Q2 2020 Earnings Call
Today's call is being recorded and all lines have been placed on mute to prevent any background noise slides for today's discussion are available on the Investor Relations section.
The flux dot com website.
As a reminder, today's call contains forward looking statements based on current expectations and assumptions and these statements are subject to risks and uncertainties that could cause actual results to materially differ.
Such information is subject to change in the company undertakes no obligation to update these forward looking statements.
For discussion of the risks and uncertainties see flux. His most recent filings with the FCC, including current annual and quarterly reports.
This call references non-GAAP financial measures for the current period those measures can be found in the appendix slides otherwise they're located on the Investor Relations section I'd be flux website, along with the required reconciliations with us on today's call are ready to see.
Advocacy, Chief Executive Officer, and Chris Collier, Chief Financial Officer.
After the speaker's remarks, there will be a question and answer session.
I'll now turn the call over to Rayva see advocacy.
<unk> Chief Executive Officer. Please go ahead.
Hey, Thank you Hey, good afternoon, everyone and thank you for joining us on the call. Today says we beat the midpoint of our fiscal year I'm really excited to share the progress for second quarter and talk about how we move forward.
Well I reflect on the last six months you know, we said about a journey to shift our portfolio mix, while improving margins and delivering appropriate levels of adjusted free cash flow.
I'm really happy that our results this quarter are showing that this can be done.
Our second quarter performance like Q1 is another step into right direction.
Of course, I want to start off by thanking our nearly 200000 flex employees, who have worked really hard and further build on the legacy of this great companies I want to thank the flex team.
Let's start with slide three.
And then a very dynamic unexciting period for flex and we've done a lot of transformational activities that we've been managing through what I'm really pleased does that this has been capped off but that's really strong financial performance. So let me talk you through the financial metrics.
We achieved revenue of 6.1 billion and this reflects our underlying makes train strategy and displays growth in core areas like industrial and energy.
We realized an operating dr. operating margin of 3.7% showing significant gains in our conversion and benefits of our portfolio mix.
We delivered adjusted EPS of 31 cents and this is right where we committed.
And our adjusted free cash flow generation of hundred 87 million, resulting in adjusted free class Cashel conversion, that's returning to historical performance levels.
And varied we're targeting to operate our business.
Well, let's go to slide four we've done a lot this quarter building on what they started in first quarter.
Firstly, our teams have done an exceptional job executing on our mix strategy as they've been reducing exposure in India, and China, and reaching an amicable, it's a settlement with wild way.
At the same comedy focused on our core growth segments, and getting back to enhancing our sustainable disciplined execution that for it.
We've had many new business wins this past quarter under a few wins in particular that highlight our technology leadership and global capabilities and I want to share some of those with your right now.
So the first example is wonderful design led went in RCC space, where we designed and manufactured a storage media solution that transfer stores and catalogs media within the data center.
This solution is one of several design led then we have with this customer and is gonna be deployed across the customer data Center network.
We continue to increase our geographic penetration with significant design, let Vince in Europe , and China and that expands our position in autonomy with an electrification outside of North America and in addition, our communications and connectivity know how have led to a new major went into automotive space for an integrated connectivity module for a major nor.
American automotive manufacturer.
And then at our House solutions area, we continue to secure many design led bands and point of care diagnostics and drug delivery, we solidified our lead in the diabetes market with a significant continuous glucose monitoring device win.
Additionally, we are encouraged by the increases in customer outsourcing, we're seeing that reinforce the market trend that really bodes well for us in this space.
But in all these examples were leveraging our deep experience across design and manufacturing capabilities, along with our strong customer collaboration to provide meaningful solutions to their manufacturing and design challenges.
So in April six months ago, when I first talk to although fuel we committed to doing four things.
Managing our mix.
Driving disciplined execution, winning more design led businesses and consistently driving free cash flow.
Oh. The reason we chose those four areas was because of its clear that growth is not the challenge in our industry, but delivering incremental margin with escrowed and the right level to free cash flow typically has been.
And doing so consistently really matters. So our performance. This period across these four elements really demonstrates that we are executing I know works paying off now combining these four priorities with the right type of profitable growth will be the powerful story as we move forward.
We believe this disciplined approach that we have created will create a lot of positive momentum for flats and will drive shareholder value.
So I want to take a few minutes the shared with you with some thoughts on our strategy going forward.
You know, we've talked a lot about optimizing our mix and improving our execution and they've accomplished a lot in these areas and we'll continue to find an optimized.
Customers are telling us that they have outpaced the industry and technology innovation, particularly in health solutions in automotive and our energy and power sector as well as Fourg and Fiveg.
The technology leadership is very important any plan to maintain our leadership position.
Our goal is to ensure that our commercial plans in the segments focus on driving growth in technology to when the right type of business.
And operationally will simplify and optimize our factories to the high scale efficient our job model or the high makes nowhere volume longer lifecycle model.
The Great news is that we know how to do does really well and they have a pedigree like non other to meet these demands.
Our plan moving forward is to run end to end business segments. The emphasis on differentiated engineering and upgrade operations manufacturing service models, which are tailored to meet individual customer needs.
A fourth of the core if our strategy is always enthusiastic and passionate flex culture that makes all of this possible.
I'm very excited about this past the were taking and we're looking forward to hosting an investor and analyst day in fiscal year, 20, Q4, but will further expand on our approach.
I'm really pleased with our performance this quarter.
We have taken another big step into right direction on our plan is working.
I'd like to turn the call over to Chris will walk you through our financial results in more detail and then I'll come back with some closing remarks, Chris.
Thank you very busy.
Please turn to slide six for our second quarter income statement summary.
Our second quarter revenue was 6.1 billion down 9% versus a year ago and at the low end of our guidance range.
Our Q2 adjusted operating income was 227 million, which was within our guidance range and up 2% year over year.
Our adjusted net income was 158 million.
Resulting in an adjusted earnings per share of 31 cents, which was at the midpoint of our guidance range and up 7% year over year.
Second quarter GAAP net loss was 117 million and was lower than our adjusted net income.
Hi, merely due to $19 million the stock based compensation 14 million and not intangible amortization.
And 226 million in net restructuring and other charges.
As we accelerated our strategic decision to reduce exposure to highly volatile products in China, and India, and we undertook targeted actions to reduce streamline and align our operating cost structures.
We previously guided to a range of 145 million to 265 million for these charges.
The bulk of which we incurred in our second quarter.
Now please turn to slide seven four quarterly financial highlights.
This quarter, while our adjusted gross profit was down 5% year over year to 414 million.
Our adjusted gross margin improved a healthy 30 basis points year over year to 6.8%.
Reflecting our improving mix of business and benefiting from operational efficiencies.
We continue to manage the enterprise, where they stranded cost discipline.
Our second quarter. Adjusted after you know you expense declined 11% year over year.
286 million.
Even as we further involved and reposition spending to support and extend our design and engineering capabilities.
Our us today as a percentage of revenue is expected to remain in the 3% to 3.2% range, thereby providing sustainable operating leverage.
The combined impact of our improving business mix operational execution is strong cost discipline translates into improving operating margin and profitability.
Our quarterly adjusted operating income was 227 million, which was up 2% from the prior year.
Our year over year operating margin expanded by 30 basis points to 3.7%.
Which reflects our fifth straight quarter of year over year margin expansion.
Please turn to slide eight for a second quarter business group performance.
During the quarter or revenue reflected expected pressure from our restructuring actions as we proactively reduced or high volatility short cycle low margin business as well as weakness in certain end markets.
Revenues for high reliability solutions industrial and emerging industries.
And the consumer technology group met or exceeded our prior guidance.
HRS revenue.
It was 1.2 billion declining 2% year over year.
Health solutions was down 5% as it experienced minor timing pushouts or weaker than forecasted demand for a small subset of products.
Which combined resulted in a temporary slowdown this quarter.
Auto was up 1% as it continues to ramp new business across its portfolio and navigate to slower growth environment.
Oh I group grew revenue, 40% year over year to 1.8 billion and benefited from strong performances from home and lifestyle and energy customers and programs.
Even a semi cap equipment remains muted.
CTG declined 21 person from the prior year to 1.4 billion, reflecting anticipated revenue reduction as we lessen our exposure to high volatility low margin short cycle businesses.
We've made good progress on our repositioning and anticipate that these activities will lessen as we complete the targeted portfolio rationalization or the end of this fiscal year.
Lastly, she she revenue declined 19% year over year to 1.7 billion.
As a result of reduced demand with certain telecom and networking customers and the impact from our walkway settlement.
The underperformance was broad and encompass some of our largest customers.
Reduction in our customers forecast is consistent with the indicators were seeing from the market.
And signaling a near term slowing of telecom capex.
Turning to profitability.
We were pleased to deliver 3.7% adjusted operating margin in the quarter, even on the lighter than expected revenue.
Profitability, if they trust was solid and resulted in a 7% adjusted operating margin.
Reflecting our conscious decision to accelerate investment into the ramp of our largest ever health solutions program.
It should bring an uplift to both revenue and operating profits as it moves into full scale production in fiscal 2021.
Hi, I continue to benefit from strong operational leverage and from ramping programs with greater design and engineering content.
Which resulted in a record adjusted operating profit in a very strong 6.2% adjusted operating margin for the quarter.
She sees 1.8% in CTG is 1.9% adjusted operating margins remain pressured as we transition our portfolio and reposition our operating structure.
We want to reiterate that enterprise margin expansion remains the cornerstone of our strategy.
And we're driving commercial discipline and operational efficiencies in order to deliver profitability.
Turning to slide nine let US review, our cash flow generation highlights.
For a second quarter performance displayed solid cash flow execution, consistent with our expectation to return to positive adjusted free cash flow generation in fiscal 2020.
We continue to operate with discipline, not working capital, which remains inside our targeted range of 68% of revenue.
We're confident in our ability to manage the business within this range.
In particular.
Inventory management remains an area of focus and one where we believe we can further optimize.
This quarter, we ended with 3.7 billion or 60 days worth of inventory.
60% or two days year over year.
We expect to further improve our inventory management as we continue to drive better demand planning activities across the enterprise.
Our net capital expenditure totaled 95 million for the quarter.
Its lowest level in over three years and was lower than our depreciation for the quarter.
We are operating a well built all global infrastructure and benefiting from prior years investments that are now supporting new technologies products and programs.
Another strength of our global system is our ability to redeploy installed capacity, where it is needed among different sites and businesses.
Which enables us to optimum we leverage existing assets.
Taken together these factors contributed to decreased capital expenditures for the quarter.
Even while we continued to invest in the capex necessary to support our higher margin long lifecycle programs in our IEI and HRS businesses.
We remain confident that we have sufficiently invested to support the profitable long term growth.
As we entered the second half of fiscal 2020, we expect that our Capex will continue to close we aligned with our annual depreciation level, thereby benefiting adjusted free cash flow.
This quarter, we generated 187 million in adjusted free cash flow.
Our adjusted free cash flow generation for the last 12 month is $548 million.
And result.
In an adjusted free cash flow conversion of 89%.
We continue to make progress to operate with discipline and strive to generate free cash flow conversion in line with historical levels.
Lastly.
We remain focused on delivering shareholder return.
As we repurchased roughly 6 million shares for $60 million during the quarter.
And we've repurchased 241 million over the last 12 months.
Please turn to slide 10 for third quarter guidance.
[noise] revenue is expected to be in the range of $6 billion to $6.3 billion and reflects the impact of our targeted actions to reduce our high volatility short cycle low margin business and continued weakness in certain end markets.
HRS revenue is expected to be flat to up low single digits as we anticipate modest auto demand expansion due to ramping new programs, coupled with a stable demand in our health solutions business.
We expect ongoing strength in I would tend to 50% growth as we continue to ramp business in home and lifestyle and energy.
She sees revenue is expected to be down 20% to 25%.
Reflecting the distinct productions and customer demand continued softness in end market demand in our telecom and networking offerings.
On top of a difficult year over year comparison, as we had a peak third quarter last year.
It for CTG, we expect revenue to be down 25% to 30%.
Reflecting the targeted reductions of highly volatile products due to distinct actions, resulting from the pruning of our consumer portfolio.
Our adjusted operating income is expected to be in the range of $230 million to $255 million.
Which reflects continued adjusted operating margin expansion.
Interest and other expense is estimated to be in the range of $45 million to $50 million.
We expect our tax rate in the quarter to remain in the mid range of 10% to 15%.
Adjusted EPS guidance is for a range of 32 cents to 36 cents per share based on weighted average shares outstanding a 512 million.
Or just any biggest guidance excludes the impact of stock based compensation expense net intangible amortization and the impact from restructuring other charges.
We've completed the bulk of our targeted restructuring and other actions as weve swiftly move to align our operating costs.
We expect that we will incur the remaining estimated charges over the remaining quarters.
As a result, we expect to GAAP earnings per share in the range of 21 to 25 cents.
With that let me turn it back over to rapidly for some closing comments before we open the call for Q1 night. Thank you Chris.
I had communicated an E. P. S range of $1.20 $2 30 in April and leave a main comfortable with that range, our teams and really focused on meeting our commitments and they've taken thoughtful but swift actions in our portfolio that have put us on a path to improving operating margins. We have demonstrated strong free cash flow conversion.
Our four focus areas have helped stabilize their performance and this enables us to really expand our efforts around disciplined growth going forward.
Now I'd like to have the operator open the line for questions.
As a reminder to ask a question you will need to press star one in your telephone to withdraw your question press the pound or hash key we ask that you. Please limit yourself to one question and one follow up question.
And your first question comes on line of Mark Delaney from Goldman Sachs. Your line is open.
Yes. Good afternoon, thanks, very much for taking the question and a nice job on the free cash flow and margin expansion that a company reported today somebody to better understand the situation that the company is is seen in China.
Maybe from a couple of different dimensions, you talked about winding down the the business with walk away I understand the piano guidance already but if you could just talk a bit more about where flux dance with that in.
More broadly theres been some press reports about.
Potential difficulty of a certain U.S. companies doing business in China as part of the trade War I.
I know, it's still an important region for for Flex long term can you talk about any any more challenging conditions at Fox may or may not be seen nine in the China region.
Hey, Mark. Thank you for the question and then thanks for the comments on our cash flow and margin expansion. We really do believe our work around execution is paying off and you'll continue to see that progress moving forward now in China and walk away Mark Let me start with while we as I said in my prepared remarks, you know, we really have established a steady.
And worthwhile way and have put that situation behind us right now and in terms of overall, China, we still have a very strong position in China.
And our teams have done a really good job old stabilizing our situation with long way, but really focusing across the board in terms of growing the rest of far business. So our footprint. That's still strong I said they have a significant presence in the region and we feel fairly comfortable that we're in a strong position.
Moving forward now in terms of overall supply chain and what happens with trade conflicts, you know where belt position with our customers to go wherever they want a us to goal in terms of the well in the world and we are following our customers as they see fit in terms of moving supply chain, but our our position in China remains strong there and.
Great position right now I can go into the actions we did.
And they're fairly bullish in terms of continuing to build in our presence there and moving forward. So either way we feel good about where we are about China right now.
That's helpful and my follow up questions on the HRS segment.
Oh auto has been a been a headwind I think the company's benefiting from some nice and product cycles and guiding all of HRS up.
What a five maybe just talk about some of the puts and takes two I'm HRS revenue growth and the potential for that revenue growth to I'd be able to pick up a back towards had been historically your business that the company is able to grow high single or even double digits and you talked about some good backlog and some of the program wins and medical and auto so there's going to help us understand whats.
At a time frame, yes, we should be thinking about for improved growth with any HRS. Thank you.
Okay. Thanks Bar came we feel very bullish about our a terrorist segment both in automotive and handheld solutions and we have talked you know in the past about you know the strong bookings we have in both the segments of automotive and health solutions, and particularly kind of thing you know very forward looking spaces.
Like autonomous and electrification and automotive side.
Automotive sector as all of you know has faced some market challenges and we have seen the effect the fed but the fact that we're kinda returning to growth in that segment really shows that we are bookings is paying off and were gaining market share.
As we are driving FFO growth structurally where belt position.
You know both in electrification and autonomous until we really feel strongly about that back we will continue to see growth and we'll track what market in terms of any market issues, but our bookings will reflect share growth and the area in terms of health solutions. You know we saw we saw a quarter and that we we had some puts and takes.
Particularly with some program prime send some customer move outs, but the numbers I really small at the end of the dates $20 million. It you know if it's a 5% decline and health solutions and they made a real conscious decision there to ramp up some very large programs that we have because we could do that are it you know this quarter afforded us the.
Cushion to be able to ramp these programs and customer one customers wanted to see as do that.
So we feel very good about where we're pushing for ramping all SLA, both automotive and health solutions in terms of new booking and overall I expect health <unk>, Oh HRS to return to growth one as the automotive sector a starts to upswing, we'll see that effects of that but our bookings in medical.
And automotive should start to pay off I would say through early next year.
Good stronger mid mid single digit growth and were still seeing record bookings of and year to date, so feeling really bullish about the sector and our position in this sector.
Your next question comes in a line of Paul Coster from JP Morgan Your line is open.
Yes, thanks to its searching my question.
I thought the at the moment, some you know everyone's putting the multitude expansion, but are multiyear from now Oh promotion expenses. Most of the you know you you want to be measured but slightly muscle.
Just to try to the right for metrics, because it's not guaranteed or would you still the.
Margins will continue to expand the mix could parts for instance, can you just talk a little bit about how you see.
The the company's key performance metrics evolving over the next year.
Yeah. Thanks, Paul here I'll take a minute and just save or that the comment on operating margin expansion, because even though the trick in this sector has been how do we manage makes and improve margins in delivery P.S. at the same time spend this year for US has really been focusing on that and then you can see that with our current quarter and our future guide.
This is that we're on track.
To do that and do as well, but absolutely agree with you that you know we have to focus on the segments, where and continue to drive profitable growth driving large scale growth has never been the challenge for this segment as all of you know, but making sure that we're driving profitable growth as important he feels really good oil.
And plans to develop the design wins that were seeing and I real push for driving a mix change with the right type of growth I'm in the segments that you know drive a higher value margin expansion for us. So we do want to be measured on both and you know as I told you in my prepared remarks, our full.
Within the first six months was on the four areas I talked about but moving forward, but also pushing for very disciplined growth.
Growth strategy across our segments and the real key is a disciplined growth strategy, but flex has been great heritage and a fantastic pedigree on technology on these segments.
So we know how to do this this is not a question are we don't so Fred getting back to growth is not a hard thing to do a it's really important for us to make sure that weren't getting back to growth for the right type of growth and the mix changes, we have done really positions us well to take advantage of that Paul moving forward. So I would say that everybody should be feeling very calm.
Fit into variability to make that happen.
Hi, I'm sure you're being slow stress testing you'd be business. It's been a this position do you have some sense of how the slicks business things will evolve with a slowing economy or even a recessionary barb.
Sure. Yeah, you know I think the you know he also has seen the history in terms of kind of what happens to this space in a slowing economy out a recessionary.
Environment did all usually they're very counter cyclical in terms of cash generation Oh, and then of course, we will continue to be that way, but I think the other important thing to take away Paul would be to say, we have done very well in the past few months in terms of managing our overall margin performance in our S. Before.
Our mens even hat as revenue has declined so I would say even in a recessionary environment, what I'd really expect the team to do is to really focus on how we manage our cost profile. Both from a gross margin standpoint, and also making sure that we have the right focus in terms of our overall SDMA cost so as you know.
No I think our history says that we've done great on cash, but our last few months should tell that we'll continue to do well, even managing our margin performance.
If revenues are impacted in the recessionary environment.
Your next question comes from the line of Steven Fox from Cross Research. Your line is open.
Hi, good afternoon, I'm, sorry, if I missed this but I was curious if you could sort of detail how much of the year over year decline was sort of self inflicted in terms of walking away from business.
Disengaging from Wawa, and what the growth rates would have looked like excluding that had a follow up.
Yeah. It's Steven you don't we said we had a predicted last quarter right that our disengagement from kinda some high cyclicality businesses would be the impact of $300 million to $400 million a quarter and Ah you know we continue to stick with that range that we haven't given that's the impact that work.
Expecting to see and we have seen at the same a in our Q2 results and our guidance moving forward.
Okay. So you're in that range right now films.
That's correct, great and and then just bigger picture on I you mentioned some of the.
Core markets that you're focused on I was wondering like those are sort of broad.
Sport categories I was wondering if you can give some more detail in term terms what types of new programs you having the most success was and how you can just for the growth in some of the broad category just mentioned with.
Thank you.
Yes, the Stevenson too I, let me just touch on to their you know probably three major categories and I. The way the segment a is reported today, but let me talk about two one is the industrial side of the business itself right, which is a focused on on most of the diversified industrials and as you know.
You know the penetration of M.S. providers in that space since really small and we haven't really developed a strong go to market in that space. It's a lot of lot more smaller customers. So it's a higher mix, but it's also a you no longer life cycles of products more technology focus better margins. So we really drive.
Having a commercial strategy in terms of our base industrial program itself and they feel really good about that because there's a lot of penetration that can be done in that space. It's a very diverse segment, then really pushing to win strongly in that that's also more vertically integrated segment into himself.
In a not just electronics, but electronics to mechanical capability all the way to control. So that is one big area that we're gonna can they're continuing to drive for growth and we feel good about where we are today and where we are going forward. The second I'd say is on the energy space. You know we have a very strong presence into them so far energy portfolio.
Our nextracker business and were really driving a an expansion in that space not just with the basic products, we have but with more software penetration that really optimizes. The performance off Oh, the solar segment itself and so feel very strongly about that also so.
Oh really good performance I'd say, both in industrial and based energy and those are the two I'd really pick out to say, we're driving and we feel very strongly that since it's not a highly penetrated space. We can continue to drive a cool growth than that.
Your next question comes from the liner <unk> <unk> that a chart from Bank of America. Your line is.
Hi, Thank you for taking my questions [laughter] Ravens, he just to start off with the high level [noise].
[laughter] menu, but rather segment, so [laughter] can be 70%.
So do you think pruning that you're doing so.
[laughter] programs is another large using dimension expanded.
[laughter] in longer term why even [noise].
[laughter] and at night.
[laughter].
[laughter] very strong sound. This stuff, okay that went away, but I think I understand your question. Your question was you have two segments that are have lower margin two segments that are higher margin. So you know what's your view on portfolio moving forward.
So here's what I'll tell you a roof flu is that you know we're going to talk a lot about this in our investor day in in that mid mid Q4, but you know around these four segments. There is you know quite a bit of interdependency that we'd like to take advantage on Sofia.
Talk about our T.C. business, you know it gives us scale, but it also gives us tremendous technology platform, that's important and the rest of far businesses. So our entire economists strategies failed off all the the engineering and technology know how would that be got from the CE CE business. So the diverse.
City off our portfolio I'm sure as always one that lots of people will have questions on but what do we want to talk about moving forward as how can be marketshare leaders in all four segments and how can be drive the right type of growth a in each of these four segments of course in Twoq and as you can pay.
Well, that's out there and a higher margin space I would say in C.C. and consumer our goal is to change the mix at this point in time and really figure out how we can focus on a on wins that are more accretive and more focused on design and be more selective a in both of those spaces.
And I think they other big thing that we're looking to do and I said that in my prepared remarks, we'll fluid is that the real change has the also being on an operational model and operational efficiencies required to deliver a high scale business and the high mix business and where tree nuts solving that Craig I'll, probably you operationally managed those two one.
For efficiency and scale and other for mix and technology is really important.
Dr. accretive margin growth in both in in the fourth segment. So yeah simple answer is every portfolio has has that some mix, but as an overall we think.
That today, the diversity of our portfolio works for us and a you can see that an eye results. This quarter right, but what has really helped us as the diversity of our portfolio and even but the ups and downs across the segments. They've delivered overall strong operating margin growth and escrowed, So I'm more to come in terms of bar.
Our Investor day, but we think there's some core technology Ah capabilities that we get from RCC business that leverages the rest of our portfolio.
Your next question comes from London, Jim Suva from Citigroup. Your line is open.
Hi.
This is actually Michael Virgins, who that city on my one question is more general in nature and that.
Choose the rest of the year would you mind framing how we should look at two machines and the first is probably the GE ramping.
Second would be about how we should think about India.
[noise] Yeah. So let me talk about both Michael one is fiveg ramping.
A lot has been talked about a five G over the over the last few months you know, we believe there fairly well positioned in terms of Fiveg technology out kind of would the top two European players and they have a very strong presence in terms of telecom ramping itself and fives he ramping itself it.
Has been somewhat spotty into Europe , and Asia I have been slow North America has ramped up a little bit faster and we think any large infrastructure rollout has is going to have cyclicality and you know as you have seen all the announcements that have come out in terms. So five d. it all out.
You know from the large telecom players is that it's based on geography, you know there is some movement in some time himself. Some geography is going faster than the other and we are seeing the same impact because we are suppliers to all of them said to me. It's not a question of at you know Oh.
Off of what that's going to happen or not it's just a question of timing and when it does happen, we're well positioned I'd say with with all the major Fibe TV providers.
In terms of India itself, you know, how our base India business was before Michael we have talked about that we've ramped down significantly from where we were particularly our dependency on the more higher cyclical products.
Our focus is on growing India, but really changing the mix and we have a really strong pipeline for India. That's more focused.
On a on kind of the higher margin better makes a products and you're seeing a really big push for movement, all some manufacturing capabilities in India. So our timing that's perfect and that's because we really have the scale and presence I'm back we had developed before we ran sat down this quarter and we have work.
Working on ramping it up with a strong pipeline, we have but that being very very thoughtful about the right kind of business and taking advantage of the position we have.
Okay. Thank you everybody.
Thanks, Michael.
Your next question comes from a line of Adam Tindle from Raymond James Your line is open.
Good afternoon. This is Madison on for Adam and Thanks for taking my question you've talked about a focus on design and engineering led engagements as the operating margin can be nearly double traditional yeah must business. I know you gave a lot of good examples on the work Youre doing but can you touch on some of the metrics around these types of engagements whether it be the pipeline.
When rates are backlog and how do you think about the growth profile. If these types of engagements.
[noise] Madison you don't we'll talk more about this when we do our Investor day, a in mid Q4, because I think we really have to focus on showing you the right type of engagements that where that we're looking at from our bookings pipeline and Andrea.
To give you more examples of how these can scale up right because the thing about design led engagements as isn't just one off and if they told me one off that tends to be a smaller portion of your mix. Our goal is to really drive a platform type engagement and comes up our design led wins then you can scale it across multiple customers.
And you know I in HRS are both really very very different if you look at <unk> performance. Today, you can clearly show that the design, let Vince or shorter cycle, you see it faster in terms, you'll see a bookings and you know conversion to revenue HRS is a whole different ballgame like the design wins that we have working on top.
They really takes kind of couple of years in terms of <unk>, I guess taste and period for it to show up in our overall revenues. So very different based on segment, but I'll really talk to you know more about it when we do our investor day, and really focus on kind of forward looking metrics of how we should see this expand.
And show up in our mix and they'll have a lot more detailed then.
Okay, great I'll be looking forward to that and then just a follow up for Chris on cash flow. She you've talked about a commitment to generating positive free cash flow moving forward. So is there a way we can think about free cash flow for the full year, you've obviously been very disciplined on capex here. So do you think you can surpass the roughly 600 million dollar level that we've seen him.
Directly and then if you could just remind us of capital allocation priorities in lieu of this thanks.
Sure. So I would start by thinking through the levers that we are driving in terms of our free cash flow.
And what we highlighted on the call was if you look back over the last 12 months, we generated $548 million roughly 89% free cash flow conversion rate you know what we're doing very well is we are.
Operator, with great discipline over cutbacks in bringing that back down in line with depreciation and as we saw this quarter even below depreciation that provides a nice uplift you know networking capital management continues to be something that we've been we've been doing well out, but we highlighted today that there's room inside of inventory to get much better.
Her.
And then you extended to the other big lover in terms of our profitability and as we've been managing with greater predictability good discipline over cost Harper our earnings cycle is getting better earnings generation is getting better.
So.
Our goal is to get back to historical levels of free cash flow conversion and those are accounted to like a 90% free cash flow conversion I think we're making good progress we've hedged four straight quarters now of real healthy free cash flow conversion and you know the other thing is you know this year. We're also absorbing a fair amount.
Rupturing costs as we go through that that restructuring activities.
It is necessary as we repositioned the portfolio and we optimize the cost structure and that's you know well over $125 million of cash that were absorbing this current year.
So as you look forward, just think of us making progress to deliver in that historical free cash flow range.
And that late leads right into supporting you know are very disciplined capital return view you know, it's gonna be disciplined in terms of going and taken a free cash flow in providing that sound.
Financial condition for the company it also extending and fulfilling our long term commitment to shareholders through the repurchase we'd historically been operating with the where the conversion of over 50% of our free cash flow in terms of the share repurchase and if you look back over this past 12 months.
I've been following that same a same aspect. So it remains a key feature for us and we're just can operate a very prudent capital structure going forward. You don't we don't have many requirements in terms of Ah M&A as we have a really well built out global system today, and we have solid capabilities to support our quarter.
Target growth markets.
So I think we gave an ability here to operate with a balance from flexible financial condition and a continued to fulfill our sure.
Shareholder return.
Your next question comes from the line those Christian Schwab from Craig Hallum Capital. Your line is open.
Okay, great. Thanks for taking taking my question. My question has to do is with revenue for this quarter.
And I understand you know we knew we were going to exit some of these low margin high velocity volatile short cycle businesses. My question has to do with forecast a shipment you know if you want to comment on that whether it be your top 10 or top 20 customers. If there was it.
Material difference between forecast in shipments during the quarter.
[noise], Yeah, Christen, Hey, I'll answer that you know I'm, a Chris said in a in his prepared remarks so.
You know the major difference I'd say in terms of the forecast and where we ended up was kind of shift in RCC business, we definitely saw in quarter slow down in the telecom sector like we talked about that that impacted CPC revenue different than what we had actually.
And thought would happen, but you know what's really good about all of that is even with that a change in short cycle in the overall revenue are the diversity of our portfolio really played out well and we were still able to hit our our overall U.P.S. a number and improve our margin at the same time so.
Yes, there is movement in terms of telecom and C.C., but what really pay played out as how were managing makes and how were taking advantage of the diversity of our portfolio and focus on execution and still delivering our E. P S and margin improvement.
Great I guess the reason for that question is it I you know you guys know better than than anyone does that general purpose chip lead times have.
Have collapsed right. So it wasn't all that long ago lead times were 26 weeks and you know no you were at eight weeks, which I think explained to large semiconductor companies conference call. This week and you know weve you'd have m. LTC chips no longer.
An allocation. So you know our checks you know suggests that there's a lot of companies who are feel very comfortable drawing down inventories themselves to generate cash for themselves.
And it seems to me to be you know atypical semi world correction that could be going on as lead times, you know or getting back to normalized levels and my guess is they have to at least bounce back to 12, plus or minus would you agree with that is part of some of.
The demand degradation that is going on.
[noise], yeah, so what I would say Christian is that we've definitely seen nothing like you said, it's a well known issue that I lead times are down and particularly enamel ceasing chip I mean, there definitely in a whole different situation from where we were last year and were in a more manageable.
Framework in terms of lead time across the board, but for US. The revenue change was really a dissolved off the telecom space in C.C.. So that really drove our overall kind of revenue change and CE CE.
We're not seeing seeing any major impact from the lead time change and the lack of and the fact that supply constraint as gone away.
And that most cc chip, we're really not seen that in terms of revenue constrained overall, we think that that that issue is behind us.
And then to supply chain is it really different for each of our segments radar HRS worth CTG NCC supply chains have different I very dear friend Andre component focus so.
Revenue shift in the quarter was due to telecom and then we think that then the overall lead time shrinkage really isn't impacting us significantly from shifting revenue.
And working its way through the customer value chain.
Due to technical difficulties, we are reopening rupee embedded her years line from Bank of America Ruplu. Please go ahead with your follow up question. Your line is open hi, Thank you for taking the follow up you.
You know on I, you know you've had substantial margin improvement.
4.2% last year quarter, and no 6.2 person. So they would be can you help me bridge, how that 200 basis points improvement came and do you think there's more opportunity for you to expand margins there.
Should we think about operation operating margin in that segment. Thank you.
[noise] so roof.
No. There definitely are two things are happening and I. One is our growth overall is strong so that definitely helps from an absorption and conversion standpoint and that improves our margin and then we're really seeing again base business growth is across all sectors of I, a Bible, our industrial our energy and our home and.
Lifestyle business and all three have higher margins in general and are converting had the right level in terms of saw and our mix also within that portfolio is improving overall, how I think about it moving forward is obviously I would like to you know see our margins continue.
To improve like I said before you know both in the industrial and energy space. It is so the penetration there's so much room for improvement in terms of overall penetration for M.S. players in that space that we feel really good that as we drive to a stronger growth in that I will continue to see better absorbed.
And we'll see continued to see margin improvement and then all this is within the confines of the semi space being fairly constrained as you know right and you know our expectation as that comes back online. We should also see improvement as a result of that but at this point, what I really want from that business is going to.
You had growth and we feel really good in terms of a you know where the margins are heading in that that in that segment.
And there are no further questions at this time.
Hey, Thank you all for joining us and as you can see from all the questions that you. All ask this also a really good performance from us Oh in terms of operating margin and cash flow performance, we're really doing a lot of hard work in terms of managing our makes a which has been impacting our revenue in the recent quarters, we feel really good in terms.
If our forward looking focus on how we returned to profitable growth, but at the same time keep the benefits that we see from operating margin expansion and cash flow performance. So we're really delivering on the path. We set forward six month window, which is about disciplined execution and then we're really looking forward to talking to all the fueling our investor day in the.
Mid fourth quarter and talk to you more about our long term strategy and where were where were taking this company. So really excited to set that up for all the field and thank you for joining us.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[noise].