Q2 2021 Flex Ltd Earnings Call
[music].
Good afternoon, and welcome to the Flex second quarter fiscal year 2021 earnings Conference call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After.
After the speakers remarks, there will be a question and answer session.
At this time for opening remarks, I would like to turn the call over to Mr., David Ruby Flexes, Vice President of Investor Relations, Sir you may begin.
Thank you, Rob and welcome to Flexes second quarter fiscal 2021 conference call. Joining me today is our Chief Executive Officer, Ray with the Baby and our Chief Financial Officer, Paul Lundstrom ASCO.
This call is being webcast and recorded and if you have not already received them slides for today's presentation are available on the Investor Relations section of our flex Dot com website as.
As a reminder, today's call contains forward looking statements, which are based on our current expectations and assumptions that are subject to risks and uncertainties, including the impact of the code of 19 pandemic and actual events or results could differ materially.
So such information is subject to change and we undertake no obligation to update. These forward looking statements are full discussion discussion of the risks and uncertainties. Please see our most recent filings with the SEC.
Lastly, this call references non-GAAP financial measures to the current period GAAP reconciliations can be found in the appendix slides today's presentation as well as the Investor Relations section of our website.
With that I'd like to turn the call over to our CEO Randy Thank you David.
Good afternoon, and thank you for joining us today I Hope you and your families I mean, well to these challenging times.
I wanted to start off by thanking all of my flex colleagues for their commitment and perseverance through these unprecedented times.
Believe it is often in these types of situations that we find what they had to leave made off. These past months are an example of that.
Behalf of the entire leadership team our sincere thanks to the global Flex family for all of that all for all that you have accomplished our strong fiscal Q2 results are a testament to your efforts.
Now, let's turn to slide eight.
Let me start off with a few highlights in our financial metrics for the quarter.
Our revenue was over $5.9 billion up 16% sequentially and down 1%, 1.7% year over year.
Our adjusted operating margin was strong at 4.1%. This includes continued coal that 19 related costs as well as some lingering demand weakness, partially offset by austerity measures that ended with Q2 are.
Our adjusted EPS was 36 cents up from 31 cents in Q2 of last year.
Our adjusted free cash flow came in at $326 million I will point out that this is the strongest quarterly adjusted free cash flow in 15 quarters and maintains our objective of 80% adjusted free cash flow conversion.
Moving on to the next slide the EPS.
So too did really well in fiscal Q2, taking advantage of improved market dynamics that resulted in sequential improvements in all our end markets.
Reliability segment grew both sequentially and year over year.
These results were driven by a continuation of the strength, we've seen in health solutions as well as stronger than anticipated rebound in automotive after a very difficult Q1.
Despite continued macro challenges in automotive.
We are winning new businesses and expanding our presence in key long term markets, such as autonomous and electrification.
For example, this quarter, we launched a collaborative partnership with letter tech to combine their sensing platform and our automotive sensor design and manufacturing expertise to deliver an optimized solution to customers working on all levels of autonomy.
Additionally, within our renewables group, our Nextracker team had some strong wins with this market leading solution and Australia's largest solar farm in Queensland and also advise Mohammed bin Rashid Solar Park. It happens to be the largest solar park in the middle East.
In fact, our reliability segment revenue and profit dollars were both up on a year over year basis for the first half of fiscal 21 either.
Even with the fiscal Q1 shutdowns and slower recovery in automotive.
These results come from consistent disciplined execution as well as longer term purposeful diversification.
Our agility segment improved revenues sequentially from work and learn from home trends as well as general improvement in consumer spending but remains down year over year to give you a much slower recovery in emerging markets.
We continue to stay disciplined and manage cost and mix, which helped agility segment improved profit margin year over year and sequentially.
In the agility segment, we remain focused on the right business aligned to our strategy regardless of growth takes a little longer in this environment.
Looking at these results from a higher level I would say our strategy is working as we outlined at our Investor day back in March our strategy is to migrate towards higher value opportunities. We have reengineered, the structural foundation and delivery platforms for the company.
As we approach our targeted markets with six diversified businesses, each with unique vertical offerings and supported by our resilient global supply chain and unified technology Expo and.
The market strategy enables us to provide domain specific sustainable value and drive profitable growth across each of the markets we serve.
We are underway in our multiyear transformation journey COVID-19 has presented real challenges as well as opportunities.
But by remaining steadfast in our strategic approach I am confident that we will continue to overcome these challenges as well as find new creative opportunities that play to our strength.
Our strategy is about changing the baby operate the value we create an internally building the right growth mindset.
This approach is how we move away from the historical fits and starts of the legacy CMS business.
Following the strategy I believe you will find in the years to come that our company will look much more like diversified manufacturing businesses than traditional in that.
This will happen by changing our mix within segments and by making the right technology in portfolio investment.
Along with our four strategic pillars of market technology operations and systems is our focus on people and culture are new values and purpose have been invaluable guides as we have navigated the pandemic and our foundation of the culture, we are building.
We are fostering a contemporary in high performing inclusive and diverse workplace and ensuring we have the right talent to implement and carry out our strategy.
As you've seen over the last few years, we have made it a priority to increase our domain expertise across the company.
As you all know most recently, Chris Collier stepped down as our CFO.
Chris It's staying as a senior advisor to work with me on some critical projects, we have going on as part of our transformation.
This has been a fantastic partner for me in the last year and a half both.
Both educating me and supporting me in this transformation plan.
I want to take this opportunity to thank Chris for his incredible service to this company and its hard work, helping with the planned and disciplined CFO transition.
With that I am excited to introduce our new CFO, Paul Lundstrom, Paul brings very strong financial experience and manufacturing and industrial sectors as well as international markets to help execute on our strategy.
He joined US just about two months ago and hit the ground running.
Im sure you all think it should be an expert on flex by now so I'll actually have them handle all of today's Q any.
Now I'll turn the call over to Paul who will walk you through our results in more detail ill then come back at the end to share some closing remarks, Paul remember that probably in the script, but thank you for everything. So if you could please turn to slide six flex revenue was just under 6 billion in the quarter and that was up 16% quarter over quarter and down.
2% year over year.
Although we are pleased that both the agility and reliability segments experienced sequential growth.
Good night team related demand pressures still remain in certain end markets.
We will spend more time detailing those factors later in the call.
Despite a roughly $100 million revenue headwind adjusted operating income of $247 million was up $20 million compared to last year.
Better mix.
Activity and austerity measures were tailwinds in the quarter and more than offset COVID-19 related costs.
As a result, our adjusted net income was $180 million and our adjusted earnings per share was 36 cents up 16%.
Every year so.
Second quarter GAAP net income of $113 million was lower than our adjusted net income due in part to $24 million of stock based compensation and 14 million in net intangible amortization. In addition, net restructuring and other charges were roughly 30 million.
As we move through the balance of fiscal 2001, we will proceed with remaining restructuring activities in a measured and prudent way to minimize impacts to our operations.
We still expect approximately 100 million of costs.
Between Q2 and Q4.
If you could please turn to slide seven or.
Our second quarter adjusted gross profit was two skews me $423 million and despite more than a 100 million of topline pressure was up year over year with margin rates up 30 basis points to 7.1%.
Since March our teams have navigated the dynamic demand and production environment exceptionally well and we are pleased that our global sites operated with minimal production disruptions in the quarter.
We did however have cost headwinds related to the ongoing pandemic continued spending on enhanced health and safety incremental supply chain costs and the under absorption of labor and overhead were present in the quarter.
Decline meaningfully from what we experienced in Q1.
Maybe comment or two here on DNA adjusted SGN, a expense decreased 5% year over year to $177 million, which was down 10 basis points to 3% of sales.
Its reliability solutions generated 170 $79 million of adjusted operating profit and a 6.7% adjusted operating margin.
We had some pressure in automotive given the softer volumes, but it was a marked improvement from Q1, resulting in nice growth and both profit dollars and margin rate for overall reliability.
Flex agility revenue of 3.3 billion was up 14% quarter over quarter and down 7% year over year.
Within agility.
Meticulously against the backdrop CDC in lifestyle were solid growth with revenue up low single digits year over year CDC benefited from critical infrastructure demand from our networking and cloud customers, though enterprise. It spending has not recovered in the current environment.
As I mentioned lifestyle revenue was up year on year and saw a meaningful recovery compared to Q1 as consumer spending picked up in areas like Floorcare small appliances and high end audio solutions.
Lastly, consumer devices was up sequentially, but on a year on year basis down roughly 30%, primarily driven by continued soft demand in various emerging markets.
Turning to profitability flex agility solutions generated $88 million of adjusted operating profit and a 2.7% adjusted operating margin both cc in lifestyle performed well from better sequential volumes, but as I mentioned, we did have some headwinds and consumer devices.
Turning to slide nine on cash flow.
For the quarter stronger earnings and favorable working capital drove sequential growth in both operating cash flow excuse me sequential growth in operating cash flow adjusted free cash flow of $326 million benefited from disciplined capex.
We remain fundamentally structured to achieve 80% or greater adjusted free cash flow conversion in the coming quarters.
We closed Q2 with inventory of $3.6 billion, which was up 4% sequentially, but down 3% year over year and resulted in inventory turns of 6.3 times Thats up a full turn from a quarter ago.
At this point many of our supplier constraint and and component shortages have abated, but we continue to monitor this landscape closely.
Our net capital expenditures for the quarter totaled 69 million.
Our prior year's investments are enabling us to support our current technologies products and programs, but we certainly won't hesitate to invest in compelling areas of growth as well as those opportunities arise we.
We will continue to manage capex to be at or below depreciation in the near term while.
While simultaneously funding those core areas of growth.
Now turning to our share repurchase program I want to give you an update on our thinking in terms of returning capital to shareholders.
Our repurchase program has been on pause since March as we focus instead on preserving our strong cash and liquidity positions during the most volatile periods of the ongoing and demick.
So we are still faced with an elevated degree of uncertainty in some parts of our business. We believe that visibility has improved enough to resume closer to normal operations, such as rolling back austerity measures.
And also reinstating share buybacks disciplined and prudent buybacks are a key feature of our capital allocation strategy and we will proceed in a measured thoughtful way as we get back into the market here in Q3 and in Q4.
On slide 10.
We continue to operate with a balanced and flexible capital structure that has staggered debt maturities.
Nothing meaningful do in the near term.
And no maturities that exceed our expected annual adjusted free cash flow.
During the quarter, we took advantage of favorable market conditions and issued $575 million of long term debt in August which.
Which extended our weighted average maturity to almost six years, while being leveraged neutral we use some of these proceeds to further work down the outstanding balance of our ABS program, which which at the end of Q2 was negligible.
Proceeds were also used to pay off $433 million of term loans due in 22, which had the effective extending maturity as I mentioned before.
Our cash and liquidity position remains strong and is further supported by our $1.75 billion Undrawn revolver in short.
Our flexible capital structure gives us confidence in our ability to meet our current and future business needs, while simultaneously and importantly remaining investment grade rated.
On slide 11, maybe a couple of thoughts on the upcoming quarter, but before we get into the guidance. Just a reminder, that although weve gained a tremendous amount of experience and knowledge since the beginning of this pandemic, we're still operating in a very dynamic.
And highly fluid environment are.
Our first priority of course is the safety of our workforce and we're keeping a close eye on our sites around the world as local conditions change in real time.
Guidance is therefore based on our current visibility and information that is available today unexpected COVID-19 related impacts to our business.
So let me start with our flex Agiliti solution segment, I would love to say agility, we up mid single digits, but frankly, given the environment, we're going to range it a little lighter than that and call it somewhere between low and high single digit growth quarter over quarter both.
Both our lifestyle and cc businesses should be roughly flat sequentially in Q3.
We expect to see sustained demand for products that support remote work and school and critical infrastructure demand should persist along with positioning ahead of Fiveg ramps lastly, consumer device the customer devices will continue to rebound quarter over quarter as mobile demand and production recovers.
Turning to our flex reliability solutions segment, we expect revenue to be up low to mid single digits quarter over quarter third quarter automotive revenue will be up low to mid single digits sequentially, but as I mentioned before remains below pre coated levels all.
All major geographies are recovering, though our risk assumption remains that overall global automotive production will be down high teens for the year.
Although we continue continue to see robust year on year growth in health solutions compared to Q2 health solutions will be down low to mid single digits sequentially as we move into Q3.
In the back half of the year, we expect to see a roll off of demand for certain critical care products, such as ventilators. Our expectation is that elective procedure demand will recover to offset the slowdown in coated related products, though it appears this recovery is still in its very early stages last.
Lastly, our industrial business will be up low to mid single digits quarter over quarter, driven by renewable energy.
And core industrial both of which ops are offset by a customer specific headwind.
Within power solutions.
Now on slide 12.
Given the sum of all those outlooks, we would expect our quarterly enterprise revenue to be in the range of $6 billion to $6.4 billion.
Our adjusted operating income is expected to be in the range of 235 million.
To $275 million with operating margin expansion.
COVID-19 costs continue to remain a headwind and as a reminder, benefits from austerity measures will also be rolling off in the third quarter as we restore full compensation and reinstate our incentive plan for affected employees. Among other actions interest as net interest and other is EPS.
Submitted to be between 40 and $45 million, we expect the tax rate in the quarter of between 10 and 15%.
And overall adjusted EPS guidance should be in a range of 34 to 40 cents per share based on weighted average shares outstanding of $504 million.
Our adjusted EPS guidance excludes the impact of stock based compensation net intangible amortization and the impacts from our restructuring and other charges. As a result, we expect a GAAP earnings per share in the range of 21 to 27 cents.
With that I will turn it back over to Randy.
Paul.
As you can see our fiscal Q2 execution led to really strong and you can also see from Paul's comments that the fact that improvement to continue into fiscal Q3.
So as I think about the second half of the fiscal year. There are a few elements I would like to highlight for.
Greatly enhanced solution gold related episodic in acute care product demand may likely roll off in late Q3, we fully expect elected related medical products are at times. It concerns about increasing colored levels in multiple geographies appear to be slowing back at Calgary. So we don't expect to see the elective medical.
A market rebound until early in our next fiscal year.
On the other end markets I also anticipate some catch up demand could begin to normalize as I think about Q4, I would anticipate trends roughly in line with typical seasonal decline.
Well I'd certainly like to provide as much visibility as we can given the continued uncertainty from the pandemic and the geopolitical concerns we will refrain from providing complete Q4, our full year fiscal 21 guidance at this time.
Now I talk about our solar space, there's been a lot of excitement lately around that thanks.
I will say that it's been great to see the opportunity in the solar market being recognized this is validating our investments in building out our nextracker business.
I've also said many times that it is our job to continuously evaluate our portfolio positioning.
Improving the mix find.
Finding and investing in great opportunities and taking a disciplined approach in finding the right way to monetize each of these businesses to maximize long term shareholder value.
I'll finish by saying I remain extremely confident that we have that right strategy to reach our longer term goals and that we will emerge from this global crisis stronger and better positioning for the future.
Again, I want to say, thank you to all our employees for their ongoing commitment to our customers for their trust and partnership and to our shareholders for your continued support.
Thank you and in order to ask a question you will need to press star one on your telephone.
Our first question comes from a line of Michael Marino from RBC capital markets. Your line is open.
Hi.
This is Michael Murray on for Rob third molar.
So you touched on this in your comments briefly.
So competitor of Nextracker recently went public as being valued very highly right now so if the overall run out with solar companies, it's pretty apparent that the value is it being properly reflected in flexes share price.
So first could you give us a sense of the size and margin profile of Nextracker and then just a quick follow up are you considering steps to unlock value of this either.
With further financial disclosure or a potential spin off.
Thank you, Mike I'll leave, whereas only having betsen on whether this would be the first question are not so.
So let me start by just giving you a little bit of view on Nextracker business itself.
I'll start by saying that I have known the I've been part of the solar business for a long time from my prior role as a.
Leading the electrical business and haven't played a lot of.
They have having had a lot of experience with a solid market for the for more than a decade.
So our Nextracker business itself is number one in global market share on slow solar tracker businesses that has been that way for the last five years and continues to be that way.
Till date, they have installed around 40, plus gigawatt of smart solar tracker for projects across five continents. So we're really global in our business here.
And then not only do we have the tracker product itself, but we havent really fantastic software called true cap chair materially focuses on mark monitoring and as the control software platform.
Across the kind of solar field.
And so over the last few years, the Nextracker business has grown from being a few hundred million in revenue to being.
North of $1 billion today and in terms of operating margin really is in line with industry peers and operates.
In the double digit operating margin range. So you can see the very strong business a market share leader. He has had a healthy growth profile and it really has had fantastic operating margin performance and continues to be so.
I would say that.
That we believe strongly in Nextracker is market, leading technology and have been investing heavily in that business to grow and support that business there.
Well, we don't want to do is to just allow the external noise distract us from continuing to build that business. So we will focus on that for sure.
In terms of monetizing and unlocking value.
We you have seen in the last couple of years, we haven't hesitated to take portfolio decisions whenever we needed to and I think that's been my track record and also all his track record and how we have managed businesses.
So our job is to continue to manage our portfolio will work the mix.
We also will make sure that we are finding and investing in new opportunities.
It also will find the best ways to monetize assets that we think will provide the maximum long term shareholder value and they are very committed to doing that.
I wanted to step back and just quickly Italia that has been here on this journey only for two years and then that two years, we've got a lot done it had disciplined execution is managed our portfolio.
Have reoriented, our segments to drive organic growth and we are in a fantastic position today to really look at how do we manage to monetize assets, we need to but also having that long term in our portfolio, where we need to dive drive growth. So it's a good high class problem to have and very excited about that position that.
Alright, thank you.
Your next question comes from the line of routine by the carrier from Bank of America. Your line is open.
Thanks for taking my questions and everybody. Thanks for the details you gave on flex tracker.
I was wondering if you can give a little bit more detail in terms of you said, you're making investments to grow the business is this a capital intensive business can you give us any sense of the debt on the balance sheet of Nextracker and what type of Capex is required to grow that over the next couple of years.
Yes, absolutely I'm not going to go a whole lot beyond what I already said this is in terms of revenue and margin performance I would say.
In terms of what's needed to grow solar businesses in general.
And the capital intensity of the business I think you can read that for many industry reports in general it's an asset light business, but I think there's enough industry reports on tracker businesses itself and I'd say, we're very much in line with that.
Okay, and then youve been pruning the portfolio on the other side of the business on the CTG the former CPG MCC.
In nine the agility solutions part of the business is that pruning done or is there still more pruning can be done on that side of the business.
Oh, well I've said this before is that you know our six segments have been clearly defined and setup, including that Steve within agility.
And.
You know, how we buy six business units and how we think about our IRA agility businesses within the portfolio will always be looking to improve our mix right to go to higher value customers, then manage customers, where we don't think thats long term value for us and the customer.
And that's how we're managing it and I've said that I don't see any large scale pruning left to do but managing within that as always our job I think you'll all expect us to do that constantly.
Right and just for my last question. If you can just clarify this from a strategy standpoint are you hearing correctly that you know from a product portfolio standpoint, you would be open to looking at both.
Assets and reliability solutions segment as well as Agiliti solution segment to unlock shareholder value. So if it if it makes sense to divest those assets you would be open to doing that I mean, depending on how things.
Earnings growth so from a strategy standpoint is that the correct way to look at it.
From that strategy. Since then fine group little as I think I have made it clear in my comments I said before as that.
We need to monetize assets and they have a better value somewhere else they'll always be open to doing that but I've also said that from a long term shareholder value perspective, we're also focused on investing in our reliability business.
Yes, within healthcare and automotive and industrial because we think that long term the best value for our shareholders comes from investing in those businesses and driving growth.
Profitability in those businesses. So you have to look at the strategy Holistically I think they're both parts of that.
To execute on.
Thank you for all the details and congrats on the quarter.
Thanks will.
Your next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.
Yes. Good afternoon, thanks for taking the questions and congratulations on the strong results.
So I'm going to start with a question also on Nextracker and that certainly the you mentioned.
Look at looking to be open to best monetize and create shareholder value can you give us.
Any more detail to have flex plans to measure or gauge whether or not you think flexes receiving fair value for the Nextracker business.
Yes, I'd say Mark how I would say is that we feel that nextracker is a great asset and how we are managing and how we're growing that business within our portfolio and I think in terms of the value of each of our businesses not just nextracker because they like other fantastic businesses.
Within our portfolio will be measured based on independent businesses that exist in their space and devaluation that is not the time for those businesses. So.
I think thats, the only big picture on strike and give you mark but I just want to.
To make sure I go back to that to the the question off that van many assets that we think are great gave great assets were really pleased that people are recognizing that that there's power to those assets and that our valuation should reflect those assets. So were super excited about that.
And that will be assets that will monetize but there will also be other places that will in that and thats. How we should think about the story.
That's very helpful and thanks for all the other comment you made on that business I think this is helpful for investors.
My second question I wanted to touch on your comments about.
Seasonality in fiscal Fourq, you and when I look back historically the range has been approximately down 5% down about 15% quarter on quarter.
Is that what you're alluding to when you're talking about the seasonality and I do ask to clarify just because.
The company has been evolving businesses as I said, there's there's been a bit less consumer exposure, which is thats one of the businesses in particular that have historically created that debt at the of that seasonality in the March quarter. So Im curious is that the short at the historical numbers is that the right way to be thinking about it or is there some sort of new seasonality, we should have in mind for for the March quarter.
Yeah.
Yes, Mark this is Paul I do I do think Thats, the right way to think about it I think over the last several quarters. The company has done some pruning that in theory down the road should should have an effect on on seasonality, but if you go back in time and just look at the history. You know its been a 10 10 11, 12% sort of a sequential decline from Cesar.
Banality as we've moved from our fixed fiscal Q3 into the fiscal Q4, and I don't think you'll see a significant change to that as we move ahead into this upcoming fiscal.
Fiscal Q4.
There's there's a lot of moving pieces with this as you can imagine the comps are interesting as you come into the year on year is in Q4, but.
Given the snap back effect and what may or may not happen in healthcare, we certainly are expecting some some quarter on quarter top line contraction as we move into Q4 and as Mike. The only thing I would add is that yes. We are definitely reviews the seasonality effect in Q4 for monthly.
Historically had just because of how our mix has shifted.
So there's definitely some improvement because of that but we do think that there will be some seasonality because you know it's post holiday season, and things like that and also that in the call that really add some confusion to all this story in terms of how we see the quarters play out also so that is I think some.
Some predictability issues because of that.
Thank you very much.
Our next question comes from a line of Matt Sheerin from Stifel. Your line is open.
Yes. Thank you I wanted to ask about your.
The datacom part of the.
Julie solutions business.
The telecom the cloud business, which seems to still have some some fairly good traction and then also the infrastructure products and networking servers storage here, where we are seeing weakness and continued weakness in on Prem are you seeing any signs from your customers found that they're expecting a turnaround at all in that business.
So anytime soon.
Yes, I think what we've said is that we're not seeing any immediate turnaround in that business and that's what made us less than our.
Even in our script.
And I think were hearing that consistently from our customers to use so I think our overall view is that.
We see critical infrastructure investments continuing.
We see that that will be reflected in cloud.
But you do see that enterprise spending will continue to be weak in this space and that's kind of how we think overall.
Our CP business will operate yes, just I'll just pile on on that a little bit I can't imagine theres. Many CFO is out there who are want to invest heavily in enterprise right now given the pandemic so that will probably.
Gravity said continue to be a bit soft I also have have read some external stuff about cloud that is saying that maybe there's a little bit of digestion coming into the calendar year period, Q4 that might be a bit of a watch item, but but as we mentioned in the in the prepared remarks, we are expecting about flat CSC moving from Q2 to Q3 Yep.
Okay, Great Thats helpful. And then Paul just a question on the Opex line you did talk about some of the August 30 measures going away. So I guess, there's some expenses coming back so what should we be thinking about as you know you over the next quarter or two.
Yes, so west DNA I you know you look back six eight months ago, I think we have talked about 3% to 3.2% or something like that that's that's kind of how I would I would be thinking about it. If I were you is as we move forward there is going to be a little pressure as you alluded to austerity measures are rolling back.
And we continue to have covered cost Cocos.
The question is pinned on Nextracker, what im the co it is going to be.
Continued to be a headwind for us in Q3, and Q4, so maybe a little bit of pressure there if I kind of think about the the walk.
Op margin walk just from from Q3 to Q4 volume.
Volume is is.
Not significant quarter to quarter.
Maybe 200 million and I don't see a whole lot of drop through on that cobot, it's probably neutral from quarter to quarter, but we do have headwind from austerity.
Measures and maybe a little bit of tailwind from from other productivity, but look we're going to we're going to continue to be disciplined as we've said before and do our best to keep the controllables in the box.
Got it okay. Thanks a lot.
Your next question comes from the line of Paul Coster from JP Morgan Your line is open.
Yes. Thanks for taking my question first on any sort of puts and takes that you can it's been cold monitor runs from.
The composition of the next Congress and post them soon.
The elections for instance, green tinge to certain infrastructure expenses is that good or bad.
Yes, I'd say two things one is ill first start with trade even though your question was on Green, Paul say that on trade, we expect that.
Overall kind of.
So based on.
Whether our president Trump continues there will be have a new government.
We think the focus on China continues to some extent, we believe that the focus on regionalization.
We'll continue to be a conversation across our customer base just to de risk whether it is due to geopolitical issues or whether it's related to health and that mix issues. We think the green investment is is a plus for us.
We have a fairly large energy business that will benefit from that.
So were bullish in terms of the investments that have been outlaid in terms of.
The Green energy program, and if that pans out we view that as a plus.
Got you and then on fortunate to have a mixture I could couple of quick questions can you give us any sense of how much more of a billion.
You are right in terms of revenues there and then.
You mentioned twice.
Long term shareholder value improve throughput.
No.
So to close.
Even if youre clearly too soon choose Madden brand you know from your business you just can't get that kind of valuation most boots.
Inside a larger company so it feels like short term and long term.
We try and do you have to kind of go with where the market valuations is telling you to close the NASA.
Yes, Paul maybe you missed the first part of our comments they did say that the business size in terms of revenue is a little north of $1 billion.
And.
Okay.
The operating margin is in line with industry peers in terms of double digit operating margin in terms of the comment that I think.
You know I need a holistic comment that we will look at ways.
That we can identify and monetize any opportunity we think that is better value.
Externally than internally that needs to be the K.
But you know our goal and focus obviously.
Hi, create long term shareholder value. So in terms of monetizing assets investing in assets. They all go into the picture in terms of how we make these decisions and Thats a lot of long term shareholder value is an important.
On a theme for us and our long term shareholders Theyve been very clear about that also so you have to think about both sides of this equation.
Okay.
So thank you.
Thank you our next.
Your next question comes from the line of Steven Fox from Fox Advisors. Your line is open.
Thank you good afternoon.
Couple of questions on the reliable reliability solutions business the margins.
Under the new structure, the best we've had in the.
You know six quarters, we're looking at the incremental margins or 12% year over year, 15% quarter over quarter. So can you just sort of explain how much of that improvement.
Is mix versus just natural operating leverage versus better costs, and then secondly on the auto piece of the business, you're saying that it's going to be down year over year.
For the rest of this year fiscal year I guess.
What are the external factors on that I mean is it just because of global production or is there any customer specific geographic model specific things going on there. Thank you.
Yes, thanks, Stephen so in terms of reliability margin.
I'd say, it's a combination of things one is obviously the health solutions business, having a strong performance in the quarter.
With all the kind of work they have done for college related work definitely helps.
In terms of improving the overall business performance I'd say industrial was pretty much in line with what we have typically seen from the from the industrial businesses.
And automotive while it had a good snap back from Q1 is still down year over year basis right. So.
And so I'd say, if I think about all of that Holistically and me had you know kind of the the mixes of Covance cost then upgrade benefit.
That somewhat net off each other but provide some upside.
To make the margin performance for that business pretty strong so.
So I would say that good performance overall, we are running the business in a more disciplined way that's a huge clos, we've got benefits from cobot upside that helps.
They have auto recovering, which was which was a boss and how we're managing that recoveries really good then industrial this kind of performing as we expected to.
So I think good performance across the board and a combination of factors of growth and productivity in terms of auto being down year over year.
Whether we like it I have tests or not that's kind of the best.
Indicator in there that's helpful, where the market's going they're calling auto right now at 18% year over year down we think we're actually going to be better than that and the reason will be better than that it's just because of the underlying trends of where we participate in the auto business.
Where we have more and more in elektron in things like electrification and in connectivity and electronics components, which provides a higher value per car and we helped us better than the overall I adjust numbers. So we think will be better than the minus 18%, but the underlying trend pared down and.
We're going to be better than that is there is our view on that.
Great. That's very helpful. Thank you.
Thanks Steven.
Your next question comes from the line of Tim Yang from Citi. Your line is open.
This is Tim we are calling on behalf of Jim Suva, a follow up question on automotive.
Are you guided December quarter automotive to be up low to mid single digits. I think this is a below although production growth forecast from our insurance of roughly 9% to 10% sequentially for the quarter. So maybe can you just elaborate about what why your sequential growth, it's a little bit low although production for the quarter is it more like a voluntary or customer specific.
The issues or something else.
So Tim I mean, if it earlier could you repeat the first part of that question.
So your December quarter guidance follow motive is up low to mid single digit quarter over quarter.
And then I think forward, although production forecast for December quarter from third party agents I think they are forecasting like 10% so.
Can you maybe just address on why your sequential growth a little bit below the forecast.
Yeah sure. So let me let me take that and so you got to you got to look back to where we're coming from so you go back to Q1, I mean, we had trough like we had troughed in a long time, I mean automotive year on year was down call it 50% or so that snaps back significantly in Q2, and as you probably heard in our prepared.
Remarks, we were up high single digits and automotive looking ahead to Q3. This is pivoting to a sequential basis, and we'll probably be somewhere between low to mid single digits sequentially. So continued recovery, but that is still down two to review. These point on the prior question from Steven.
Look I, just wondered whether you like it or not continue to project.
Down pretty automotive rates below pre covert levels and down high teens year on year. So if we can if we can print a mid single digit.
Hi signal digit down year on year performance like we did in Q2 to me that would be a win and it will be a win for the reasons that you mentioned there were growing.
Other parts I think of course figure that share of wallet, if you will.
Areas like autonomy electrification connectivity.
Those are all great and in our space and as that share of wallet grows we should outperform overall automotive and I think from a sequential perspective, Tim the way I think about it is and that week.
We could be more conservative for sure and one of the reasons could be that.
Where we're trying to manage.
Kind of that the timing of order supply constraints and things like that that we're trying to manage for the automotive business, because it's had a pretty big snap back from where it was.
So I think you could say that could be the difference between where we're at and what you are saying the projection is that of nine to 10, but it's constrained supply constrains or better.
And.
And now we're able to get all our shipments out it could be better than what we have been here.
Got it Thats very helpful.
The past some flocks benefit from the major gaming console ramping in call. This event was that the case for us this year or your exposure to that and the market has actually changed.
No I I really don't even know what our exposure to that as some assuming it's not that had that big.
So its not significant for us.
Got you okay, great. Thank you.
Okay. Thanks.
Your next question comes from the line of Shannon Cross from Cross Research. Your line is open.
Thank you very much rather you did well across the board to a large extent this quarter, but I'm wondering what areas had sort of the most outperformance are surprised you relative to where you were forecasting for the quarter, maybe auto but I'm curious if that's sort of where you saw the most upside and then perhaps where you see the most upside.
And then.
The current quarter that we're in and then I have a follow up for Bob. Thank you.
Yes, Thanks, Shannon, Yes, we didnt do well kind of across the board on all metrics.
And and you nailed the most important one that was much better than what they expected.
Because automotive, but frankly, we had no upside in quite a few segment our lifestyle business performed very well and that came from.
Continued strength in appliance and floor care.
And that was pretty strong so that was a positive.
From where we thought things were.
Had already mentioned that the expected C C to be strong because of the infrastructure investment that we were able to make a lot of those shipments so that definitely.
Helped us I would say on the.
Consumer devices did rebound from a low but it was lesser than what we expected that because of emerging markets being slower.
So thats kind of how overall Q2 played out so.
And then I would say looking forward, what we're hoping for from.
From an opportunity standpoint is that automotive continues the snap back like I talked about as they can manage the supply constraints channels at the same time with all the noise around Covanta in Europe.
And continued shutdowns happening across the laws were kind of watching that very closely also so you know those things could swing things pretty quickly I think thats a good caution.
Great and then Paul granted Youve only been there a few weeks, but I'm, just curious where you're seeing perhaps the most opportunity.
Sort of balance what you've you've seen in the last few weeks with what you did at Eric I can imitate aerojet rocketdyne sorry.
Sure so.
If there were if there were to be one observation that I would have it would be this and this is based on going through a number of different factories, either in person or or virtually.
Incredible amount of capability with with the company I mean, we make highly engineered products you just ridiculously small highly engineered products.
At incredible rate.
And our ability to sort of pick up operations and moving from one part of the globe to another is just incredible so I guess the one surprise for me maybe would just be margin rates given the capabilities scale and of the company its.
Im a little surprised that it in some cases, we run it low single digit margin rates and so that will be sort of in my first observation and my question would be how much is that how much of that is blocking and tackling tackling disciplines stuff. How much of that is just sort of consistent with with CMS industry and is there room to grow but.
No I think where we're ready to see and I have been completely aligned since this process started the summer is focusing on disciplined execution, how can we get the margins up how do we change the the overall mix and portfolio.
To to change the profile of the business into a more predictable higher earning company and Thats.
That's a question and answer your question Thats going through my focus over the next several quarters years.
Hey, Thank you very much.
And Shannon.
And your final question comes from the line of Christian Schwab from Craig Hallum. Your line is open.
Hey, congratulations guys on the other great quarter in this environment.
My question has to do with in the prepared comments you know we talked about.
All of the changes in product repositioning that we're doing.
And thought of yourself more of like a diversified manufacturing business not a dms business and I assume that's because you think the multiple that you've historically have gotten is too low and I'm wondering if you could give us an idea of some of the companies.
That you have in mind that you think your business is more similar.
Two then just be considered a contract manufacturer.
Yeah, Chris any thanks for that question, Yes, I think you have to think about our business in two parts right and the reason we.
I have gone to those two business segments model.
It is.
In the reliability and the agility segment would be because they believe segment.
Function more like the traditional SMS business that traditional contract manufacturing business.
And then at the same time, when you think about the reliability business, which has been high value businesses like health solutions, and automotive and industrial that really functions like any of the diversified industrials.
Function tried lot of technology investments long customer affinity cycles very difficult manufacturing processes.
So I would say that for the liability business, we definitely feel that our multiple should be a lot higher.
Then what were getting a tie in so that is how I think about it and I would put it in.
Obviously, if I'm selling the story, which I am question and thanks for this question I'd say that.
What reliability should get assigned as that is a diversified industrial multiple and you should be able to pick any of them and say now you look at that group of companies and you should be able to assign that multiple for our liability business and I think the agility gets the traditional.
Matt multiple but as we continue to move that business in terms of how we run it and how we manage it that will shift but.
But thats.
How I look at the two parts.
20 times EBITDA sounds pretty good to me Christian.
Thanks, I appreciate that I don't have any other questions. Thanks.
Okay. Thanks, Thanks for the question Chris Great. Thank you Christian so as I wrap up I would just say thank you all for joining us today and.
Even though these are unprecedented times im sure. This quarter. It gives you a tremendous amount of confidence in the future flax and it gives us too and I wish that all if he does remain safe and in great health and we look forward to talking to you again next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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