Q3 2021 Flex Ltd Earnings Call
Good morning, and welcome to the Flex third 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 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 Grubin Flex as Vice President of Investor Relations. Sir you may begin.
Thank you Rob good morning, and welcome to Flex as third quarter of fiscal 'twenty 'twenty. One earnings conference call with me today is our Chief Executive Officer, Ray, but the adviser and our Chief Financial Officer, Paul Lundstrom. Both will give brief remarks, followed by Q&A. This call is being webcast and recorded and if you have not already received them slides for today's presentation are available.
<unk> on the Investor Relations section of our flex Dot Com website.
As a reminder, today's call contains forward looking statements, which are based on our current expectations and assumptions and are subject to risks and uncertainties actual events and results could differ materially also such information is subject to change and we undertake no obligation to update these forward looking statements for a full discussion of the risks and uncertainties. Please see our most recent.
<unk> filings with the SEC.
Lastly, this call references non-GAAP financial measures for the current period GAAP reconciliations can be found in the appendix slides of today's presentation as well as on the Investor Relations section of our website with that I'd like to turn the call over to our CEO remedy.
Thanks, David.
Everybody and thank you for joining us today for our fiscal Q3 earnings call and that too at an earlier time I do hope you and your families are healthy and safe of course before I start I want to thank all my flex colleagues for their continued hard work and commitment I would say that our strong third quarter results are in.
Two testament to the efforts of all my colleagues across the world.
I'd also like to provide you an update on our next tracker business.
As I have previously said, we continuously evaluate our portfolio positioning improving the mix finding and investing in great opportunities and taking a disciplined approach in finding the right ways to maximize long term shareholder value.
As such the company is now actively pursuing alternatives for this business.
This may include among others, a full or partial separation of the business through an initial public offering.
Ill spin off or other transactions.
As you can understand there's only so much we can share with you today and will continue to provide more information on this topic in the future now.
Now please turn to slide three.
Okay.
Revenue was over $6 7 billion up 12% sequentially and up 4% year over year, our adjusted operating margin came in at a strong for 0.6%. This figure includes the absorption of continued macro related challenges I'll touch on in a minute Newport other crimes as.
As well as the full elimination of the previously implemented austerity measures.
Our adjusted EPS was <unk> 49 cents up from 38 cents in Q3 of last year.
Our adjusted free cash flow came in at 289 million demonstrating another strong quarter in free cash flow generation.
Now moving on to the next slide.
As you can see these are very strong results fiscal Q3 is historically, our strongest seasonal quarter. However, we execute it even better than our prior expectations as we navigated the challenging environment and delivered to meet improved demand.
This led to sequential and year over year revenue growth in both high reliability and agility segments with five of for six business units growing sequentially as well as year over here.
In our reliability segment, our health business is well positioned for continued growth as we invest in new program ramps in our chronic care products continued to ramp this quarter.
We also saw a slower than expected decline in COVID-19 related critical care products. Unfortunately, this is due to the resurgence in Covid cases.
Automotive benefited from a stronger than anticipated global recovery led by North America with improvements in all regions. The team has been working very hard to to deliver in a very difficult macro environment, but they continue to make progress and we see a very bright future, particularly in a growing electrification and autonomous businesses.
Industrial improved sequentially as expected on continued strength in core industrial however, as we discussed on our last call, we still face a year over year decline due to a customer specific headwind in power solutions as well as a tough comp in renewables related to safe Harbor.
I want to point out both of these items are transient we remain very confident in the secular drivers in both of these spaces and there's absolutely no change to our market positions are.
Our agility segment performed very well across the board.
We continue to manage our mix to capitalize on important long term secular drivers in areas, such as cloud and five G as well as shift to premium brands and mid to high end products in our lifestyle business.
We also continue to benefit from the recovery in consumer spending, which led to solid holiday uptick as well as continued spending related to work and learn from home.
The key here is that the teams really exit executed very well to meet strong demand, while driving productivity and focusing on the right kind of growth. This led to improved profitability and growing revenue, which our goals. We've previously laid out.
I'm very proud of these strong results we achieved this quarter, but I also want to point out that this is no time for us to take our eye off the ball.
We have all read the latest headlines on the devastating impact from the Covid second wave.
So far there have only been a few regional lockdowns, such as in Malaysia, and Brazil, but it goes without saying that our number one priority is to protect our people and their families.
We've also heard about the confluence of events that led to increasing supply constrained in everything from semiconductor components to transocean ex shipping containers.
This has created an additional layer of uncertain the day in a number of end markets.
So far we have anticipated and manage through these latest challenges. However, we will continue to monitor this rapidly evolving situation.
Rest assured these are near term potential challenges and overall, we continue to see an improving environment and growing opportunities.
One last item I wanted to touch on before I turn the call over to Paul I've said before that ESG is an important focus for flex and I'm really proud of the work we've done so far.
Flex currently ranks number one in the electronics manufacturing sub industry and is in the top 50 out of almost 13000 companies globally as rated by sustained analytics.
I look forward to discussing he is he in more detail on our Q4 call, but I wanted to point out our most recent achievements, we launched and closed on January 7th our new 2 billion sustainability linked five year revolving credit facility with our banking partners. This was to replace our previous 1.75 billion for.
<unk> flex.
<unk> Flex is the first company.
In the tech space to have an ESG linked loan where the pricing is linked to flex. This performance in meeting specific ESG key performance indicators targets in this case greenhouse gas emissions reduction targets and work related safety incident rates.
Again, I'll update you more on our broader ESG efforts in Q4 with that I'll turn the call over to Paul who will walk you through our results in more detail I'll, then come back and be and to share. Some closing remarks, Paul Okay. Great. Thank you for ABC and good morning, everyone.
If you could please turn to slide six flex revenue was $6 7 billion in the quarter, which was up 12% quarter over quarter and up 4% year over year.
Q3 was stronger than expected with top line growth in both the agility and reliability segments and with broad strength across the portfolio.
Adjusted operating income was up 22% year on year to 311 million with 60 basis points of margin expansion.
Profit growth was bolstered by stronger volume with good mix as well as productivity and efficiency gains.
I also want to remind everyone that this figure continues to include some headwinds from COVID-19 costs.
As a result, our adjusted net income was 251 million with adjusted earnings per share of 49 cents year on year, those were up 30% and 29% respectively.
And Ah reconcile adjusted net income to net income on a GAAP basis third quarter GAAP net income of 208 million was lower than our adjusted net income due to $25 million of stock based compensation.
<unk> 13 million in net intangible amortization and 4 million of net restructuring and other costs.
On a gross basis restructuring was $30 million in the quarter, partially offset by 26 million of other investment gains we continue to track to the targets. We outlined in Q1 and still expect to close to about $100 million of restructuring costs between Q2 and Q4.
<unk> as we had previously committed on.
On slide seven our.
Our third quarter adjusted gross profit was 514 million up 55 million year over year. Adjusted gross margin was also up 50 basis points to 7.6%, which is record performance for flex and reflective of our strong execution in the quarter.
In total adjusted SG&A spending was flat from a year ago and three per cent of sales. We continue to believe that our repositioned cost structure will provide meaningful earnings leverage as we execute on our long term growth strategy.
It up adjusted operating income of $311 million was up 22% year over year, and 60 basis points of margin expansion led to a record for 0.6% operating margin rate.
Flex reliability revenue on slide eight was 2.9 billion in the quarter up 8% sequentially and up 2% compared to a year ago.
Q3 performance for all three businesses and reliability met or exceeded our initial expectations going into the quarter at.
Automotive in particular benefited from the industry's ongoing strong global recovery as demand has improved substantially from trough levels last spring.
Automotive automotive revenue was up high single digits year on year with improvements seen across all regions led by the Americas as.
As expected health solutions sales were up double digits year over year critical.
Critical care products diagnostics and patient monitoring programs continue to be in demand with perhaps a touch more volume than we expected.
Lastly, industrial was down high single digits compared to the prior year as mentioned last quarter, a customer specific headwind and a tough comp and renewables related to safe Harbor created some pressure in industrial but was partially offset by strong growth in the balance of the business.
Turning to profitability flex reliability solutions generated $178 million of adjusted operating profit and a 6.2% adjusted operating margin, which was down 40 basis points year on year due to headwinds related to automotive product transitions as well as investments associated.
With new product ramps and health solutions.
Flex agility revenue of 3.8 billion was up 16% quarter over quarter and up 6% year over year.
Within agility lifestyle was the standout for the quarter up 10% year over year. Thanks to continued strength in the high end audio for care and appliance end markets.
C E. C also did better than expected up low single digits year over year led by cloud and critical infrastructure, while enterprise it spending remained muted.
In line with the broader market.
Lastly, consumer devices was up high single digits year on year benefiting from seasonal upticks in consumer spending and demand.
Turning to profitability flex agility solutions generated $153 million of adjusted operating profit and a 4% adjusted operating margin driven by strong volume and mix.
Turning to slide nine.
For the quarter stronger earnings and favorable working capital again drove sequential growth in operating cash flow, while adjusted free cash flow of $289 million also benefited from disciplined capex.
We've spoken in the past about targeting an 80% or greater free cash flow conversion on an adjusted basis.
Looking ahead to this fiscal year ending in March we expect to achieve roughly 80% free cash flow conversion on a non-GAAP basis.
With adjusted free cash flow over GAAP net income likely closer to 100%.
We closed Q3 with inventory of 3.7 billion, which was up 2% sequentially, but flat year on year, resulting in inventory turns of 6.8 times up half a turn from a quarter ago.
We like others in the supply chain are seeing significant component constraints and of course, we are working diligently with our partners to secure needed parts and fulfill demand.
Our net our net capital expenditures for the quarter totaled $65 million, we continue to efficiently manage capex, while supporting the strategic goal of increasing our technology and capabilities in higher value end markets.
I'm also happy to share that we resumed our buyback program during the third quarter as you'll remember our repurchase program had been on pause since March as we focused on preserving our strong cash and liquidity position during the initial period of uncertainty, but as we've said before disciplined and prudent buybacks remain a central.
Iteration of our capital allocation strategy. So we made the decision to get back into the market as visibility has continued to improve.
Speaking of cash and liquidity I wanted to provide a quick update on our new $2 billion Undrawn revolver.
We entered into this five year facility on January 7th of this year, replacing the existing 1.75 billion dollar revolver that was set to expire in 'twenty 'twenty two.
As Ray with you highlighted a moment ago. This was the first ESG linked credit revolver agreement for the tech industry, tying the cost of the facility to key metrics that support flexes long term sustainability plan, namely reductions in greenhouse gas emissions and improvements.
In workplace safety incident rates.
Overall, we are pleased with a balanced and flexible capital structure, which enables us to meet our current and future business needs, while simultaneously remaining investment grade rated.
On slide 10 couple of thoughts on the quarter and maybe before we get in the guidance I just want to reiterate what we've said previously on on every earnings call over the last year and that's that we are still operating in a dynamic environment and we must be mindful of the need to protect the health and safety of our workforce given all the recent news.
Around supply chain constraints I would also add that we do see component shortages as a headwind in Q4, and we have contemplated those effects in the guidance and I'm about to share.
This is a rapidly evolving situation that we will continue to closely monitor our guidance is therefore based on our current visibility information that was available today.
On those expected impacts to the business. So let me just start with the guidance I'll start with flex agility solutions, which is expected to be up low to high single digits year over year.
Within that lifestyle is expected to be up high single digits to low teens year over year in Q4, reflecting sustained demand for products that support remote work and school.
For the quarter CEC is expected to be up low to mid single digits year over year with critical infrastructure demand balanced by muted enterprise. It spend lastly, consumer devices is expected to be up low single digits as compared to last year.
Turning to our flex reliability solutions segment, we expect revenue to be up low to high single digits year on year.
Fourth quarter automotive revenue.
We'll be up low to mid single digits year on year and again, we're carefully monitoring the potential supply chain disruptions due to the ongoing tightness in the component environment.
Health solutions will be up low double low double digits to mid teens year over year in Q4 with continued growth from new program ramps and then lastly, our industrial business will be up low to mid single digits year over year from strong growth driven by core industrial and power products.
On slide 11, given the some of those outlooks, we would expect our quarterly enterprise revenue to be in the range of 5.6 to 6 billion. Our adjusted operating income is expected to be in the range of 225 million to $265 million.
Interest and other we estimate to be roughly $40 million and we think our tax rate in the quarter should remain in the 10% to 15% guidance range.
Adjusted EPS is in the range of 32 to 38 cents per share based on weighted average shares outstanding of $508 million.
Our adjusted EPS guidance excludes the impact of stock based compensation expense net intangible amortization and restructuring charges that we expect that restructuring charges in Q4 will largely be offset by one time gains.
As a result, we expect GAAP earnings per share in the range of 24 to 30 <unk>.
With that I'll pass it back to remedy.
Yes.
That I remain extremely confident in our strategy and our execution in fact, some of the challenges over the last 12 months showed the increasing value. We can provide to customers production in multiple geographies scale and expertise in managing complex supply chain design and engineering capabilities, all contribute to help our customers build products that.
Make a difference in People's lives.
More and more companies are relying are realizing the advantages of partner and with flex and this value will only increase as we continue to invest in technologies and capabilities to grow in higher value markets.
Lastly on behalf of the entire leadership team I want to thank our customers for their trust and partnership and our shareholders for your continued support with that let's start our Q&A.
In order to ask a question you will need to press star one on your telephone please limit yourself to one question and one follow up your first question comes from the line of Matt Sheerin from Stifel. Your line is open.
Yes. Thanks, Good morning, everyone. My first question.
Just regarding your outlook for for the March quarter, and what she said reflects.
Some conservatism relative to expectation of component constraints is that coming from customers and are you starting to see.
Some rescheduling or orders pushed out because of that or is that more internal in terms of your own outlook.
Matt. Thank you for that question I would say its two fold right we're definitely.
Not seen push out of demand from customers at this time, but we're seeing.
The inability to deliver you know some of them are some components from our side as coming from suppliers and then we're also seeing customers, having other suppliers, having shortages, which really starts to constrain the entire supply chain end to land and we haven't seen any or.
Cancellations from customers, we have only seen shifts I would say, which is a very a highly evolving situation on a day to day basis. So we have done our best to take all that into account, but Matt as you know this is an ever evolving situation every day I've done more CEO calls in the last 20 days.
And then even during the Covid time said really shows kind of day effect that's happening in the industry. So we are being somewhat cautious about it and monitoring it very closely.
Okay. Thank you for that and then just related to that in terms of your own working capital requirements and inventory are customers asking you to start placing some inventory maybe for out quarters, we're starting to hear that from several components suppliers and distributors in terms of very strong book to bill ratios and what does that do to the to the <unk>.
Near term cash flow story for the company.
You know I'd say, one thing that Matt they've learned to do very well even last year was really kind of manage the incoming demand from customers put some intelligence to it to help our customers make decisions and then be somewhat realistic and the demand we put on suppliers you know our.
Last quarter's inventory performance is a good indication of that but you know what you are seeing right now is the so-called bullet. The fact that happens every time when shortages occur in the industry right lead times get moved out people put more orders than they need and it creates an effect that kind of.
Rippled through the entire supply chain. So we are seeing more orders than we think that we should see them and that could be a little bit of inventory going into the system. It's natural to happen in a time like this and we do our best to apply intelligence to that as we accept orders from customers and as we look.
What inventory, we should put it into the system, we have considered those and our working capital metrics that we are thinking about for Q4, yes.
Maybe just comment on the guidance there Matt.
So a little bit of pressure on the topline potentially little per test potential on on the cost lines as logistics and other potential cost headwinds do affect the P&L and then a little bit of conservatism in the cash flow outlook as well because what ray with he just said about the inventory. So I would say sales cost and pellets sheet all or potentially.
Adversely affected here a little bit in Q4, and again, that's all contemplated in the guidance.
Thanks very helpful.
Your next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.
Yes, good morning, and thanks very much for taking the questions maybe to start can pick up on the questions. Matt was asking around our supply chain and you know I think flex is probably one of the companies that's best positioned to speak on this topic given how broad based our overall flex plays in the broader tech.
Macroeconomic landscape.
As you as you're talking to your suppliers and looking at things like shipping and component constraints. You do you currently expect that the peak of the problem is going to be in the calendar first quarter.
This is for Biogen is trying to work to potentially mitigate some of these issues or do you think it potentially if it gets it gets worse beyond the March quarter.
Yeah, Mark this is Ben and written about so much right now in every newspaper you'll pick up I'd say our view, we do have a very broad industry perspective, and we also have you know we buy components across many different diverse industries I'd say first thing is that it.
If a culture of SaaS, because it depends on which component right. So if you're thinking about a chip shortage you know that that takes longer to ramp up right. So some of the projections easier today is that that could be more in the second half of the calendar year. If you think about kind of assembly and test capacity those are easier to read.
Amp up at Mary hearing those would get ramped up more towards the end of calendar Q1 getting into Q2, So I'd say, it really depends on which component and how all those come together I.
I think it's hard to predict so in general what you're hearing from and the industry, which is what I am hearing from suppliers that I'm talking to and I'm talking to many supplier Ceos is that somewhat sometime late.
Q2 is when you see all this coming together in terms of a full recovery, but it's really hard to assess I would say based on what we see today because it's just evolving constantly I think there'll be more clarity in the coming weeks as we get better view into supplier capacity that they're adding in.
Thank you for that that's helpful and my second.
Myself into discussion ex tracker and.
Perhaps flex could update on the size of an ex tracker business in terms of revenue or EBITDA, especially given the upside that the company has been <unk>.
<unk> for perhaps the run rate of an ex tracker business is different than what you described on the last earnings call and then as you're thinking about the strategic alternatives you spoke to today.
Can you talk a little bit more about what the key factors are the flex is considering about how to best maximize shareholder value with that asset.
Any idea about how long it may take to come to a decision on that thank you.
Yeah. Thanks, Mark I'd say, one is I think we're going to stick to what we told you last quarter, because I'm pretty accurate still that revenue will be north of a.
$1 billion and operating margin will be in line with industry peers in terms of double digit operating margin. So I I'd say no updates to that obviously it becomes clearer as we go through the process.
And in terms of how we think about strategic alternatives I think one thing hopefully mark you and all our investors will give us credit for is being disciplined in everything we approach right and we will do the same for this also.
I'd say, we'd go through all the options, we'll see what makes the best sense for flex and our shareholders and long term you know I think are making sure that this is the right decision for our shareholders and flex is important which will lead to cannot you know our decision of how we give back money to shareholders in terms of.
Buybacks are how we invest in M&A, particularly in our reliability segment, where we wanted to clearly move higher up the value chain. You know those will be the decisions, we'll be looking at in terms of how long I'd say you know you can see that we're moving pretty fast last quarter. We talked to you about you know that we're assessing it.
And this quarter, we're already announcing that we're looking at alternatives. So you know there's always a sense of urgency and the things we do but we're also very disciplined so I would say.
You know I'm, not giving any predictions because I don't want to tie myself up to a timeline, but we will move as fast as we can in this process.
Yeah.
Your next question comes from the line of Jim Suva from Citigroup. Your line is open.
Thank you and I have Mike two questions and I'll ask them at the same time. So you can answer them in any order that you want to put.
I'll wait for the whether it be new or your discussions with your senior management and the board has something changed over the past say six months or a book when you entered the company of Flex. We're now doing things like considering unlocking the value of next tracker is a lot more on the payroll and before flex ruling.
From a known for that so has anything changed there or was that just you're bringing in or shareholders or management or you know kind of what really changed because I think a lot of investors look at that value and hidden gem. They also wonder are there other things behind the doors of flex to unlock value and then my second question is on the automotive it seems like you need.
Can you talk about you, having some great success, there, but ultimately the big rebound in all of those are you actually seeing on a run rate go forward.
Okay.
A fair amount of share in autos and is that something that is kind of going to set up for potential new chapter of growth for flex and all of those group. It seems that there's a lot of innovation in the elektron application and electronics and automobile. So I'm just wondering if it's actually more volume share rather than just simply.
A rebound that is happening more near term.
Thanks, Jim bought a very good questions. Let me handle the first one first I'd say you know I don't know I can't comment on history, but I think Jim what I would say for currently I'm you know how the board and I are approaching things is that our first focus was.
All operational <unk> to make sure that they're focused on and being disciplined in how we execute make sure. We're disciplined in how we think about growth and driving good growth, but during that time. You know we also we're thinking about portfolio management right. I think it's very important for any company to be focused on high do you want.
A change of mix over the long term and you know so.
Evaluation of portfolio has been considered over the last kind of as you know one euro to really think about what do we want to be and that you saw the launch of reliability and agility, you'll see us talking about making more investments in reliability moving up the value chain. You know you'll also hear us talking about next tracker you know in looking at all.
Furniture for it so I'd say you know, we're just running the business as any disciplined our board and business a leader should be running the business and I think we're being very pragmatic in our approach so not sure about history, but I'd say all I can say for today is that we're doing what good businesses should do I think.
So if the auto rebound.
Our two things one is Jim is our auto business is.
You know has really grown over the last few years as you have seen.
It is a very strong business for US today, you know we're excited about how fast that business has been coming back in the last two quarters, but obviously there are like most people struggling with shortages. We have gained share I would say in both the electrification in the autonomous space both of which.
Our focus areas for us we want to continue to invest very heavily in our electrification space and we have our own products in our own technology in the electrification space and we want to continue to invest in that.
To make that a bigger part of our portfolio. So we do believe that our share is very strong and has been growing and will continue to invest in that space as we move up the value chain.
Thank you so much for the details it's greatly appreciated.
Thanks, Jim.
Your next question comes from the line of Steven Fox from Fox Advisors. Your line is open.
Thanks, Good morning two.
Two questions if I could excuse me first of all on the operating margin performance I was wondering if you could break down the 60 basis points of year over year improvement a little more.
And I understand the reasons you gave just.
A little bit more math on that and then how what's its implications for you know margin targets. When we look out maybe the next year or two is for six sustainable et cetera, and then secondly, just real quick on the health solutions business, yet you're growing double digit year over year, you mentioned new program momentum is.
Do you see that continuing for a few more quarters or should we think about some of that year over year growth slowing as you ramp some of these big programs. Thank you.
Thanks, Steven I'll have Paul probably take the margin question Yeah sure. So I appreciate the question Stephen So strong margin growth in the quarter, we're very pleased to see.
I'd say a <unk>.
Simple math volume and mix certainly was a was helpful. You know topline growth with strong drop through we did have some productivity in there a couple of small tailwind. We did have a little bit of COVID-19 headwind, we had a little bit of we talked about in the script, a little bit of ramp cost and.
Investments as we continue to ramp on some some pretty strong growth in health solutions, but I would say what I was particularly pleased to see was agility margin growth. You know jewelry was up 130 basis points in the quarter, which is very very strong and you've heard us talk about mix and continuing to focus on mix in and sort of the big picture theme on flex as.
As we look forward over the next few years is continued strong growth and reliability side of the business, which typically has a little bit a little bit better margins, but managing mix is is very much something that we're doing and the agility side of the business as well and so very pleased to see that I think the types of customers and types of business.
We're going out after within that segment.
Starting to see the fruits of our labors, there, which is good and that coupled with strong margin.
From the lifestyles business lifestyles as I mentioned was up 10% year on year in the quarter and so that helped us to mix up there as well so.
Really pleased with the performance you know in short answer would be good mix, good volume dropping through with with some productivity a tailwind as well so very very happy with that performance in terms of health solutions.
That business has had tailwind in our fiscal 'twenty one from some of the critical care demand coming from Covid in the Covid response, and so as we as that starts to roll off over the next couple of quarters, we expect that to be replaced with tailwind from some of these new per.
Program ramp ramps, but as I look forward. The next few quarters I do see a little bit of an air pocket as as Covid comes down hopefully critical care not excuse me critical care hopefully elective comes up and as we ramp into those into those nextgen programs, but.
I would say, we won't be down, but the growth won't be robust in health solutions over the next you know 234 quarters.
The only thing I'd add to that would be to say to the health solutions question is that you know we do have a one time that we're seeing right now from ventilators and Covid demand.
That we expect not to continue but also health solutions is also booked out for you know kind of many years. They have a very healthy booking trend. So our base business is expected to go grow in double digits and we see that continuing at least for the next three to four years and we expect that will continue as we book new businesses.
I think we will just have that one time effect from COVID-19, particularly on ventilators that was a huge demand.
This year that will even out but the base business is projected well to be in the double digit growth in terms of long term margin targets I'll, just say Steve that.
You know our strategy is paying out right. We said that we'll focus on the right kind of growth manage our mix and you know we have they are focused on developing these dedicated delivery models for agility and reliability business, which really focuses on productivity and efficiency last year in Investor Day, I told you our app.
Operations for operating margin was mid single digits and now you can reach your own conclusions in terms of whether we're headed in that direction or not but I feel like the strategy is working.
And and our margin targets long term that we gave you is sustainable.
Great I appreciate all that color yeah. Thank you very much that's very helpful.
Your next question comes from the line of Adam Tindle from Raymond James Your line is open.
Okay. Thanks, Good morning, right with you I just you know in light of the potential next tracker monetization wanted to ask a high level question on your view of M&A in the industry. It's been pursued in the past. Our success has been somewhat mixed selected <unk> comes to mind for example, but the industry has evolved and just wondering if you could maybe update.
Your view on why or why not M&A makes sense in this industry with your fresh look at it.
Yeah. Thanks, Adam I would say that I know you know my personal view and of course, everybody has their own views on this is that the this space doesn't need any new capacity. So we're not looking for a consolidation in the space you know I think our base.
Ganic business, we will just look at productivity efficiency right mix in terms of M&A, we're clearly looking for higher value, both technology and product M&A in the reliability space, which is health solutions electrification and automotive and power and industrial.
L.
So that's the part that will be thinking about so our M&A strategy will be clearly focused on moving up the value chain with products and technology in D. C spaces and that's how we are going to think about M&A moving forward at them.
Okay, and just to clarify are there any dis synergies that investors should think about associated with next tracker strategic alternatives.
Paul Yeah, but they would be small.
Okay and Paul on the topic of costs I wanted to ask you you're already at the low end of the SG&A targets.
It sounds like you still have some of the $100 million on the come you're still incurring some COVID-19 costs I'm wondering if you could maybe help quantify those two buckets and how much incremental of the 100 million is still to come how much COVID-19 cost is still embedded in kind of your view of you know the right SG&A metric can you stay at 3% does it get below.
3%.
Just some color around that would be helpful. Thank you.
Happy to do it so I don't think you're going to see much better than 3% I think 3% is best in class in the industry and in a world where we're for.
For the most part tapped out there can you still get some productivity as as you hold SG&A costs, essentially flat with a little bit of top line growth you know, maybe but boy, it's certainly going to be on the margin and I don't see that going below three in.
In terms of restructuring that look we've got 120 facilities around the world. The operating three different countries. There's there's always room to do more in terms of productivity and we'll continue to watch that noise as we move forward. Your question on restructuring is a good one you know look were restructuring costs than what we had committed before was.
About 100 million, we did 35 million in Q2, we did note a $3 million or so in Q3.
I'm thinking it'll be $20 million to $30 million or so in Q4, which puts us right at that 100 million or so.
Hum.
Just one one point I want to make is as we cut had mentioned this in the script what I am expecting in Q4 on restructuring spend though is probably some offset from gains so net net restructuring you'll be a net.
Net of gains restructuring probably closer to zero.
But we're going to focus on factory productivity I do think there's more to do there is as I've mentioned before and will continue to work on that as a as we move forward over the next couple of years.
Very helpful. Thanks, and congrats on the results.
Thank you.
Adam.
Our next question comes from the line of Shannon Cross from Cross Research. Your line is open.
Thank you very much maybe sort of a follow up to Steve's question I was wondering.
From some of the sort of across supply chain and then certainly attack that there may be a bit of over earning right now in terms of sort of across the entire supply chain because things are so tight I'm. Just you know maybe the end customers aren't pushing back on pricing what sort of trickles, all the way down and I'm curious if if you.
We're thinking about that or if maybe the incremental COVID-19 costs are offsetting and so you know when we get past. This challenge that everybody then everything will sort of equal out and you know we'll continue this progression.
From an operating margin perspective, but I'm just curious if your thoughts as you talk to some of your customers in that if if maybe there's just a bit more room in the margin. These days because again things are so tight.
So yeah.
This is Paul I wouldn't say over earning right now I mean to your point you know we continue to have headwinds from COVID-19 costs and that stuff that we didn't have in our comps a year ago.
You look at where we are here in Q3, and what I expect to see as we're coming into Q4, we're probably still talking 10, or so million of of Covid related costs and in terms of the logistics.
We certainly don't feel like we have pricing power on that sort of thing right. Now I mean, it's it's costs that are kind of being pass through us in and under the ultimate Oems and so we're certainly not a beneficiary of that if anything I would say it's the opposite.
As Ray with you kind of highlighted.
You know what what have we contemplated in our guidance, we talked about sales that I talked about the balance sheet side on the cost side, there's a number of elements as as you look at the full chain logistics challenges that we have here that are manifesting themselves in things like even oversee containers are are constrained you were looking at.
40 foot container pricing changes you know used to be 2500 Bucks a container and now it's 6500 and as you know we we use three to 4000 containers a quarter and so you can do the math on an annual basis that could be 50 60 million. So that's big.
So again I wouldn't say over earning I would say if anything there's there's short term cost headwind that we hope to be able to pass through you know down the road, but.
But but those are my thoughts Ray with you maybe for Shannon I'd agree I'd say Hum you know I wish over earning but definitely not I'd say our customers are very disciplined in our suppliers are very disciplined. So you do see these things kind of fruit flow through the value chain like Paul mentioned logistics costs are high.
And then lot of chasing rate supply and expediting supply shortages I'd say, our I'd say margin improvement comes from our strategy, which is better mix.
And delivering volume with better productivity I'd say those are the major things I think these puts and takes how we manage that in a disciplined way is how we'll see it pass through the P&L, but yeah Shannon really good question.
Thank you and I guess, yes.
That's all for future years.
My second question is just in terms of enterprise spend we continue to hear for it in the supply chain things remain very weak talk to some of the the end companies and and they're seeing at least some stability.
On some hope I'm curious did you see any improvement earlier in the fourth quarter and then we went back into shut down or has the linearity for enterprise Ben been pretty weak throughout the whole quarter and then you know what do you think the key drivers will be to restart that thank you.
Maybe just you know.
On the topline as we had mentioned in the script enterprise was down a little bit year on year, and we're expecting that to continue as we move into Q4, It's just I think it's it's tough because.
It's just a little too early to call, but we really don't see people coming back into the office you know right now and I I I I.
I had kind of jokingly said a quarter ago I don't see a whole lot of CFO is wanting to invest in an enterprise spending right now given the continued uncertainty and the fact that people just just they're not back in the office right now.
So.
We're upbeat on the future and and I'm, hoping that what we see here is some pent up demand and a bit of a snap back as we move forward into the.
Our fiscal 'twenty, two and maybe the back half of the calendar 'twenty, one, but a bit of a TBD.
Thank you Shannon.
Yeah.
Your next question comes from the line of Paul Coster from JP Morgan Your line is open.
Yeah. Thanks, very much for taking my question just a quick follow up on strategy. I mean, you have this amazing platform that.
You can make available to our customers of course to go global and scale up.
Now clearly had a great success with your own brand through that same platform and in this case next tracker I'm. Just wondering you know is it does this sort of feed the strategy a bit and is it does it make sense for you to start to nurture our.
Brand initiatives that are not competing with your customers, but that can then subsequently be essentially spun out in the manner that you know may.
Next tracker will be.
Yeah, Paul I'd say that.
The way I think about our portfolio is that a.
And I've said this before in our Investor day call as I see each afar or our business units, which next tracker as part of our industrial business unit to be able to stand alone independently in terms of their performance to the available market. They.
They should be growing share they should be delivering that that share in that volume in a productive and efficient way and that's kind of how I see each of our independent business.
Business units perform I'd say in terms of does this become a strategy to take our individual brands and scale it up.
And then decide how to monetize it I'd say I don't see it like that I see it as each of first that each of our business units needs to perform.
And then as they add value to the overall flex that helps our multiple and our shareholders and that's how we think about strategy. So I'd say no comprehensive change to that strategy.
And then quick follow up.
A administration and in D C.
Priorities changing in infrastructure and global trade made change in some ways any any thoughts on how that affects flex.
Yeah, I would say that.
You know our personal hope is one is from yeah, you know from a sustainability and climate change perspective.
We'd be very supportive of the measures that the Biden administration would be bringing true which helps our business like next tracker I'd say in terms of trade I think me personally like most Ceos want to see a trade policy.
Clearly with China, that's less aggressive and we continue to support some of the things that the Trump administration started with regard to trade policy with China, you know like focus on IP and security, but we also think there is a better way to handle this moving forward that is.
You know helpful for all industries, we do think that the focus on onshoring and bringing businesses back to individual countries that trend will continue and flex is very well positioned to help that.
And with our customers because you know we have great manufacturing capabilities in almost every country in the world until we're hopeful for you know continued building on some of the themes that the last administration worked on them, but in a way that's more mutually acceptable and more positive for our industry in general.
Excellent. Thank you very much.
Thanks, Paul.
And your final question comes from the line of group led by the carrier from Bank of America. Your line is open.
Thanks for taking my questions.
On the industrial side can you give us a sense for the relative growth rates of the different end markets. So you know you have renewables you have industrial devices capital equipment and power systems, just on a relative basis, which one is growing faster and which one is growing slower.
Sure Group list. So you think about Q3, specifically I think we had mentioned earlier that there was a little bit of headwind on the renewable side due to safe Harbor and then it was the.
Tax policy favorable to that that industry that created some accelerated buying in in the calendar Q4 of last year, So a little bit of a tough comp on that one did give us some headwind in that renewable side of the business I would say in the in the double digit range.
You know power, we had mentioned before we did have a customer specific headwind, but what core was up you know up mid single digits and and our I would say pretty strong performance in <unk>.
As we look ahead, and maybe give you a little bit of thoughts on on Q4, I think power will be flattish I think the renewable side are flattish.
With a strong growth in core you know high single digit blood.
But all three sub segments on a year over year basis will have growth.
It's pretty incredible considering this is a COVID-19 here right. So for a full year fiscal year 'twenty. One all three segments will have positive growth.
Okay, Yeah that makes sense.
That's helpful.
Just for the follow on question reliability solutions margins.
Declined 50 basis points sequentially on higher revenues.
Prepared remarks, you talked about automotive product transitions.
You see the situation improving in the fourth quarter or do you think that you're still going to have headwinds and should we think about.
One two per cent is not bad in terms of margins, but it's lower than the high sixes that you've had in the past. So I mean any thoughts on whether this is.
For more long term headwind or is this transitional. Thanks, yeah. So so long term I would say no.
Maybe answer the tactical question real quick on the automotive side, you know look that's that's going to be a watch item.
As we continue to see how this this component component shortage drama plays out over the next couple of quarters.
So, we'll we'll watch that carefully.
In terms of the you know in Q3, the little bit of a margin headwind as you had mentioned we did have some headwinds one on the automotive side is as I mentioned, one unhealth solutions sides and also as I mentioned both of those were next Gen contract related and if you think about the automotive side of the business, we had a little bit.
Or a supply a blip I don't see that repeating but we were transitioning some some products and then what could happen on the health solutions side, we're investing pretty heavily right now in and what I think is a substantial ramp.
On new products that and that investment was a bit of a drag in the quarter, but you know that's the those are the that's high quality and from hesitant with with an expected ramp over the next few years in the health solutions business.
As we move into 'twenty 'twenty, two I think that that growing health solutions business.
That the new product growth offsets a little bit of the air pocket that I had mentioned on on some of the Covid related health care.
Spending, but you look to 'twenty, three and beyond our health solutions business is going to grow nicely.
And again, we agree with the has has been saying over the last several quarters. We loved the profile of that business. You know, we like the margin profile and I think as we continue to invest in and grow that business over the next few years, you'll you'll continue to see mix up at the at the overall flex level.
And then Ruth for the only thing I'd add to that is that you.
You know as we have room to make these investments and business ramps and prior transitions you know we wanted to continue to invest in reliability and like you said, it's still a great margin profile, but.
But when he has room to invest its going to get an unfair unfair share of kind of funding from the business to be able to support that because it sets us up well in the long term. So it's a very passive plan for way of how we're executing in that business.
Yeah that makes sense and thanks for all the details appreciate it.
Okay. Thanks for Blu Blu.
And there are no further questions at this time.
Okay, Great Hey, Thank you for joining us today, and very excited and confident in the future for flex them as you can see from the great performance, we delivered in Q3 and our guidance for Q4 I.
I do wish that all of you remain safe and in good health and I look forward to speaking to you again next quarter. Thank you everyone.
Ladies and gentlemen, this concludes the flex third quarter fiscal year 2021 earnings conference call. Thank you for participating you may now disconnect.
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