Q4 2021 Flex Ltd Earnings Call
Okay.
Good afternoon, and welcome to the flex fourth 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.
And I would like to turn the call over to Mr. David Rubin Flex Vice President of Investor Relations, Sir you may begin.
Thank you Denise good morning, and welcome to flex as fourth quarter of fiscal 'twenty 'twenty. One earnings conference call with me today is our Chief Executive Officer Ray with the advice and our Chief Financial Officer, Paul Lundstrom, Both will give brief remarks, followed by Q&A.
Call is being webcast and recorded and if you have not already received and slides for today's presentation are available 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. So actual events and results could differ materially.
Also such information and subject to change and we undertake no obligation to update these forward looking statements for a full discussion of day risks and uncertainties. Please see our most recent filings with the SEC. This call references non-GAAP financial measures for the current period. The GAAP reconciliations can be found in the appendix slides of today's presentation is <unk>.
Well as on the Investor Relations section of our website.
Lastly, a word on our flex next tracker business on April 28, we announced that we confidentially submitted a draft registration statement on form S. One with the U S Securities and Exchange Commission relating to the proposed initial public offering of its class a common stock the initial public offering and it's time and they are subject to market and other conditions and S.
She sees review process, we made this announcement and corns with rule 135 on the Securities Act.
See regulations, we will not make any further statements or answer additional questions on the next tracker filing at this time with that I'd like to turn the call over to our CEO remedy.
David Good morning, and thank you for joining us today for our Q4 earnings call I Hope you and your families are all safe and healthy.
Before we discuss our results I want to start by thanking our flex colleagues for their incredible dedication and contributions and getting us to a very unusual year.
So let's talk about business.
Two other last fiscal year flex pools that it was able to deal with a global health and humanitarian crisis, we continued to adapt and improve first and ramping our health and safety levels to protect workers, enabling work from home orders and most recently deal with the global component shortages and logistical disruptions.
Flex is people processes and systems have proven to be very resilient and the entire flex team has done an amazing job and overcoming these unusual obstacles and supporting our customers.
Our procurement and supply chain teams, especially have made it truly herculean effort to attract on every component and every shipping container to keep our factories running and supporting our customers.
Now, let's turn to slide three to review some of our key financial highlights from the quarter.
Our revenue was $6 $3 billion down six 8% sequentially better than typical seasonality and up 14% year over year.
Our adjusted operating margin came in at a record 4.9% there.
This figure includes the absorption of costs related to the challenge and components supply and logistics and logistics environment.
Our adjusted EPS was <unk> 49 cents up from 28 cents and Q4 of last year.
This is the third quarter and a row of record EPS.
Adjusted free cash flow came in at 135 million.
Now for our fiscal 'twenty one results. Please turn to slide four our full year revenue was 24 point and 1 billion essentially flat year over year. Despite all the challenges. This year, we achieved a record full year adjusted operating margin of four 3%, a 60 basis point improvement.
And what year.
Our adjusted EPS for the year was $1 57, a 28% year over year improvement and two this year, we generated adjusted free cash flow of $677 million.
Now moving on to the next slide.
A year, though and we laid out our strategy for a multi year transformation over that time, we have overcome significant challenges.
Well, it's still it's still too early to sound the all clear, particularly regarding the global component constrained situation and continued pandemic.
We think these are transitory challenges and there is much to be excited about the future.
And we made tremendous progress on our long term strategy redefining our end market focus continuing to improve our mix, improving our operational execution and cultivating and inclusive high performing culture.
All of this we delivered record results improve it improve their quality of earnings and strengthened our cash position.
Redefining our end market focus, particularly since we have large and markets has helped us focus to win and areas, but our combined capability of technology commercial excellence and operational execution gets rewarded by customers.
And we said and before we will combine this with continued investment and certain technologies and products using the strength of our balance sheet.
This combination allows us to specialize and expand and targeted submarkets that have significant long term secular drivers.
The leverage and scale of this combination along with the flex delivery model creates lasting competitive advantage that will only strengthen overtime.
We are seeing the early fruits from this strategic shift.
Our work has already led to success is manifesting and both program expansions with current customers as well as wins with new customers.
These successes continued its strength and customer trust and expand our experience and portfolio of offerings, creating a virtuous cycle.
And I'm, a little bit detail on our segments and our health solutions business, we talked about focusing on medical equipment devices and next generation drug delivery earlier.
Earlier this year customers came to us with a challenging and dire requests we quickly ramped multiple ventilator programs and one of the fastest large scale medical device ramps and history. While this was a temporary project demonstrated high versatility and ability to operate at scale and speed.
And global supply chains, where and chaos and our customers needed us and lives were at stake we delivered and our improved model allowed us to do so and a fiscally responsible way.
I would also point to our global leadership and chronic care and related medical devices, where we have executed on multiyear truly Pat paradigm shifting medical device manufacturing program. This success shows the market begin manufacturer of highly complex essential products at scale and I'm very proud to say our previous successes.
Led to significant new long term program buttons, and the chronic care related space that we have begun to ramp.
Now automotive is a sector that is going through significant transformation, the steady shift to electrification and inevitable move towards autonomy means increased complexity and new modes for value creation.
And we're focused on where the market is going with our emphasis on autonomous connectivity electrification and smart systems.
What we refer to as our Acis focus and that has paid off with wins this year and all four of these business pillars.
This quarter alone, we ramped several new programs and auto connectivity.
In fact strong execution by our automotive team supported by our exceptional supply chain and logistics teams delivered above market results in both our Q4 and the calendar year based on the IHS data.
In automotive, we highly value our long term customer partnerships and look forward to deepening these relationships as we enable their technology transformations.
We're also broadening our partnerships with new industry players because of our leading edge capabilities. One. Recent example of this was the announcement of our partnership with sexual supplying their L. Three autonomy driving controller for trucks.
Oh for production by the end of 2021.
You May also recall, our collaboration that letter tech focused on supporting their automotive front lidar solution and open sensing platform as well as our collaboration with EV manufacturer Neo the latter resulted in and innovation partner Pace Award in 2019.
Actually on that note I also want to offer a big congratulations to the automotive team as they were recently named a finalist for this year's pace award for not just one but two product innovations and <unk>.
One on the electric vehicle space and another and the autonomous driving space.
And our industrial business, we focused on industrial devices on capital equipment power systems renewables and grid edge, we continue to increase our business and these sub segments, but our focus on specific areas has led to wins and new verticals such as next generation robotics and we're ramping this year.
Yeah.
In our agility segment, you will recall, we previously discussed our two pronged strategy for driving productivity and cost discipline as well as wins and key growth markets with long term secular drivers such as five G cloud and increasingly complex consumer durable products, where we think flex can provide differentiated.
<unk> to our customers.
The teams have made exceptional progress on all of these goals and as you can see it and our results as evidenced in the growth and lifestyle and C. C as well as the very strong margin improvement from the entire segment I'm very proud of the agility agility teams work here.
So the key takeaway here is that that our strategy of having defined and focused and market segments is working well.
While our end markets are large we have picked the sub segments, we want and women and are investing to improve our share and those areas.
Our eyes on the demand environment to which looks positive and both the near term and the longer term.
There are some near term challenges, but we're experts at navigating uncertain Nikki and we'll control the things. We can the teams are all executing very well and this was another strong quarter showing the potential of our company as we continue down our transformation path.
Now turning to the next slide I want to cover one more thing before I turn the call over to Paul last quarter, I mentioned and I talk more about our ongoing ESG efforts I want to point out our U S. She felt because it's certainly nothing new for flex and we had been at this for nearly 20 years. These years of effort and accomplishments I reflected and our.
Improved performance and our Dow Jones sustainability index scores and being included and the S. M. P sustainability yearbook for the second year in a row.
Yeah.
What we have done moving forward and it's just set out even more ambitious goals across all aspects of ESG for 2030 Bill.
Building on a broad foundation that we have set.
And the spirit of consistently raising the bar flex was recently accepted into the very rigorous science based targets initiative. We're excited to join this ambitious global effort to drive meaningful reductions in greenhouse gas emissions across the value chain.
I encourage you all to visit flex dot com to see our 2030, environmental social and governance goals and looks for look for our new sustainability report in June to see the details of our full sustainability efforts and results as well as our upcoming 10-K and proxy statement for the additional progress and commitments to human capital <unk>.
<unk> and of course inclusion and diversity.
With that I'll turn the call over to Paul Who'll walk you through our results in more detail and then I'll share some closing remarks Paul.
Okay. Thank you Rey Betsy and good morning, everyone I'm on slide eight.
Flex revenue was $6 3 billion and a quarter, which was up 14% year over year and down 7% sequentially better than our typical Q3 to Q4 seasonality.
Adjusted operating income was up 50% year on year to $310 million with a 110 basis points of margin expansion.
Growth was bolstered by improved year over year volume.
Better mix and continued productivity gains.
We did have some headwinds in the quarter, namely the continued cost pressure from COVID-19, as well as some incremental costs associated with ongoing challenges and the supply chain.
As a result, our adjusted net income was 248 million with adjusted earnings per share of 49 cents year.
Year on year, those were up 73, and 75% respectively.
Reconciling to GAAP fourth quarter GAAP net income of $240 million was 8 million lower than our adjusted net income due to $18 million of stock based compensation and $13 million and net intangible amortization, partially offset by a net credit and restructuring and other costs.
Restructuring charges were $26 million. However, we had a gain from a facility exit and a favorable adjustment on the tax line, which more than offset restructuring costs and the quarter.
Global restructuring costs for the year were $101 million, but again as I mentioned with some nice offsets from other items.
On slide nine.
Our fourth quarter adjusted gross profit was $505 million up 113 million year over year Star.
Strong discipline and operating performance drove one full percentage point of adjusted gross margin expansion to a record 8.1% in the quarter.
In total adjusted SG&A spending came in at $195 million up 10 million from a year ago, but at 3.1% of sales down year on year and inside our targeted range of 3% to 3.2%.
So for the quarter adjusted operating income of 310 million led to a record 4.9% adjusted op margin rate.
Turning to slide 10.
We saw top line strength, and both reliability and agility in the quarter with year on year growth and both and with the typical seasonal Q3 to Q4 contraction and better than we anticipated.
Flex reliability revenue was 2.8 billion and the quarter down, 2% sequentially and up 11% compared to a year ago.
Q4 performance for all three business units within reliability were up automotive revenue was up 20% year on year with strong execution against the industries continued global recovery as.
And as well as several new program ramps.
This was the strongest top line quarter in three years for the automotive business and a pleasant surprise given the global parts shortages and the industry continues to struggle with Cree.
Credit to the flex supply chain organization for very solid execution through a difficult period.
Health solutions revenue was up 25% year over year this quarter Chris.
Critical care continued to operate at heightened levels due to persistent COVID-19 challenges. However, we also saw the beginnings of a return to normalcy in areas such as elective procedures, we continue to progress with our ramps and chronic care related products and our long term outlook remains strong.
Lastly, industrial returned to growth this quarter with revenue up low single digits compared to prior year.
Core industrial improvements remains steady and our prior customer specific headwind and power is behind US renewables was down on the quarter with difficult year on year comps related to ITC Safe Harbor.
Turning to profitability flex reliability solutions generated a $190 million of adjusted operating profit and a 6.7% adjusted operating margin, which was up 20 basis points year on year due to tailwind from continued improvements and productivity and mix are tempered slightly by new product ramps and health.
[noise] solutions.
Moving to agility, both revenue and profit were up sharply from the prior year with sales growth across all three business units.
Segment revenue of 3.4 billion was up 17% year over year and down just 10% quarter over quarter.
CEC was up 11% year over year led by continued strength and cloud infrastructure.
Five G rollouts and enterprise it spending showing improvement as well.
Lifestyle was up 22% year over year with a new business ramps and continued demand strength for high and durable goods with premium brands and audio floor care and appliance and markets.
Lastly, conservative biases benefited from continued recovery and consumer spending and grew 24% year over year, albeit on an easier compare.
Turning to profitability the agility segment generated $136 million of adjusted operating profit and a 4% adjusted operating margin for the second consecutive quarter. This margin expansion was driven by new business wins at accretive margins tailwind from productivity programs and continued.
Cost management from our agility operating model.
Turning to slide 11, we wanted to look back on 2020, one and share with you some supplemental business unit disclosure.
So for the year total flex revenue ended flat in spite of the many challenges.
You can also see that our segment mix continues to shift towards our higher margin reliability segment.
Our reliability segment revenue grew around 5% year on year, driven by strong growth and health solutions, which grew 25% year on year to two and a half billion based on strong critical care demand.
Rapid ventilator project ramps earlier in the year as well as continued growth and chronic care on.
Automotive revenue was down 7% year on year to two and a half billion with substantial disruptions for me and industries production shutdowns and the June quarter of last year.
Lastly, industrial revenue grew 3% year on year to 5.6 billion that industrial number I'll add includes about 1.2 billion and revenue for the next tracker business at around a 15% EBITDA margin net.
Ex tracker grew about 2% last year on a tough comp.
And from ITC Safe Harbor.
This will be the full extent of our commentary on next tracker for now.
For agility due in part to COVID-19 related impacts in the first half of the fiscal year. Our agility segment revenue declined 4% year over year to 13.5 billion, but returned to revenue growth and margin expansion and the second half for the year of 25% decline in consumer debt.
Devices was driven by a combination of strategic disengagement as we've discussed before.
As well as the COVID-19 impact.
This was partially offset by growth and C E C and lifestyle CEC revenue grew 2% year over year, driven by cloud and infrastructure spent infrastructure spending.
Lifestyle was up 5% year over year due to strong bookings with new customers and continued market strength driven by work learn and live from home trends.
Turning to slide 12 for the quarter adjusted free cash flow of 135 million was up slightly compared to the prior year.
All things considered adjusted free cash flow for the year was strong at $677 million.
If you recall, we spoke before about targeting 80% or greater free cash flow conversion on an adjusted basis for the <unk> 2021 year, we finished at 85%.
And adjusted free cash flow to GAAP net income was 110%. So all things considered I would say strong conversion and high quality of earnings for the year, particularly given the component shortages were seeing and the industry.
Looking ahead to 2020 two on.
Although I'll say, it's a little early to call. We expect adjusted free cash flow on a dollar basis to be roughly in line with 2021.
Back to Q4, we closed Q4 with inventory of 3.9 billion, which was up 5% sequentially and 3% year over year, resulting inventory turns of 6.1 times.
Down from 6.8 turns last quarter, but up from five and a half year ago.
We continue to see component shortages and the supply chain and although it was manageable and Q4, we do expect continued working capital pressure over at least the next couple of quarters.
Our net capex for the quarter totaled 31 million, which was light in the quarter due to cash inflow from a building sale as part of our facility exit proof proceeds from that sale were about $60 million and drove the gain I mentioned, just a couple of minutes ago.
For the year Capex was lower than usual driven by some delays created by COVID-19, and also the natural ebb and flow of large projects.
But looking forward to our fiscal year 2020 two.
We have a number of high priority investments lined up for the business and do expect to grow Capex. This upcoming year capex of roughly 2% of sales is a reasonable expectation and as we've said before we remain committed to responsibly invest and our strategic growth plans by increasing our technology and <unk>.
Abilities, and the higher value and markets as rybicki as outlined.
One last comment on cash share repurchase remains an important consideration and our capital allocation strategy and we did step up our buyback program in the back half of the year, our spending was 146 million and the quarter, which bought back 8.1 million shares.
Onto guidance on slide 13, we see two notable potential headwinds moving forward, namely component shortages and persistent waves of COVID-19 that said all our fundamental demand indicators remain strong. So we'll continue to monitor the risks and adjust as necessary.
As you've seen us do before.
Starting with flex agility solutions, we expect fiscal Q1 to be up low to high teens year over year on continued improvements, but also against an easier comp.
Lifestyle is expected to grow 30% to 40% year over year in Q1.
C E C should be up low to mid single digits year over year for the quarter.
And with continued cloud and five G demand along with improved enterprise it spending.
Lastly, consumer devices is expected to be up 25% to 35% year over year in Q1 on an easy compare.
We expect consumer devices to be one of those end markets most sensitive to industry component constraints.
Turning to our flex reliability solutions segment, we expect revenue to be up 15% to 25% year over year.
First quarter automotive revenue will nearly double year over year as this comps against last year's global auto production shutdowns.
Health solutions will be flat to up mid single digits year over year against a very difficult comp reflecting continued strong demand.
Lastly, our industrial business will be up mid to high single digits year over year from steady improvements and an easier compare.
Onto slide 14.
Overall, we expect flex Q1 revenue to be and the range of 5.9 to 6.3 billion our adjusted.
<unk> operating income is expected to be and the range of $240 million to $280 million.
Interest and other should be roughly $40 million and we expect our tax rate and the quarter to remain at the higher and of our 10% to 15% guidance range.
Adjusted EPS guidance is and the range of 34 to 40 cents per share based on weighted average shares outstanding of about 507 million, our adjusted EPS guidance excludes the impact of stock based compensation expense and net intangible amortization.
As a result, we expect GAAP earnings per share and the range of 26 to 32 cents per share with that let me turn it back over to Ray with you.
Paul So now turning to slide 15, and we'd like to give some guidance for fiscal 'twenty. Two. Please know we're doing this with some uncertainty and the market data component constraints and some countries still battling COVID-19.
Based on our current visibility we believe these uncertainties are baked into our guidance our fiscal 'twenty two revenue will be somewhere between 25 billion and $26 billion and around a four 4% to four 6% adjusted operating margin and full year adjusted EPS will be in the dollar 60 to $1 75.
Per share with GAAP, EPS and a range of $1 $32 45 per share.
And our Investor day, just a year ago, we gave our long term financial framework also on this slide.
Even with COVID-19 and the portfolio shifts, we're making we believe our performance this year.
And our guidance keeps us on track to reiterate our targets of.
Of course these targets assume no further investments using our strong balance sheet beyond what we were planning at that time.
So summarizing all of this and the last slide.
I have to say I'm proud that we have validated and that and executed our strategy well and a difficult year.
Our results clearly demonstrate the path. We're taking is correct and we'll continue to execute with discipline and invest to maximize value and deliver profitable growth.
So on behalf of the entire leadership team I want to thank our customers for your trust and partnership and our shareholders for your continued support.
And that will start our Q&A.
And ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad to withdraw your question press the pound key.
Ask that analysts limit themselves to questions and then rejoin the queue for any additional question. Your first question comes from Shannon Cross with Cross Research. Your line is open.
Thank you very much I had a question on I T spend just got off the CDW call and.
And we're talking to some of the other Oems It seems as if data center should start to improve and second half.
And obviously, you've got some five G benefit and there as well.
How are you thinking about where where enterprises are at and the.
Entity for spend and then my second question is.
With regard to stimulus how should we think about the opportunity for stimulus to run through your model as we look to 'twenty two and beyond.
And given all of the dollars debt that will be out there fairly soon and thank you.
Yeah sure. So thanks, Shannon and and good morning, So first on our enterprise enterprise spending as you heard us point out CEC was up 11% and the quarters. So that was nice to see I'll say that.
A large portion of that growth came more from the comms side and and from cloud enterprise spending was up which is great but up mid single digit as I. You know you kind of look at that I'd kind of joked accorded to back about C. C F OS and not wanting to spend a whole lot on enterprise with everybody is still working from home, but I guess are more.
Our macro view would be that will pick up as we move forward over the next several quarters and and so I would say I'm bullish on the space, albeit maybe only seeing green shoots now at that that mid single digit up is as I just mentioned in terms of stimulus spending you know look.
And the rise rising tides lift all boats and and you know, we're certainly hopeful that we'll see some of that but I don't see a direct correlation at at this point and time.
Okay. Thank you.
Absolutely.
Your next question comes from Paul Coster with J P. Morgan Your line is open.
Yeah. Thank you for taking my question on people are curious as to the kind of role you believe you will play in the auto vertical.
That's a cool moving forward Red Bell and is it that you will and this would.
B, a sub component and <unk>.
And there's a M S complete to the to the sort of you know deep inside the supply chain would you actually expect to be an OEM and a direct OEM supplier moving forward.
Yeah. Thanks, Paul the way I'd answer that if you think about our auto business.
And even today, Paul I'd say, a part of our auto business does kind of pure contract manufacturing are part of our auto business and does joined design and manufacturing, which is a pretty important part of our offering and then the part of our auto business does our own design as you can.
And he is here from the pace awards that we're winning and high last year and this year. So I'd say, we're already quite a mix in terms of the automotive business itself and how I see there is change going on and the auto space. As you. All are there in terms of all the tiers of manufacturing with increase.
So electronics content, both in electric vehicles and autonomous it gives us the opportunity to play a more significant role in our own designs and joined design and until we think that will continue to move up the value chain and the auto sector, particularly ramping up.
Our presence in the EV space, we already have a very strong presence and the autonomous space and we'll do that.
By being more of a component player in or to the automakers directly and AR, but we'll continue to support them and any E. M. S. Ah projects that we already do so it will be a makes and they will be trending towards morph and E V autonomy.
More our own product technology focus.
Great and if you were to sort of look at the pipeline of opportunity. There is it really with traditional Oems or with the new you know the.
And it's been a proliferation of new logos recently.
Well, it's definitely with boat and Paul because it's hard to you know being the auto space and not to do with some of the newer players that you're hearing and seeing we just recently also announced a win with one of the newer players. So you're definitely seeing a mix of boat and you know one of our pizza.
Award winners are on route nominees. This year is for a project that we're doing and chine now with more and more of our newer and automotive players. So it's a mix we think it's important to participate in the traditional and and the new space.
And so and thank you so much.
Thanks, Paul.
Your next question comes from Steven Fox with Fox Advisors. Your line is open.
Thanks, Good morning, and thanks for all the color with the guidance.
Two questions if I could first of all just big picture right with the human Paul both used words quality of earnings.
A couple of times during your prepared remarks, and obviously, there's things you can point to for this year as you think about maybe improving quality of earnings next year, what would sort of be the input focus there and what would what would you say we would look at as key metrics too.
I'm, saying that Theres, a high quality of earnings in fiscal 'twenty two.
And maybe I'll stop there and then I'll ask my follow up.
Sure, maybe I'll I'll take a stab at that one and maybe just a broad broad indictment on the industry over the last decade, and I think you know people, who historically sort of talked about you know E. B B S. As earnings before bad stuff and I don't love all the adjustments debt that I think the industry is sort of you know tossed into the P&L and cash.
On the the economic reality is whether it's a whether it's non-GAAP earnings GAAP earnings eventually all those adjustments ripple through cash and you know it hasn't even on economic effect on the company and so we're going to push really hard to be extremely sensitive to that and and and print high quality earnings quarter after quarter after quarter and you saw.
Over the last couple of quarters with restructuring costs you know.
Fortunately offset by some one time gains maybe a comment on on the restructuring outlook you heard us give guidance here for 2020 two we didn't make any comments on restructuring and what were non gapping out is is stock comp and intangibles.
Our hope would be that as restructuring projects arise, perhaps there's there's you know onetime offsets so it doesn't and sort of muddy the waters. So much that said, we're going to continue to focus on this multi year margin expansion journey that we're on here and and that includes some investments and and restructuring so as U S.
And the opportunities arise for high return restructuring and we're certain we're certainly not going to hesitate.
Great and then just as a follow up can you sort of talk to the Q1 guidance on its flat to down off of what was a very big beat and the Q4 and pretty broad.
Set of good demand drivers why why is it why wouldn't it be growing quarter over quarter. Thanks.
Yep. So sequentially, we are off a little bit of as you pointed out I would say Q4 was particularly strong I think you had some pent up demand and there and and you know really really strong Q4, and one of the benefits that we saw on Q4 was favorable mix you saw that.
You certainly saw that within <unk>.
<unk> segment excuse me with with some really nice mix within that business unit and and you know strong strong margin growth as we move from Q4 to Q1.
Yeah look there's.
And mixes kind of going to go the other way and I would say the combination of of some adverse mix. You know just if you. If you look at the midpoint of our of our guidance Stephen.
On the reliability business is down about 5% and your jewelry business is flattish and so that gives us a little bit of mix headwind I'll also say, we do have some headwinds.
Profit headwinds moving from Q4 to Q1 from all the challenges that we're seeing and the supply chain.
And the component shortages are requiring us to spend incremental dollars that debt in a ripple through profit Unfortunately for things like expediting fees, and freight and logistics costs and and all the inefficiencies and stops and starts. So we are seeing a little bit of additional cost pressure as we move into Q1 versus the Q4 call.
And that's the most important takeaway there and Stephen is that seasonality always drives kind of a 1% down for us.
Quarter over quarter right and.
And you know I think it's a prudent outlook and based on just including shortages and managing COVID-19 and certain countries.
But year over year, it's still a very very strong performance, even though it's on easier comps.
And we think that it's a it's a boon outlets tastes seasonality and shortages into account.
For the guidance.
Great. That's all very helpful. Thank you.
Thanks, Steven and Steven.
Your next question comes from.
And with Bank of America. Your line is open.
And I've got two questions as well.
Just to follow up on the on the prior question on margins. So I mean.
Between the third quarter and and the fourth quarter, you had a revenue headwind of about 450 million sequentially and yet you had very strong performance. Paul is the is the 60 bps sequential op margin decline in fiscal <unk> was debt related all to mix and and if I look at the full year.
And you're guiding 4.5% operating margin for the full year fiscal 'twenty. Two should we then think of fiscal <unk> as a trough for operating margin and then sequential improvements for the rest of the year.
Yeah sure if that create the questioner includes so first on Q4 Q4 very strong quarter. You know I think everything was was firing on all cylinders here and in the fourth quarter mix was a benefit you know I think we really put a squeeze on spending to make sure. We had a strong finish to the year and and we got that benefit.
And I guess my comment on on Q1 would be yup, and we certainly have mex it mix headwind going from Q4 to Q1 as I had mentioned to Steven we do have some incremental costs associated with pressure from component shortages and some of.
And the things that debt you know I had mentioned before freight and logistics inefficiencies from you know turning lines on and turning lines off you know all that sort of ripples into the into the P&L and and gives us some pressure what I will say on on Q1 is at the midpoint of our guidance, we're at 4% 4.3% on <unk>.
Margins, which would be the strongest Q1 and the history of the company. So we're quite pleased with with the outlook in terms of the the remainder of the year you know you're right at the midpoint of our full year guidance op profit would be you know, 4.5% or so and I think for ABC and had said.
We're doing our best to be prudent theres still a lot of global uncertainty you know COVID-19 is popping up Unfortunately, all over the place and important countries like India.
And where we have operations and so there's the potential for disruption there and and we're we're certainly not out of the woods. When it comes to these component shortages and although I think a lot of it is timing we do have some some P&L pressure that we just have to we have to watch and route was the way to think about this with six very distinct and segments is that.
And you know I think sequential change.
And that's.
On teen significantly what makes right because each segment behaves and the you know differently in terms of our quarter over quarter share. So I think like Paul said mixed if you play into that but again, it's a strong guide and it'll be a you know record margins for us for Q1, and then of course you know.
Some prudent thinking in terms of shortages and managing that type of cost pressures associated with it.
Okay. Thanks for all the details on debt and then revert the maybe as a follow up to what you just said about the cig segment.
What are your thoughts about investments in fiscal 'twenty two in those segments. If I look at the numbers you gave for next tracker it looks like the business and the industrial segment ex <unk> ex trackers is actually going growing faster and about three 2% for last year.
So I mean, but you also have other and the agility segment, you've had lifestyles, which grew four and 8%. So just your thoughts on that business makes between agility and reliability for fiscal 'twenty tool any any preferences or which segment do you want to invest and thank you.
Yeah, I'd say, what we are real plus day I'll just start by saying that you know we want to and I've said this before in prior conversations as well and we want every segment because their end markets are pretty large is to find the right mix of customers within that segment.
And should drive continued year over year and long term improvement and their performance. That's how we want to think about every individual segment.
Within our business. So we want each segment to hold their own in terms of their performance in terms of investments.
And you know we are super proud of how the agility team has executed changed their makes and delivered them in execution with our new agility model and driven profitability for that business and you know our large capex investments and any new M&A that we do is being considered more.
And the reliability segment, because that's the nature of the business. If you think about core industrial and the power side, we expect to add investments there automotive definitely with our focus on improving our content on electric vehicle and more product R&D investments capex investments and any new M&A investments.
We'll be there and also on health solutions right very robust growth lot of large program drams.
And we are continuing to look to add new investment to that space and so that's how we expect our investment profile to be more headed towards the reliability side, but with strong support to grow our agility and improve their overall margin performance.
Okay. Thanks for all the details thank you.
Your next question comes from Jim Suva with Citigroup investments your line is open.
Thank you very much and great results and outlook on my question is more on the full year outlook are you know we're in a world of COVID-19. We're in a world of semi conductor shortages and increased shipping costs and uncertainty and it sounds like you're prudently put them into your outlook, but the bigger question I had is whats the kind of a real key.
Catalyst a rationale or reason you want to give a full year outlook when some companies arent, even given one quarter outlook is that you've got the commitments or the visibility or you think consensus is miss modeling the improvements and I'm just kind of curious about why you a gift.
Give our full year outlook.
Yeah Jim.
And your comments on performance and outlook and then in terms of why we are giving outlook and I've been at this for two years first year was all about and you know all the trade issues with China is and then be kind of gave and EPS ranges and outlook on <unk>.
Last year, you know, we didnt because of COVID-19, we think that it's important to I gave an indication of how we see the year.
And we think it's a it's a practice for businesses and good businesses to be able to do that so we want to benchmark ourselves to the best of the best in the industry.
And that drives some of the prudent outlook, but we think that it's.
It's a range that we can defend and hold and.
So while COVID-19 is still out there while component shortages and still out there and we think that you know we have enough visibility to take those into account as we provided the outlook So and Jim as you know it's been a mixed bag in terms of people, who are giving an outlook and people who aren't until we wanted to.
Lean towards providing some outlook our full year performance and we think we have enough visibility on.
And then my quick follow up is on the outlook. The four quarters as we progress anything that we should be mindful of that deviates from typical normal seasonality because it seems like it's been a while since we've been in a world of normalcy.
Yeah, I think the biggest thing is just where we're going to be lapping some very unusual comps here and in Q1. As you guys are all well aware you know what we'll still have some some unusual comps going into Q2 and as you look ahead to Q3 Q4, it does normalize.
You know, perhaps you have a little bit of back half.
Pent up demand impact in that I think Q3, and Q4 of 21 were particularly strong and and you know comps and maybe get a little bit harder, but we are expecting things to normalize and and you know Jim where we're frankly, we're pretty upbeat.
And I'd say, nothing unusual and returned to normal comps and yep.
Thank you and congratulations to you and your full teams.
Thank you I appreciate it.
Your next question comes from Matt Sheerin with Stifel. Your line is open.
Yes. Thank you good morning and fair.
First question and just regarding the strength that you've been talking about and in the cloud.
Segment of the business for the last two or three quarters could you talk about the growth rate specifically.
And customer concentration, we're seeing and your peers also talk about the strength there.
So just broadly speaking are you seeing.
And some some market share shifts from the traditional Odm's and in Asia for instance, and is there anything that you bring to the party.
That gives you an edge in terms of continued market share gains.
Yeah, what I'd say in terms of you know overall growth and cloud, it's a large and have space I'm, Matt and it's important to be focused on the customers that we think we can provide value to and actually grow and grow profitably I think that's really important and the cloud space.
So our look is not to win from ODM.
And you know coming from Asia, I don't think that's a place we wanted to compete and we are really focused on you know.
Winning with a few key customers, where we think that the margin and balance sheets ports, the kind of hurdle rates, we're looking for them and that's the most important thing and then of course and in cloud in General you know all the right trends are there right lot of usage data center grout and all of that.
Supports the demand and the growth, we're seeing but it's a large space.
We believe that we have to pick where we want to win them and that's what we're driving to so we have new customer wins, but we're very focused on a subsegment of that overall market.
Okay, and thank you for that and and Paul a question regarding your free cash flow projections for next year, which is basically flattish, which would change and fairly impressive given the fact that you've got pretty strong revenue growth and you would think that their working capital requirements also.
So you'll go up here given the supply constraints that we're seeing so could you walk us through that.
Sure so.
I appreciate the compliment by the way, we're going to have to scratch and claw it and make that happen, but you know what what I'd said was cash flow on a dollar basis essentially in line with with 2021 and so if you just do the math at the midpoint of our of our guidance here for 'twenty 'twenty, two that would put us at about 80% conversion and and to your point and I met the pressure.
We're seeing and supply chain right now is it's certainly there I'd kind of talked about some of the P&L headwind, we're going to have.
And what I didn't quantify forever one was the the working capital impacts that we will likely see and and at least Q1 Q2 from an inventory standpoint, and the challenge for US right. Now is that we're we're required to carry some some buffer stock you know some of that you know contractual some of it not and you know for certainly for things like.
The automotive industry, where you really don't want to be the bad Guy shutting down a line you need to make sure that that you can deliver on time when when they need hardware and so the challenge for US is that that has put a little bit pressure on on working capital and and but look you know, we we standby the 680 or so that we telegraphed for 2020 two.
Two and were going to scratch and claw and make that happen and Matt I just point to you on our balance sheet is and the strongest position ever and have a fantastic cash balance.
And we will have inventory pressure I think that'll be a big focus that we'll continue to watch through the year.
But we think that we have to have the right blend of carrying the inventory and delivering to our customers, but also delivering our overall free cash flow. So I think we have got a good mix of things to work on there.
Thank you for that are you seeing customers I'm are you asking customers for deposits against that inventory.
Oh, absolutely absolutely you know to the extent weekend and minimize our our cash flow impact with with advances or prepay heck yeah.
Unfortunately, not everyone's willing to write cheques. So we take it where we can get it but you know unfortunately, it's it's it's not a one for one but Matt. This is like everything else, we talked about whether it's and the pandemic are managing shortages in our focus is on doing everything with discipline right. They are and the shortage situation, how we bring and.
Tory who pays for it all of that is manish with very good discipline and coordinated by thousands of employees across the world and and and so based on that we think that.
In our cash flow.
And our guidance.
It's still it's still holds but lots of things to work on.
Okay, great. Thanks, so much.
Your next question comes from Mark Delaney with Goldman Sachs. Your line is open.
Yes, thanks, very much for taking the questions and.
And number of companies have talked about trying to be agile and doing procurement given how tight the global supply chain is and I'm curious if flex is perhaps been able to take any market share because of that.
And we'll give it and all of the expertise and focus which has had on managing through some of these are these difficulties and I'm curious in either on the short term, we're able to maybe take some market share.
Or perhaps are you know at least get some new engagements underway that could lead to market share and longer term.
Yeah, and Mark absolutely and arm and a lot of calls with them you know C. L customers our teams are.
And doing a lot of our supply chain teams in terms of not only providing second source re qualifying sources are finding inventory and the system and you can just see that from our performance right to see our Q4 performance compared to most people and the industry and we've navigated the shortage situation extremely well.
And <unk>, both on revenue and in terms of margin.
And so I would say and we're just getting kudos all over for our supply chain effort and being able to really kind of move every stone and in keeping our customers driving the best we can and the situation.
And then you know I'd say kind of moving forward you know as inventories rise up in the system and those things become harder, which is part of what we're saying about moving forward, but absolutely agile and I'd say lots of customers and suppliers would say that flex is just show on world class.
You know procurement supply chain capability and navigating this.
That's very helpful. Thank you and for my second question.
It was related to margins and B.
And being disciplined on pricing and and getting paid for value that that's been a big focus of the of.
And this management team and that's clearly where we're seeing that and and the results.
And I recognize you're gonna system, and some added cost pressure with the supply chain environment, you're you're dealing with their own components and and shipping.
But I'm wondering if there's any areas, where perhaps pricing is abnormally strong and I don't know if it potentially.
You know flex is able to get unusually high pricing.
And given how tight supply chains ARPA for physical goods more and more holistically and do we need to be thoughtful about perhaps this margin improvement we've been seeing moderating a bit at some point and the future fifth global supply demand starts to ease.
Yes.
And at the end of the day Mark you know in all of these kind of pricing pressures or kind of in a changing cost pressures and the value chain. It all ends up being like who ends up paying for this right and there's been enough conversation on this and now that you have to be able to pass on these prices you have to be disciplined about that.
And so those are important right and and I'd say, we're navigating that really really well and I think it's important to think about you know like just the flex core margin, even with the factory shutdowns and you know and due to shortages argued a COVID-19 outbreaks and all.
And that we expect that the core flex operating margins for the year, we'll still have a four handle and so so continued margin improvement even with these changes, but then you have to add to that that we expect that our productivity efficiency continues to improve also through the upcoming year.
And the future. So we have a pretty strong pipeline and how how we continue to keep our margin rates up and keep that moving and the right direction, we're bullish about that.
Thank you.
Okay.
And your last question comes from Christian Schwab with Craig Hallum Capital. Your line is open.
Thanks for squeezing me and I just have one more question just on your ability to give guidance for the year.
Gibson.
All of the challenges that everybody is aware of what's going on and the world.
Is this should we be thinking about this as kind of a proof point of.
<unk>.
And of Managements plan, a couple of years ago to become a preferred supply chain partner.
And and in.
And prune the portfolio of highly volatile businesses and focused programs on more predictable more important products to the end customer and that's kind of leading to <unk>.
Backlog and pipeline of work that gives you such a.
High conviction level to go out that far is that fair or am I thinking about that wrong.
No Christian and I think it's totally fair.
Are you are you are definitely summarized all of our key point and really well in terms of how we're thinking about it.
You know our view is that and we have good visibility and far and segments, we are reducing the volatility within these segments.
And we also believe that it's important that good.
Good businesses, you know give you know give and give guidance and so putting all that together, we feel more and more comfortable and providing a longer term outlook.
That being said you will see our guidance is prudent and no and so it does bring into question things like shortages.
And things like that right. So our pipeline is extremely strong we're not seeing any cancellations or anything like that we see demand signals are pretty strong you know we have a lot of new program ramps going on with kind of regionalization and so we think that it's the right thing to do in terms of how we signal.
About the strength of our business and we feel we have the visibility to do it and you summarized it very elegantly.
Great and I don't have any other questions. Congrats on the on the great quarter and a <unk>.
Very good outlook.
Great. Thanks Christian.
I would now like to turn the call back over to Rebecca Dee and Betty for closing remarks.
Yeah. Thank you all for joining us so I'm Super excited and confident about the future for flex and then of course I wish all of you remain safe and good health and we'll speak to you in the next quarter. Thank you.
This concludes today's conference call you may now disconnect.
Goodbye.
Okay.
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And on.
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