Q1 2021 Flex Ltd Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time. Your line is when we got to be placed on a musical. Thank you for your patience.
[music].
Good afternoon, and welcome to the to the flux first quarter fiscal year 2021 earnings conference call.
Today's call is being recorded at all lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question answer session.
At this time for opening remarks, I would like to turn the call over to Mr., David Rubin Flexes, Vice President of Investor Relations, Sir you may begin.
Thank you Simon welcome to Flex is first quarter fiscal 2021 conference call. Joining me today will be our Chief Executive Officer remedy advisory and our Chief Financial Officer, Chris color. This call is being webcast and recorded and slides for today's presentation are available on the Investor Relations section of our flex Dot Com website.
Please note today's call contains forward looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties.
During the impact of covered 19 pandemic actual events or results could differ materially.
So such information subject to change we undertake no obligation to update these forward looking statements for full discussion discussion of the risks and uncertainties. Please see our most recent filings with the FCC, including our most recent okay, well I see this call references non-GAAP financial measures. The current period GAAP reconciliations can be found in the appendix slides for today's present.
Station Wells on the Investor Relations section of our website.
With that I'd like to turn the call over Tursi you remedy.
Thank you David you good afternoon, everybody and thank you for joining us today and as he continued through these unprecedented time I hope you and your families are safe and healthy. It has been an eventful few months for the whole world and our flex colleagues have worked tirelessly of course to support our customers in our communities and it comes back.
The minutes for their continued supported dedication.
So because of these efforts we've made real progress to a very difficult quarter and delivered better than expected results I'll start first by providing an update on how we're operating in the covert 19 environment and then we'll talk about our fiscal Q1 results.
So navigating the coven 19 pandemic.
Remains top of mind for all size the safety involve being a for employees is our highest priority and to provide that protection. We have deployed very extensive safety measures such as enhance sanitation temperatures checks and of course, a lot of seats distancing its production environments.
That's associated costs of these measures will continue to have an impact on our business, how where we're getting more efficient at operating under the safe as possible condition and we'll continue to improve our productivity.
Personal protective equipment remains the keys to Windoor safety efforts.
Our mass production project that we talked about last quarter continues to be on track with over 20 million masks that we have produced to date at seven locations across the globe and.
And what most of the production is used to keep our colleagues and their families side, but also supporting our communities by continuing to donate master hospitals and fresher responders.
HM working from home remains effective for many employees and we'll continue to have nonmanufacturing employees work remotely as long as it is prudent.
But I do believe that human interaction as an important part of building and maintaining a healthy culture. So we are planning for an eventual return to work in some form of course, but it'll be a measured approach and only at the appropriate time.
So from an operational standpoint, all the for production sites around the globe are up and running we've also seen dramatic improvement on the supply chain since the early days of the crisis.
A few component constraints at an elevated lead time still exist, causing increased inventories in some areas.
So let me talk about managing cost.
Last quarter when uncertain that he was at its greatest we instituted austerity measures, including temporary pay cuts and bonus cuts to mitigate elevated levels of manufacturing costs.
We have used the time to plan, how we will operate with the most optimal manufacturing efficiency and overhead cost structure in a sustainable fashion in the current environment and we still remain on track to reach or long term financial goals.
As a result, we're now implementing a systematic and disciplined restructuring effort that will be executed in fiscal Q2.
This effort will enable us to further solidify our focus on improving margins and driving the right kind of girls.
Lastly of course, we continue to have a strong liquidity position and we will be prudent in our youth and deployment of cash throughout this time period.
So let me know talk about fiscal Q1 results, let's turn to slide four.
The helix executed very well despite the difficult environment, Let me highlight several of the financial metrics for our first quarter and then Chris will take you through the numbers into great detail.
Revenue of 5.15 billion was down 6% sequentially in 17% year over year.
Please note that this sequential drop was due mostly to the impact of the automotive shutdowns and a slow ramp in the corner.
And as all of you are variable have year over year comparisons from last year's portfolio shifts we've made.
Our adjusted operating margin was 3.2% despite absorbing significant covered related costs as well as negative mix impact from the automotive shutdowns.
Our adjusted EPS is 23 cents down from 27 cents in Q1 of last year.
Our adjusted free cash flow came in at negative 17, 74 million as we had talked about earlier in the last quarter, we expected fluctuations in operating free cash flow due to managing through net working capital requirements and Thats unusual period as well as timing of payments in the quarter. However, we expect to quickly returned to us.
Given our adjusted free cash flow targets, starting in the September quarter.
Moving on to slide five.
As we described last quarter, we knew that Q1 would be challenging as the impact from the cobot 19 outbreak continued to affect production in demand.
However, we did see strength in several up or end markets, which is a testament to our diversification strategy and our ability to execute and deliver.
Let me start would die reliability segment, hopefully you shouldn't was extremely strong the treat the team executed very well on projects supporting the fight against covert 19, such as our recent fast ramps and ventilators and testing equipment as well as expansions in critical care products, such as oxygen concentrators infusion pumps patient.
Monitors and I see you beds. We also saw continued strength in industrial areas such as power products.
However, we did face a major challenge in our automotive segment, most of our North American and European Auto production.
Sites remain essentially shut down in line with our OEM customers.
The new production would restart after the quarantine period, so a greatly limited our option and our ability to cut costs in line with anticipated demand levels in the quarter.
In May we're excited to have Mike So when he joined likes to lead the automotive group.
Mike has a long history in the industry and brings extensive experience and deep domain expertise to the team.
Mike hit the ground running in the whole group has worked very hard to ramp production get the wheels, turning again and I'm very pleased to announce that all the for automotive production sites are now up and running.
In our agility solutions business Cc experienced a very strong rebound this quarter as they ramped aggressively to meet customer demands for networking and computer equipment to support the increase workload from from work and learn from home.
This upside was offset by lower demand in our lifestyle and consumer device the why segments.
Initially lifestyle was impacted by both retail shutdowns as well this initial E com calmer shifts to essentially purchase only however, we have started to see strong demand in areas like floor care coffee machines in audio products.
So as I discussed with you in March during our analyst presentation, we've reorganized our market facing segments to be add John and to have end to end ownership to drive the bride growth strategy and despite the current situation, we have not wavered from our growth mindset across the company. Our teams have been very productive finding new ways to operate and can.
Turning to win new business.
And cobot 19 made it impossible for customers to tour perspective manufacturing sites, we launched our new virtual customer platform to provide them with high quality video towards the for global factories. Now. This has been a huge had with our customers. When it comes to growth. We are focused on targeting and winning new businesses that are aligned with our structure.
And your priorities and our customer engagements continue to reinforce our belief that we're perfectly position with the right combination of technology and domain expertise.
We continue to see strong new program wins in our targeted markets, whether it's the next generation medical monitoring device autonomous auto computed modules auto electrification systems or things like advanced industrial grade robotics, or new beverage and appliances.
So executing our growth strategy is going well, but also moving forward and deploying our operational model custom to our two groups and combining that with being world class and manufacturing technology.
Along with that we continue to focus on driving disciplined execution, taking rapid tactical actions as challenges at rise.
I do believe they have a good balance of moving on our strategic agenda, well executing really well in the near term.
Now I'd like to turn the call over to Chris will walk you through our quarterly financial results in more detail and I'll come back and then just for some closing remarks, Chris.
Thank you very busy.
Please turn to slide seven for first quarter income Stephen summary.
Our first quarter revenue totaled 5.2 billion, which was down 6% quarter over quarter and 17% year over year.
Our results reflect covert 19 related demand in production pressures as well as the effect of an unfavorable year over year comparison, given our targeted disengagement applied volatility short cycle businesses. We launched you know second quarter last year.
Our Q1 adjusted operating income.
463 million includes the impact of pandemic related expenses.
As a result, or adjusted net income was 116 million adjusted earnings per share was 23 cents, which was down 13% year over year.
First quarter GAAP net income of 52 million was lower than our adjusted net income primarily due to $13 million of stock based compensation 13 million not intangible amortization and 38 million net restructuring and other charges.
Which consisted of 10 million of restructuring costs, and 28 million of legal and other cost which were not related to ongoing or core businesses in which includes various loss contingencies for certain historical legal matters.
I'd like to expand briefly on our reorganization and optimization activities.
We have deliberately and thoughtfully evaluated each part of our business to determine where there are opportunities to better align with a long term strategy.
And more recently with the current economic environment.
Accordingly, we will be taking actions to phase out certain non core functions.
Streamlined organizational structure.
Sharpen our focus on key end markets, where we have competitive advantages in deep domain expertise.
We expect to recognize associated restructuring charges of approximately 100 million for the remainder of fiscal 2021.
The majority being severance and benefits related costs.
We anticipated cost savings in fiscal 2020 to approximately 60 million related to these activities.
Now please turn to slide eight for quarterly financial highlights.
As we anticipated production of productivity continued to be impacted by the ongoing pandemic.
In the first quarter or covert 19 related costs roughly doubled sequentially from the March quarter, which was in line with our expectations.
Note that the majority of workover cost impact or cost of goods sold and gross margin.
And they include our enhanced health and safety infrastructure costs incremental supply chain costs labor incentives.
The largest component being forced under absorption of labor and overhead from lost production and lower productivity.
Well these costs will persist.
He will be significantly lower in the second quarter as we expect improvements in our absorption of overhead and labor costs.
Our production levels rise and our Purdue productivity improves.
First quarter adjusted gross profit was 318 million down 21% year over year and our adjusted gross margin declined 30 basis points year over year to 6.2%.
Primarily as a consequence of covert 19 pressures in the related closure of our automotive sites for nearly half of the June quarter.
It's very busy highlighted earlier all of our sites are now operational as our teams have done a stellar job of rolling out our new delivery models, while navigating a dynamic demand and production environment.
Looking ahead, we are optimistic now we will return to consistent gross margin expansion as our operating sites remain open and disruptions lesson.
Or just you know expense decreased 21% year over year to 155 million this quarter.
<unk> dollar terms is the lowest quarterly level, we've operated that in over 10 years.
We benefited from aggressively attacking discretionary spending levels as wells from temporary reductions in compensation levels.
We will maintain our cost discipline as we realigned the company to not only what others a pandemic, but also to execute on our strategic strategy more efficiently in the long term.
We have confidence in sustaining yesterday as a percentage of revenue in our targeted range of 3% to 3.2%.
Which creates meaningful earnings leverage.
Lastly, our year over year, adjusted operating margin contracted by 20 basis points to 3.2%.
Which we believe it was a strong performance when viewed in the context of the covert 19 challenges.
Now turning to slide nine for first quarter business segment performance.
As we communicated at Investor Day in March and on our last earnings call. In me, we're operating with two reporting segments flux reliability solutions influx agility solutions.
Flux reliability revenue was 2.2 billion down 12% quarter over quarter and down 1% year over year.
Oh solutions was a standout performer during the first quarter was up high double digit sequentially.
Our core business is performing very well and demand for critical procedures products like ventilators Oxygenators in hospital beds more than offset demand softness for lots of medical procedure products.
Industrial was down high single digits quarter over quarter, the strength from our power products offset by anticipated declines for renewable energy in core industrial products.
We remain well positioned in this key business group.
Believes that its fundamentals are intact, given its broad diversified portfolio and numerous ramping programs.
Lastly, our automotive business fell to just over half its pre koby quarterly run rate in the first quarter.
Our factories are no online.
And we've moved past the large scale OEM plant shutdowns. So were in place for a substantial portion of our June quarter.
We expect an automotive revenue will continue recovering from the trough levels experienced in the first quarter, but expect that our revenue run rate will trail historical performance in the near term.
Flux agility revenue of 2.9 billion was down 1% quarter over quarter in 25% year over year.
As a reminder, this segment includes products from our communications and consumer and markets.
Would you wonder what targeted reductions over a billion dollars in revenues starting from the second quarter of fiscal 2020.
We will begin to lap the unfavorable year over year comparisons for these products beginning next quarter.
Within agility, she she was up low double digits quarter over quarter, because it benefited from critical infrastructure demand from our not working in cloud customers and we manage through production capacity challenges as we move throughout the quarter.
Lifestyle was down high single digits quarter over quarter.
Did experience soft overall demand due to depressed consumer spending and lower retail sales.
Lastly, consumer devices were down 21% quarter over quarter as result of prolong production constraints in certain geographies and depressed demand due to covert 19.
Turning to profitability.
Flux reliability solutions generated $115 million of adjusted operating profit and a 5.1% adjusted operating margin.
Our industrial and health solutions groups performed very well well simultaneously ramping multiple programs in key end markets, such as semiconductor capital equipment in diabetes care.
But the protracted automotive site closures and resulting under absorption and efficiency impacts were a headwind in the quarter.
Flux agility solutions generated $72 million of adjusted operating profit and a 2.5% adjusted operating margin.
Well see you see in lifestyle performed inline with expectations.
But major geographic disruptions for consumer devices resulted in elevated under absorption challenges.
We continue we continue to actively manage the cost structure in this group to align with volume fluctuations.
Turning to slide 10, let US review, our cash flow generation highlights.
As anticipated our cash flow generation was pressured in the quarter as production restarts clearing finished goods and timing shifts in payables all affected the quarterly cadence of our cash flows.
For the quarter or adjusted operating cash flow was was modestly positive and we generated negative adjusted free cash flow of 74 million.
Which had been anticipated due to timing of working capital management.
We closed the quarter was inventory of 3 billion, which was down 8% sequentially and resulted in inventory terms turns of 5.3 times.
We've mitigated most of our supplier constraints in component shortages and we'll continue driving further inventory improvements while operating in this dynamic environment.
In noteworthy auction undertaken this quarter was to proactively and strategically utilize the proceeds of our may debt issuance to reduce the outstanding balance of our ABS program.
We reduced the balance on the short term financing product by 655 million sequentially.
I tried the accounting effect of reducing our cash flow from operations.
Our net capital expenditures for the quarter totaled 102 million, which remains lower than our depreciation.
We are confident in our ability to manage capex to be at or below depreciation levels in the near term while simultaneously funding core areas of our growth.
In summary, while our adjusted free cash flow was negative for the quarter.
We remain fundamentally structured to return to our objective of 80% or greater adjusted free cash flow conversion in our second quarter.
Please turn to slide 11 for liquidity and cash update.
We continue to operate with a balanced in flexible capital structure that has staggered debt maturities.
No meaningful near term maturities and no maturities that exceed our expected annual adjusted free cash flow.
Many of these steps, we previously implemented to enhance our liquidity position remain in place as we continue to produce prudently manage cash and ensure that we have ample liquidity, which includes access to out to our one and three quarter billion Undrawn revolver.
During the quarter, we took advantage of favorable market conditions to issue roughly 750 million of long term debt may.
Which extended our weighted average maturity to over five years, well being leveraged neutral.
In summary, we worked diligently to maintain a sound and flexible capital structure that gives us confidence in our ability to meet our current and future business needs and we remain committed to maintaining investment grade rating.
Please turn to slide 12 for a second quarter fiscal 2021 update.
Over the last six months, we've gained a tremendous amount of experience and knowledge that has now guiding us through a very dynamic and highly fluid production environment.
Our ability to save we run our factories remains subject to local conditions and government actions.
Well, we've improved our near term visibility and execution in response to our learnings.
As such we've elected to provide quarterly guidance for the September quarter, and we'll continue to give qualitative insight into how we view each of our on markets in order to provide investors with as much transparency as possible during this period.
Let me start with a flux agility solution segment.
Which will be up 5% to 10% quarter over quarter.
Our lifestyle group should see quarter over quarter growth as improving demand for durable goods. That's supported working from home and schooling, partially offsets reduced consumer spending on non essential products.
RCC business will further benefit from increased critical infrastructure demand.
Due to increased telework streaming gaming and other online usage.
Coupled with a slight.
Pick up in our telecom infrastructure business. So you see should grow modestly quarter over quarter.
That's for consumer devices, we are also anticipating a rebound quarter over quarter as mobile demand and production begins to recover.
Turning to our flux reliability solution segment, we expect its revenues to be up 5% to 10% quarter over quarter.
Second quarter automotive revenue will improve sequentially, but will remain below pre covert night teen levels.
China Auto demand appears strong and we see he gave me a showing signs of a recovery coming out of the June quarter.
The outlook for North America is also improving.
So uncertainty related to potential future Lockdowns remains an overhang.
You know solutions positive growth on quarter over quarter basis should continue with strong demand for critical care and chronic illness products.
Offsetting weak demand related to elective procedures.
Lastly, our industrial business will be modestly up quarter over quarter, driven by renewable energy and power.
As for core industrial we continue to anticipate moderate near term capex reductions.
Given the some of those outlooks, we would expect our quarterly enterprise revenue to be in the range or 5.4 to 5.7 billion.
Our adjusted operating income is expected to be in the range of 180 million to 220 million.
Displaying adjusted operating margin expansion.
While remaining burdened by covert 19 costs associated with operational production and productivity constraints.
Our interest and other expense is estimated to be between 35 to 40 million.
We expect our tax rate in the quarter to remain at the higher end of our targeted range of 10% to 15%.
Adjusted EPS guidance is in a range of 25 cents to 31 cents per share based on weighted average shares outstanding of 502 million.
Our adjusted EPS guidance excludes the impact of stock based compensation expense net intangible amortization and the impact from our restructuring and other charges.
As a result, we expect to GAAP earnings per share in the range of five cents to 11 cents.
With that let me turn it back over to raise busy.
Thank you Chris says Oh lets you can see from Christmas Commons, we had really solid execution in Q1, and because of that'd be of confidence and giving you more detailed quarterly guidance guided.
No I would reiterate as all the if you already know that there's continued uncertainty with a cold 19, and that may and because of that we will hold off on giving any full year guidance.
What we cannot assure you is that we'll continue to operate with discipline, while serving our customers Val and focusing on key growth areas for our business groups.
Has there been opposition to the new demands of adaptive supply chains of result, I production.
I remain confident that will emerge from this global crisis stronger and even better position for the future.
Again, I want to thank I'd say, a thank you to all our employees for their continued commitment to our customers, but their trust and partnerships. During the challenge you challenging time and to our shareholders for their continued support.
At this time, ladies and gentlemen, if you'd like to ask a question. Please press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press the pound Keith.
Well pause for just a moment to can Paul the Cuban they roster.
Your first question comes to the line of Steven Fox with Fox Advisors. Your line is open.
Thanks, Good afternoon, but two questions if I could first on the restructuring announcement you you've obviously pared down some emphasis on things that were lesser value can you talk about maybe more specifics about what you're doing now and it also sounds like what markets, you're targeting to sort of a de emphasizing where you may be done.
Being down a little bit more with some added a skill sets and then as a follow up from a big picture standpoint, a lot of companies, including yourself. So sina surgeon certain areas health care bandwidth related work from home how would you describe the the opportunity going forward since it's been such a big pick up do you expect sort of a normalization.
Patient or is this a new normal any any color there would be great. Thank you.
Okay. He I'll get started and I see you know from from our restructuring standpoint, if you recall when I talk to all of you in the Investor Day in March we had talked about streamlining our organizational structure and also rethinking our delivery model for our two major business groups.
And as a result of bad we had on many avenues for efficiency and optimization of our overall head count that'd be had decided to pause on implementation of any of that as he lives are trying to understand the code 19 pandemic impact.
In Q1, so I would say what were looking at here is a combination of things one is a forest any effect that we see from Cowen 19, but also the fact that we've taken a lot of effort to streamline our organizational structure, giving our market end markets end to end control has given us a lot of fruit.
And for efficiency from kind of the corporate overhead structure and segment overhead structure, which is really helping with overall restructuring.
Markets that I see tremendous opportunities for of course is our health solutions business as you know and even before the pandemic had grade bookings trajectory and continues to now solidify that position moving forward even at a time like this when automotive end market seem to.
Be really challenged I would say for us the combination of economy connectivity and electrification mix really drive bigger electronic content in vehicle. So the growth as much greater than the overall markets is also a very interesting opportunity for us and were continuing to when many platforms there and that's true.
Business of course remains extremely solid you know to the last few years and we continue to have many avenues for growth as you know the Tam there's pretty significant.
On the agility side outside of for our base fees fee business I'd say I'm quite excited about our lifestyle business as we have redefined that.
If you'll recall the available market that as we define free back was 150 billion plus in our Investor day, and so what were finding is many avenues of growth within that business that's highly profitable.
And out you know, while we're not externally sharing all our bookings number if you look at our bookings trajectory in bad business, they're finding solid opportunities so growth, but almost double the operating margin trajectory that we have had in the past. So that is another area that we're really excited about and.
Then as as we've talked about RCC business has always been solid in terms of our technology portfolio. So overall feel really good about the areas that we have peaked in our available markets are big what we're doing is doubling down within states sub segments, and that's where we feel like we can really show our capability to win.
I think that covers the question made was there anything else Chris I think the only other point was whether or not we're going to see a the normalization to this elevated level of demand further work from home the gaming and what we've seen at the early stages here of the.
The company response, Yeah, I think initial view on this I think like most people as that.
That the near term view on that business is that there's going to be continued growth because the demand is really far outstripping the capacity available today and youre seeing that from all and datacenter and cloud customers, we're projecting that today and I would say our view is similar and in line with that.
Great. Thank you so much.
Thank you.
Your next question comes to mind of Tim Yang with Citi. Your line is open.
Hi, This is Tim young Kaleo dog, Jim Suva, Thanks for taking the crusher.
Sure agility groups seems to generate a better margins in June quarter. Despite lower revenue on sequential basis can you maybe just talk about what's driving that and how sustainable you now have a follow up.
Yeah. So I'll start and then maybe Chris you can jump in here too I see no couple of a important things that are driving one is a for Sina CBC has seen good incremental growth I think that helps our overall margin portfolio I'd say in November.
He focused on driving the right kind of bookings and improving our overall margin portfolio <unk> profile in our bookings in the last six months. We're also seeing the effect of fed our operational delivery model, where we really focused on making sure that our variable fixed cost model for our agility moves in line with a with.
Volume has also you know paying the right benefits to make sure that how we incur costs are done in the right way.
And then I'd say the lifestyle segment, the pickup of a floor care and things like coffee make a machines, which we like that from an end segment perspective are also incremental to our overall.
Margin mix portfolios. So those are all the reasons why I'd say agility is doing very well, but our continued focus would be if our bookings are in the right categories with the right operating margins and we can continue to focus on our operational model I would expect agility to you know drive the rights.
Operating margin level and Tim I think you also we're picking up on a comparison to the reliability and again as we've said in our prepared remarks, you know reliability position is very strong across the health solutions doing very well there.
Just real it's been very stable for us in growing but it's been the automotive piece of our business that you know we were shut down for more than half of last quarter. When it puts a lot of pressure that's a very rich piece of our business. So that's what you're seeing in terms of the sequential margin erosion that you saw unreliability, but Ah you know I think overall.
While we were very pleased with where we're positioning ourselves and as we extend into this next quarter and beyond.
Thanks, just Oh Youre reliability segment. The guidance I think you mentioned you had significant head of in the automotive due to factory shutdowns during the quarter and are now oil factories are running. So my question is why your grid reliability group gross for September quarter would not be higher sequentially given all the products.
And is expected to rebound roughly 40%.
In September quarter.
Yeah, I would say two things one is you know we do have automotive rebounding a very significant leave you have helped solutions with a pretty.
Solid sequential growth you know Corp. Q1 to Q2, I'd say, we have taken a more muted approach on industrial in terms of sequential growth and that's because we think that capex will be constrained in industrial and the jury's out on that maybe you know what we could be conservative on that I'd say, but that's.
We we have taken but automotive and how solution sequentially are showing pretty strong growth for us and and we are being more conservative and prudent in our industrial forecasts.
Great. Thanks, what color.
Your next question comes on the line of Paul Coster with JP Morgan Your line is open.
Oh, yeah. Thanks for taking the crushing repeat I wonder if you'd be calling the food. So maybe give us a multi quarter or monkey you are kind of scenario for how the also.
That's sort of develops obviously mismatches proving up spare capacity again.
Is it initially then nodes the traditional voice products come a kick in when are we going directly to the they use a if it is if you see these kicking in way in which regions first and maybe just suits will come through the I know that you participate many ways we go.
So someone school basic kind of various electronics is there one that would proceed all because im not see clubs.
Yeah, Let me start with maybe you know it's a it's a big question, Paul and I'll give you know kind of my perspective here is first is overall from a macro level from a from a full year perspective, we're expecting were inline with where I. It chasses, which is we think auto will be down 20% year over year.
But set that aside I think youre. Your question is more kind of a multiyear email business categories first as if you think about area as we participate in which is autonomy connectivity in electrification like I had said you know the growth in those areas that driven mainly by.
Electronic content and vehicles and so in a we expect that those areas that we have picked will have a greater growth than than the overall market and the way. We see if you think about a multiyear approach. We obviously see that you know the growth in terms of Connectivities gonna.
<unk> across the board in all regions, whether it is a north America or a Europe or Asia, we see that that that's consistent growth across the regions and we're winning in all.
Areas of the world in terms of connectivity.
Saying it and electrification.
Our out we do think that the biggest growth comes from the the overall China markets.
And but we do expect strong growth then following in North America Europe, you know I'd say that is the position that were gaining quickly in areas like converters and that we have talked to you about in battery management solutions and things like that where we're really gaining ground quickly and if I think about a month.
To your approach and that we do believe that Asia has particularly China has the strongest growth.
Although by North America.
And then by by Europe, and then lastly in terms of autonomous that's a longer term trends that build question on autonomous becomes do you have solid design capability. In autonomy is you know, which becomes a very significant revenue stream and I would say, they're extremely well position into.
Terms of autonomous not only in terms all you know the Oems, but now also in terms of tier ones. We're doing more development on that economists work and to me that's going to be many here a process, but where we want and invest in autonomous is basically on the technology investment side.
So I'd say challenge this year overall.
You know, particularly in terms of cobot 19, but where we strongly believe that the autonomy connectivity electrification segments of go would that be has to take a will be greater than the overall market NBC and if a multiyear rebound on that and so our goal is to double down.
And invest in areas like electrification more that'd be have done before because where we strongly believe that we have capabilities and that that can really accelerate our overall growth.
So about that would be my answer.
No. It was good. Thank you appreciate the maybe a quick question for Chris you folks have improved visibility through.
Chris is that something that you've done a boots improved lupus boots here or is it just that your customers are feeling more comfortable doing sports events here.
I think when you think about visibility you got to think back to what the period. We just came out of in terms of where we had many different factories around the globe either don't shut down or starting and stopping are consistent operations. You know now gives a better clarity to to a better work Oh.
Balancing load planning, we're getting just improved visibility in terms of our own ability to execute with the demand. That's in front of us and you know weve been very very aggressive in terms of our rigor and cadence in which we operate our system and really driving the visibility in our supply chain in our in our operations.
That's enabling us to get more confident in terms of what's in front of us and how to adequately managing what is really still a very challenging environment.
So and Paul last quarter, we had talked about our overall and operational radar, which is really peeling the onion on understanding and market demands using all the intelligence, we have and reaching conclusions intelligent conclusions for ourselves and also our customers. So I'd say, we're just kind of becoming better at that.
And last quarter was just you know a tough quarter to predict anything and we didn't want to get ahead of ourselves I think we're feeling more comfortable now in terms of Oh, how were predicting that demand.
Well, thanks very much.
Thank you. Thank you.
Your next question comes from the line of root Blue Butter Korea with Bank of America. Your line is open.
Hi, Thank you for taking my questions and congrats on the strong execution.
My question relates to your Capex spend in the fiscal 21, given the economic environment, how should we think about your capex spend and the split between how much is what would be towards that reliability solutions segment versus agility solutions and just to maybe just.
Looking at a broader picture when you look at your footprint are you seeing your customers asking for any product line moves from one region to another maybe to have you done is here to move out of China and do you have the capacity to support that.
Any any details on that would be appreciated. Thank you.
Yeah. So maybe let me start with the Capex. One is I would say you know we've said this before route fluids that we made the commitment last year that we'll invest and.
In Capex, a inline with our depreciation levels.
And we want to continue to to focus on it that way, but they're very focused on making sure that our capex and is invested in critical go with areas. It does lean a lot towards our reliability business more now just because of large investments in areas like the medical segment.
And the either those are fairly significant capex investments one, but we believe are the right one for us long term I'm still be doing they feel like we brought capex in line last year and I'll be wanted to keep it at that level of investment and we'll be focused on making sure. It's in line with depreciation and.
Very much in line with our growth strategy.
And then in terms of.
China itself I'd say, you know you've seen in our you know in our filings you know how RPP has moved over time, you know between the regions right. So our overall TP has reduced.
You know in a in China and has become more focused on up on U.S. and Mexico.
In the China is now at 17% and Mexico is more at 25%. So we do feel like you know customers have been driving the regionalization strategy, whether it's driven by trade or tax although his region reasons and of course.
As with coal would that that the conversation of regionalization continues to intensify and be follow our customers I think group, Louisiana I have talked about this in the past did very well positioned and dumb. So far capability, you know everywhere in the world, including China to take advantage of that trend back.
It continues.
Okay. Thanks, Thanks for the total home that would be up maybe for my follow up if I can just ask a question on margins on the reliability solutions segment.
They came in at a 5.1% this quarter.
If you can just I know you can give guidance, but in terms of just the puts and takes if you can give us some guide posts because.
You bet on one hand automotive is weak, but then you have the healthcare solutions segment, which is doing well you have a large.
Diabetes meter related program that you're ramping this year and then industrial should also be ramping with some programs like semi cap that have good margins to just in terms of puts and take you to do you think that margins can improve over the next couple of quarters, just balancing out all of these things.
Yeah attitude. This isn't easy on said, who go yes, absolutely ilim through lever that we have very pleased with our margin performance for industrial and health solutions in the quarter in that show continued its track record of you know of margins like you've seen in the past health solutions had a fantastic margin.
Performance, we were very challenged with 50% you know cut in overall automotive revenues, which is quite significant you know and taking that kinda shut down for half the quarter.
There will be impacted us significantly so no I believe you had a pretty significant impact as a result of fed will absolutely see a meaningful improvement in a falling corridors.
Okay, great. Thanks for all the details I appreciate it.
Your next question comes from the line of Shannon Cross with Cross Research. Your line is open.
Oh. Thank you very much I was just curious I'm clearly P. P E and and all the medical devices or maybe not pp three to see description, but all the medical devices are going to be important for quite awhile, given the pandemic, but it is there way to sort of quantify how long you know ventilators will still need to be manufactured or maybe decides that they up.
Community from the standpoint of the testing equipment, just trying to understand within health care.
How some of this can bridge the gap until theoretically I guess, we're all able to go back into elective surgery.
I don't know if there you have any numbers behind it or or ways to think about it but that would be helpful. And then I have another question. Thank you.
Yeah, So I'd start by saying the way we have discussed this in the past the sad we were expecting that the next few quarters.
Which is Q2 in Q3 would see meaningful kinda production from Oh Ventilators and then we we said that in Q3 in Q4, we would start seeing some return in elective procedure is so they will offset each other it's somewhat that's or I guess, a shannon and I think we have.
Very good interaction with our customers and these spaces to have that view all said, though I'd say the the the changes that we could see is obviously you are seeing that covered 19 doesn't seem to be going away. Some of the ventilator production that we thought would go down now.
It's continuing to ramp up more than we expected. So it may push out at an extra quarter than what we had said before but at a high level you know from from very deep analysis that we've done with our customers. We feel like the next couple of quarters Q2. In Q2, you will continue with ventilators. It may.
Push out another quarter and then electives, we think is going to come back in the next couple of a in Q3 in Q4 and that's how we are projecting our revenues for the year.
Okay. Thank you that was helpful. Chris.
Working capital as a use of 180 million this quarter I know, there's some seasonality, but obviously, there's there are many other puts and takes going on with with cash management. It companies. These days. So how do we think about working capital through the remainder of the year and and you know what are the key metrics. We are a key love.
Others, but that you have to pull that that might drive incremental thank you.
Yeah in my prepared remarks, I tried to highlight this past quarter the the various moving parts, so I would probably.
Point you in the direction of for US you know this past periods, we had our our payables come down over a half a billion dollars in the period.
And that that was due to timing and again due to you know we were shut down for many of our factories. During the period. So we didn't get the production flow that we had anticipated and thus the inventory still has had an elevated level than where we'd anticipated. So that coupled with wind production flows out of the back ended the quarter you have timing in terms of.
In the early in your receivables so there's a lot of different moving parts in terms of the timing of working capital management.
But we have very clear line of sight to lessening the capital intensity of the business, we're making very good progress working through our inventory management.
We see many different ways to continue to drive what is today at 69 days of inventory much lower those aspects are going to be very fruitful in terms of driving greater cash generation as we move forward.
Thank you.
[noise]. Your last question comes from the line of Adam Tindle with Raymond James Your line is open.
Okay. Thanks, Good afternoon made with the I just wanted to start you know as you thought about the restructuring playbook I'm wondering how did you think about the trade off on cultural sentiment and future growth for the company, which I know it's been a challenge for a number of quarters, just the flip side, you're starting to see sequential improvement in demand to your culture Attenuating elite.
We look at the operational metrics are actually quite healthy relative to competitors and even relative to your own historical so I guess why throw this on on top and what would you say to investors that may worry it could impair future growth.
Yeah, I'd say, Adam absolutely no concerns at all and this is why because I think I was very clear at all a few when I talked in March and we said that we had redesign our organizational structure a end to end and be every aligning our operational model to drive more manufacturing efficiencies.
That would be a needs to be align our overall cost base in line with that.
And so I think we had put that on pause just as we were trying to evaluate.
The effective to covert 19 impact and that's what we were trying to do I think they're more <unk> well positioned for growth than we've ever been before adding because growth is not it resolved or just how many resources useful added it's more unresolved how far you organizationally aligned and two when do you have a grade go to market.
Focus is your technology lined up with that and today, our six segments. The waiver organized yardi laser focused on.
On pipeline and growth and we are seeing significant results as the result of at our pipeline is stronger than it's ever been on the kinds of projects. We want to win and were very pleased with how our bookings are growing even in it in a in that time like says.
So I would say that you know investors should we feel very comfortable that you know finding the right kind of growth is about organizational alignment and that's what we're hoping to achieve and then the second part of the restructuring also really significantly addresses manufacturing efficiency.
Oh for US, which is very important in terms of how we're aligning our.
Operational model to delivered to our two group structure and we are finding tremendous room for manufacturing efficiency and that playbook is also having be effect. So I would say investors should be very pleased that were continuing to drive the right kind a girl and at the same time, we're delivering margin improvement along with that.
Good okay, but thank you and just as a follow up one a little bit more near term, maybe Chris would good answer if you could.
Touch on seasonality with the new segments and I'm really specifically thinking ahead to December I know, you're not providing guidance, but just don't want to get ahead of ourselves and we typically get a solid blip sequentially from September.
I'm just wondering if that has changed versus the normal build of hey, Ed a nickel.
Sequentially on P. us.
From September to December is there something different about the way that the businesses today.
And if you could touch on seasonality that'd be helpful. Thank you.
Sure Adam you know one of things would be very hesitant and getting too far out in front here I mean, you the world in which we're operating is very uncertain that has not changed.
That much that's why we're focused on providing a near term guidance I would say if you look back to the portfolio shifts that had been undertaken and where we're really trying to drive to optimize.
And the actions that really were launched last year, we've dramatically lessen the the size of our portfolio associated with consumer related products and so when we looked at that in the past that has been something that would probably dampen that level of seasonality that we historically would see throughout the year, but that's as much as we really.
Not to get into in terms of looking out beyond this next quarter at this time.
Ladies that restructuring tailwind or done in September or the incremental that goes into December as well.
[noise] had read the restructuring that we talked about today is gonna be enacted during this period the majority of which we would we would hope to accomplish in our.
Second quarter here and that is for the entire year.
Got it okay. That's helpful. Thank you very much.
You're welcome key grade he thank you all for joining us today and even with these unprecedented times I'm as confident as ever.
In the future Aflacs I wish that all of you remain safe and have good health and I look forward to talking to all of your next quarter. Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
Good bye.
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