy had pointed out, probably the trough in terms of supply chain challenges and that would include cost headwinds, it's probably at its worst in Q2, and it gradually improves as we move into Q3 and Q4. And the challenge with this supply chain environment is it does create stops and starts within our facilities, and that just leads to inefficiencies. We feel confident in the back half, and I maybe just go back to the April timeframe, March timeframe, as we were thinking about our full-year guidance plan, We expected that Q2 supply chain challenges would be there, and we figured that Q1 would be tough, Q2 would be a little bit worse, but things would gradually start to improve as we moved into Q3 and Q4. And what I'll say is, fortunately, that view hasn't changed. If this was moving all over the place and we didn't have that sort of consistent expectation, I guess I wouldn't be as confident as I am in the back half. But given that things are slowly starting to improve as we move through Q3 and Q4, we'll have less of that inefficiency And that coupled with, you know, new program ramps dropping in, I think we'll be right in the middle of that, you know, 4.5% to 4.7% margin rate for the full year.
spk01: Adam, I'll just point out that in the second half, you know, we've got CEC is going to be stronger because we'll have better components availability. We've had tremendous new wins in that business. That's going to help the whole return to work is going to help that. You know, also we've also said that auto wins are, you know, we'll see more some of that coming up in our next fiscal year cycle. But, you know, we're quite confident that, you know, in terms of second half, you know, we're putting some supply chain issues behind us. But we also see mix, you know, being a good thing. But we, you know, our midpoint of our guidance is pretty strong. I'd say it'll be a record year for us again.
spk02: Right, and a quick clarification on Next Tracker. Is that SEC review process complete and you're now just waiting on market conditions, or are you still waiting on the SEC review? Thanks.
spk09: Yeah, we really can't comment on the process other than we're in the process with the SEC, so when that situation changes, you'll know. Thanks, David.
spk01: Okay. And once again, if you would like to ask a question, please press star 1. Your next question comes from the line of Paul Chung with JPMorgan. Hi.
spk08: Thanks for taking my question. So, you know, on the customer side, you know, we're hearing a lot of pressure, not surprising on shortages and higher freight costs, kind of really hurting those OEMs that have kind of limited product diversification. Are you starting to see, you know, accelerating customer interest, looking to offload, you know, a lot of logistics and manufacturing? And, you know, do you have any pricing power there given the urgency? And if you could give some, you know, examples, that would be helpful.
spk01: Yeah, Paul, I'd say what we're hearing definitely from customers and, you know, more customer conversations on how they should be thinking about their supply chain, You know, in terms of having us help them think about the risks associated with it and how do they plan for it, you know, it's coming through across the board, whether it's associated with freight and logistics or whether it's associated with components itself that is in outdated tooling or that needs to be second sourced. all of these conversations because it's not one conversation, right? If it's an auto, it probably is about outdated tooling and outdated components that needs a new design and a new source, right? In the tech world, it could be a whole different conversation because it could be focused on just developing second sources and having inventory and product available closer to their point of view. every single business and customer base is having this conversation with us and for us it's all a question of making sure we're finding the right solution for each customer and that you know they value our expertise and experience quite a bit to help them design these and paul i would say that you know pricing power absolutely exists because I think you can see from the supply chain issues that customers are very clear they don't want to be in this situation again. So using suppliers like Flex to help them redesign that and make sure that they provide them the right solution is worth a lot because nobody wants to be in this situation again. So I'd say yes, absolutely. And then in terms of examples, I'd say I can give you examples in our lifestyle segment, which is very consumer-driven, where our customers are very, very clear that from not only the product availability being closer to the point of use is very important to them and they're willing to pay the price to make that happen, but then also a full life cycle of it, right, where they're able to bring in product to be, you know, to be fixed when the customer returns it. So a full life cycle solution, you know, for that segment is super important. And we're seeing customers really drive to that to say, hey, whether I'm located in Europe or in Asia or in North America, I want a full life cycle solution. I want to be closer to the point of use. And how can Flex do that for me? But I could give you an example in almost every segment on this, Paul. It's across the board.
spk08: Great. Thanks. That's very helpful. And then just a follow-up on free cash flow. I mean, you mentioned free cash would be kind of in line with fiscal year 21. Your revenues and margins are expected to be higher. Why aren't you kind of expecting free cash flow and conversion to be higher as well? If you could expand there. I know you mentioned some Q2 headwinds on working cap and whatnot, and your CapEx guidance would be helpful as well. Thank you.
spk09: Yep, no problem. So as I mentioned, we will have a little bit of free cash flow pressure in Q2. What I would say about the supply chain environment component shortages in particular is that it is and continues to be a fluid situation. If the outlook improves as we move through the back half of this year, we'll certainly update that guidance. But I think free cash flow in line with last year, which, by the way, was a very good free cash flow generation year for us, I think is prudent guidance at this point in time. In terms of CapEx, I mentioned before, CapEx to sales, about 2% is probably a good placeholder for you guys and allows us to prudently invest in strategic growth for the business, and I don't think it constrains us in any way. Thanks. Great. Appreciate it.
spk01: Your next question comes from the line of Jen Suba with Citigroup.
spk06: Thank you. And Ray, you mentioned that there's some transitory costs. We're all very familiar of the shortages in semiconductors and also the expediting costs or freight shipping costs, whether it be containers or airplanes from China or Asia or around the entire world. Are you specifically talking about the ones about freight and you think that those are going to subside? Or are you talking about more about also the component costs like
spk01: steel copper resins plastics and aluminum have recently rallied and you expect those to kind of subside you know in the next couple quarters so i think jim what i would say in terms of the commodity and the component side is that you know in the semiconductor space itself the component price increases that are being passed through you know we're passing those through too and those are going to stick for a period of time so it goes through another cycle jim as you know this very well in terms of commodities like steel um yeah they're rallying but our ability particularly a biggest use of that is in our next tracker business we basically pass through that like for like through our contract so if we we don't carry any headwind because of that And if that recovers, I would say it'll go through that same process, right? In terms of customer negotiation. So I would say if freight is probably the only place and that also, and only in the next tracker business, where it takes a couple quarters to work through the contract headwinds. And so I'd say that's what happens in terms of pricing. But if you look forward and think about how long inflation stays across all these end markets, I'm not sure I can call that very easily today. I said all I can say is that we're passing through pricing as quickly as we can in all segments, and they're sticking.
spk05: Great. Thank you so much for the details and clarifications. It's greatly appreciated. Thanks, Jim.
spk01: And your next question comes from Christian Schwab with Corey Calum Capital.
spk10: Hey, guys, congratulations on another great quarter. Regarding your guys' ability to prove out over the last few quarters in a challenging environment to be you know, a very trusted supply chain partner, you know, and you highlighted many different examples of that. As we look to the midterm, you know, beyond this fiscal year, do you guys think, given that kind of example of partnership with your customers, that you'll be positioned to, in essence, outgrow the industry as we get to the kind of midterm as far as a top line?
spk01: Yeah, I would say, you know, absolutely. I'd say, Craig, there's no question about that. Right. I mean, even if you think, you know, this quarter, as you can see, our overall growth rates, right, even compared to the rest of the industry is very, very strong. I'd say in the midterm, I have no doubts about that. Our pipeline is very strong. Our bookings have been fantastic, even with our focus on the right kind of bookings. So I'd say in the midterm, our ability to grow and grow in our end markets, in our subsegments we want to grow, is extremely strong. I'm very bullish about it. and feel very, very comfortable that customers are coming to us because they know that we execute well, you know, we really are a good trusted partner for them in terms of being able to grow with them. So no question about that. I'd say our growth focus from where we are right now looks very bullish moving forward.
spk10: Fantastic. No other questions. Thanks. Thanks, Christian.
spk01: There are no further questions at this time. Do you have any closing comments? No, I'll just say thanks everyone for joining and be safe and healthy. Thank you. Thank you for participating. This concludes today's conference call. You may now disconnect.
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