TD SYNNEX Corporation

Good morning, my name is Misty and I will be your conference operator today. I would like to welcome everyone to the TD, the next third quarter fiscal 2021 earnings 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 pass the call over to Liz Morelli, head of investor relations. Liz, you may begin. Thank you, and good morning to everyone. Thank you for joining us for today's call. With me today are Rich Hume, CEO, and Marshall Witt, CFO. Before we continue, let me remind everyone that today's discussion contains forward-looking statements within the meaning of the federal securities laws. including predictions estimates projections or other statements about future events including the benefits of the merger to our various stakeholders i.t spending demand supply expenses and growth actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties discussed in today's earnings release in the Form 8K we filed today, and in the Risk Factors section of our Form 10K and our other reports and filings with the SEC. We do not intend to update any forward-looking statements. Also, during this call, we will reference certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP results are included in our earnings press release and the related Form 8K available on our Investor Relations website, ir.sinex.com. This conference call is the property of TD Cinex and may not be recorded or rebroadcast without our permission. I will now turn the call over to Marshall. Marshall?

Thanks, Liz, and thanks to everyone who's joined us today for the call. I will begin today by reviewing the legacy Cinex results and drivers for the fiscal third quarter ended August 31st. Given our merger close date is September 1st, All discussion and outlook for fiscal Q4 reflects a full quarter of combined TD FinEx, and we will continue to use the FinEx fiscal year end on November 30th going forward. Moving to the legacy FinEx fiscal Q3 results, I'd like to point out that year-over-year comparisons I will reference today are impacted by both the unusually strong performance we experienced a year ago given the rapid adoption of work and learn-from-home trends during the pandemic and the supply constraints currently impacting our industry. Revenue came in at $5.2 billion, reflecting a slight decline from the prior year due to ongoing industry supply chain constraints. As we indicated during our June earnings call, we expected the impact from these constraints to fiscal Q3 revenue would be $150 to $200 million. While demand in the quarter continued to be very strong, the impacts from the industry supply chain shortages were higher than anticipated. While it's difficult to quantify with precision, we believe the impact to our Q3 revenue most likely came in between $200 and $300 million. Demand in the quarter continued to be robust and fairly broad-based, and we saw particular strength in commercial software, networking, security, and notebooks. Our manufacturing business results were consistent with expectations. Gross profit of $313 million increased $15 million or 5% compared to the prior year and gross margin was 6% up from 5.6% in the prior year. Total adjusted SG&A expense was $144 million down 3% year-over-year and represented 2.8% of revenue. Non-GAAP operating income was $168 million and improved by $20 million or 13% versus the prior year. And non-GAAP operating margin was 3.23% of 43 basis points year over year. Q3 interest expense and finance charges were $26 million and the effective tax rate was 25%. Interest expense was higher due to the pre-funding of $2.5 billion of bonds on August 9th. Total non-GAAP income from continuing operations was $112 million, up $15 million, and improved by 15% over the prior year. And non-GAAP diluted EPS from continuing operations was $2.14, up from $1.88 in the prior year. Now turning to the balance sheet, we ended the quarter with cash and cash equivalents of $4.05 billion and debt of $4.03 billion. which also reflects $2.5 billion of bonds related to merger, which I spoke to previously. Accounts receivable totaled approximately $2.2 billion, down 20% year-over-year, and inventories totaled approximately $2.9 billion, up 7% from the prior year. Our cash conversion cycle for the third quarter was 32 days and improvement by one day from the prior year. Cash used in operations was approximately $56 million in the quarter. We are pleased to report that our board of directors has approved a quarterly cash dividend of 20 cents per common share for the current quarter. The dividend is expected to be paid on October 29th, 2021 to stockholders of record as of the close of business on October 15th, 2021. Now, moving to our outlook for fiscal Q4, which is reflective of the combined TD Cenex company. Total revenue is expected to be in the range of $15 billion to $16 billion. Distribution revenue is expected to grow low to mid-single digits year over year and in line with historical seasonal trends quarter over quarter, despite a supply chain headwind of approximately 4%. Our manufacturing business is expected to decline year over year due to a strong performance in Q4 of fiscal 2020. This business is lumpy and is also experiencing supply chain constraints. Our approach remains consistent with prior guidance, which is that we guide towards the lower end of expected outcomes for the manufacturing business. Non-GAAP net income is expected to be in the range of $242 million to $272 million, and non-GAAP diluted EPS is expected to be in the range of $2.50 to $2.80 per diluted share, on a weighted average share's outstanding basis of approximately $96.2 million. Non-GAAP interest expense is expected to be approximately $40 million, and we expect non-GAAP tax rate to be approximately 25%. Please note that these statements regarding our expectations for our fiscal fourth quarter 2021 are forward-looking and that our results may differ materially. I will now turn the call over to Rich.

Thank you, Marshall, and good morning, everyone, and thank you for joining us today. We've certainly accomplished a lot in the last six months, I am privileged to join you today on behalf of the new TD Cynics and our more than 22,000 coworkers around the world. Since our official day one earlier this month, we've been hard at work rolling out our new organizational structure and laying the groundwork for our future combined company. We've announced our executive leadership team comprised of seasoned leaders from both legacy companies. And thanks to our robust planning and integration efforts, we have hit the ground running on post-Day 1 goals and objectives. However, we have much to do, and I look forward to sharing updates with you as we progress. We are energized by the positive feedback from our customers and vendors and are well positioned to raise the bar on the value we provide to our partners. Those opportunities are reflected in our new name and logo. Our new name, TD Cinex, reflects and preserves the longstanding legacies of our two great companies. Our logo, the Nautilus, is a symbol of growth, expansion, and renewal. For us, we expect growth and expansion will occur in many dimensions, including the growth of our business and our partner relationships. We also announced our new shared purpose, mission, vision, and values for our coworkers, many of whom I have gotten the opportunity to get to know better in this past month. With each meeting, I come away even more impressed with their collective talent, motivation, and commitment to excellence. Although still largely working remotely, We are united behind our vision of connecting the global IT ecosystem and unlocking its potential for all. As we enter our fiscal Q4, we have much to be optimistic about. Our role in the IT industry continues to increase in importance. Our products and services portfolio is tied to some of the highest growth technology markets, such as cloud, security, big data and analytics, Internet of Things, mobility, and everything as a service. As TD Cinex, we have an incremental opportunity to offer our expanded portfolio to our more than 150,000 customers and expand globally as we bring our enhanced portfolio to the markets that we serve. From a macroeconomic perspective, we are maintaining a sense of cautious optimism as the recovery from our global pandemic continues to be uneven by geography and industry. For our industry in particular, we believe in the long-term drivers for IT spending, but continue to see a supply-constrained environment for at least the next few quarters. For Q4, as Marshall noted, the distribution business is robust and on track for a normal seasonality from a sequential perspective and low to mid single-digit growth year over year. We see strong demand across PC ecosystem products, advanced solutions, and next-generation technologies. We continue to see a significant backlog level on a combined basis, We estimate this impact to represent an approximate 4% headwind to revenue, though we still believe in a robust demand picture based on discussions with our vendor partners and customers. From a merger perspective, we are on track and committed to achieving $100 million of cost synergies and a 25% non-GAAP EPS accretion over the next 12 months. We are optimistic that we can exceed our year one accretion targets. As I mentioned at the beginning of my remarks today, now the real work begins. We are primed and ready for the task of integrating our two great companies and will leverage our wealth of experience in this area. As we contemplate changes and come to decisions on our integration journey, Our focus is on establishing and maintaining a superior experience for our customers and vendor partners. Among our top objectives is the harmonization of various IT systems, applications, and tools in the Americas. In closing, I'd like to thank all my TD Cinex coworkers for their dedication and focus during the lead up to our merger close and for their spirit of collaboration and participation as we move forward together. The opportunities ahead of us are boundless. I look forward to meeting with our investors and analysts in the coming months. sharing our vision of the future of the IT ecosystem and keeping you updated on our integration progress. We will now take questions. Operator?