Q1 2022 Flex Ltd Earnings Call
And welcome to the Flex first quarter fiscal year 2022 earnings conference call.
Today's call is being recorded in 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.
Rubin Flex as vice President of Investor Relations, Sir you may begin.
Thank you Rebecca.
Good morning, and welcome to Flex as first quarter fiscal 'twenty 2 earnings conference call with me today is our Chief Executive Officer Ray with you at <unk>, and our Chief Financial Officer, Paul Lundstrom, both will give brief remark.
David I'll buy Q&A.
This call is being webcast and recorded and if you have not already received and slides for today's presentations 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 current expectations and assumptions and are subject to risks and uncertainties. So actual events.
Vince and results could differ materially.
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 filings with the SEC.
This call references non-GAAP financial measures for the current period. The GAAP reconciliations can also be found on <unk>.
Mark slides on today's position presentation as well as on the Investor Relations section on our website.
Lastly, with regards to flex his next tracker business as we've previously discussed last quarter on April 28, we announced that we confidentially submitted a draft registration statement on form S..1 with the U S Securities and Exchange Commission relating to the proposed.
<unk> initial public offering of its class a common stock the initial public offering and its timing or subject to market and other conditions in the SEC's review process. We made this announcement in accordance with rule 135 on the Securities Act. We continue to look at the market conditions, and we will evaluate the right time to do the transaction.
Transaction, but we remain committed to doing so falling SEC 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 the CEO Debbie. Thank you David.
Good morning, everyone and thank you for joining us today on our Q1 earnings call.
Call of course, I have to start off by giving a shout out to all my flex colleagues across the world was for once again, staying focused and delivering on solid results.
So, let's turn to slide 3 to review our financials, we achieved revenue of $6.3 billion up 1% sequentially a little better.
Other than typical seasonality and up 23% year over year.
Our total flex adjusted operating margin came in at 4.6% and core Flex operating margin ex next tracker contribution was for 4%.
Similar to last quarter, our adjusted operating margin includes.
The absorption of costs related to a challenging component supply and logistics environment.
Our adjusted EPS was <unk> 46.
Up from 23 in Q1 of last year, but also up from the pre COVID-19 level of 27 in Q1 of FY 2020.
Our adjusted free cash flow came in very strong at $219 million.
Now moving on to the next slide I'd seen demand across the enterprise remains very strong and as you can see the team executed extremely well again this quarter global supply chain and logistics issue remain a challenge in Adelaide.
Of uncertainty to the near term. However, we continue to expertly navigate through the environment with an army of supply chain professionals, which is almost 10000 people strong and of course, the decades of experience all supported by World class system and tools to provide the best with visibility and agility.
To layer on this is a real competitive advantage for flex and for our customers.
Our ability to quickly adapt to global changes is unrivaled and proof of courses in the results, especially when you look at the improvements we have made across the organization over the last 2 years.
The June quarter of cash.
2019 was my first full quarter with flex on.
Our adjusted operating margin at that time was 3.4%.
Fast forward 2 years and it is for 6%.
Which is after 2 previous record quarters. If you look at our gross margins, you'll see similar improvements.
<unk> joined our June quarter gross margins were 6.5% and this quarter.
Was 7.5% so we're simply operating at a better level.
I'm very proud of how well they are executing on our near term and on and our longer term goals.
We continue to land.
Expand and elevate our relationships with our customers.
We're winning in the key areas, we've talked about before such as diabetes care medical imaging and throughout the electric vehicle ecosystem on Adas.
And on premium durable goods cloud in renewables.
When I the secular drivers for the next wave of outsourcing are now very clear, where the need for more resilient and agile supply chain the requirement for additional regionalized production and the demand for more sustainable approaches.
Winning new businesses as well as expanding our footprint with current partners.
This performance.
It's all a testament to our goals of deeper relationship with our customers and suppliers and a continued steady shifts to higher value businesses.
And all of this is leading to a higher quality of pipeline and bookings across both our segments.
Now, while we have made good progress.
We're certainly not done.
With that I'll turn the call over to Paul to walk you through our results in more detail and then I'll come back with some closing remarks, Paul Okay. Thanks for your EBIT and good morning, everyone I'm on slide 6.
Flex revenue was $6.3 billion in the quarter, which was up 20.
<unk> percent year over year, and 1% sequentially better than our typical Q4 for Q1 seasonality adjust.
Adjusted operating income was up 78% year on year to $290 million with a 140 basis points of margin expansion.
Obviously, we're lapping COVID-19 your comparisons but.
3 we saw material sales and profit growth compared to the quarter 2 years ago as well and.
And the 4.6% operating margin rate was the highest Q1 margin rates we've seen here reflects.
Our profit growth came from drop through on significantly higher volume.
No improvements in the mix of our business and our constant push for productivity gains.
There were some headwinds in the quarter.
We continue to see COVID-19 disruptions.
And industry wide component shortages and cost pressure on logistics did affect our business in the quarter.
Adjusted net income.
<unk> was $230 million with adjusted earnings per share of <unk> 46 cents.
Year on year, those were up 98% and 100% respectively Rec.
Reconciling to GAAP first quarter GAAP net income of $206 million was $24 million lower than our adjusted net income primarily due to $20 million of stock based.
Just compensation.
$13 million in net intangible amortization parse.
Partially offset volume net credit and tax and other.
On slide 7.
Our first quarter adjusted gross profit was $476 million up $158 million year over year.
Execution.
Was solid with 130 basis points of adjusted gross margin expansion compared to last year, but also a full point higher than what we saw pre COVID-19 in the June quarter calendar 2019.
In total adjusted SG&A spending came in at 186.
Million up $31 million from a year ago, but at 2.9% of sales down year on year.
Slightly below our targeted range of 3 to 3.2% of sales.
So for the quarter adjusted operating income of $290 million led to a solid for 6% op margin rate.
On slide 8.
We saw better than expected top line strength in both reliability and agility in the quarter with both growing double digit year on year, despite component shortages in the industry and logistics cost headwinds.
I said last quarter, and I'll say, it again credit to the flex supply chain.
<unk> for solid execution in a very challenging environment for.
Flex reliability revenue was $2.9 billion in the quarter up 30% year on year.
Q1 performance for all 3 business units within reliability were up year on year automotive revenue was double that of a year ago up 1.
<unk> percent year on year with strong execution against the industry's continued global recovery and of course stated by the easier comp from last year's shutdowns. These.
These were strong results and better than what we saw in the June quarter of calendar 2019.
Health solutions revenue was up 9% year over year this quarter.
100 on at care strength continued and coupled with improving elective procedures offset the normalization. We are seeing in the critical care space as it returns to pre Covid levels. We continue to win in health solutions net lends confidence to our strong longer term outlook in this space.
Lastly, industrial grew 20% compared to the prior year led by strength in core industrial and renewables industrial continues to be a bright spot for flex up year on year, but up significantly for the 2 year period as well, both with and without next tracker.
Looking.
It's the reliability business generated $170 million.
Adjusted operating profit and a 5.8% adjusted op margin rate.
Margins improved by 70 basis points year on year, but were tempered by higher costs due to inefficiencies create inefficiencies created by the current supply.
Chain in logistics environment.
As you see in the footnote <unk> on margins were down in the quarter with logistics logistics cost headwinds, we view as temporary.
Moving to agility segment revenue of $3.4 billion was up 18% year over year.
Within agility CE.
Profit was flat year over year, but recall strength in cloud infrastructure and 5 G. Rollouts remained strong through Covid last year as data centers and networks had to quickly adapt to the changing workloads created by work and learn from home.
Life style was up 36% year on year with new ramps.
You see what customer expansions driven by our strong value proposition as well as an increase in customers looking to broaden their regional manufacturing presence.
Lastly, <unk>.
Consumer devices benefited from continued recovery in consumer spending and developing markets and grew 50% that's 5 zero percent.
Year over year.
Turning to profitability.
The agility segment generated $137 million of adjusted operating profit and a 4% adjusted operating margin rate for the third consecutive quarter.
This is well beyond a COVID-19 recovery.
Going back to pre COVID-19 levels or jewelry.
And current has historically operated up margin rates with a 2 handle so I would say very nice to see the traction in that business agility.
Agility is firing on all cylinders.
Last year jewelry margin expansion or excuse me year on year agility margin expansion was driven by a continued push for new business wins and renewals.
<unk> is at accretive margins as well as continued cost management discipline from our agility operating model.
On slide 9.
For the quarter.
Adjusted free cash flow of $219 million up substantially compared to the prior year, which was severely affected by COVID-19 and the shutdowns.
<unk> visible automotive production.
Looking ahead to the full year 2022, we still expect adjusted free cash flow on a dollar basis to be roughly in line with 2021, albeit with some pressure in Q2.
We closed Q1 with inventory of $4.4 billion, resulting in inventory turns of 5 points.
6 down from 6.1 turns last quarter, but up from $5.3 a year ago, we continue to see component shortages in the supply chain and although it was manageable in Q1, we do expect continued working capital pressure as we move through Q2.
Our net capital.
And glitches for the quarter totaled $115 million as I mentioned last quarter Capex of roughly 2% of sales is a reasonable expectation for 2022, and we remain committed to responsibly investing in strategic growth.
Lastly on share buyback, we stepped up our share repurchase program in the quarter.
Quarter, ending on repurchases was $162 million, which amounted to 9 million shares.
If you could turn to slide 10.
And as Youll hear from Ray within a couple of minutes were upbeat on the year that said, we expect component shortages and logistics headwinds as well as persistent waves of COVID-19 to remain ahead.
Headwind in Q2, but the demand side is there and all of our underlying demand signals remain strong.
Looking ahead to Q2, we expect our reliability solutions segment to grow low to high single digits year on year as I mentioned earlier, the demand side is strong, but likely will be tempered a bit by constraints.
Rates in the supply base.
We expect automotive revenue to be up mid single digit to high teens year over year, despite continuing component shortages and OEM production disruptions.
Looking back to last year Q2 was our peak quarter for health solutions with strong demand.
Critical care products like ventilators moving into Q2 of this year, we're seeing normalization in critical care.
And consequently expect revenue to decline mid to high single digits year on year. Please remember we saw a significant COVID-19 related product bump in Q2 of last.
Demand and now we're seeing a normalization period based on our very strong pipeline, we fully expect the strong growth to continue for years to come.
In our industrial business should be up mid single digits to mid teens year over year as we continue to see robust demand in renewables gaming and kiosks metering.
Year from other areas.
Looking at agility agility solutions Q2 growth should be similar to that of reliability with revenue up low to high single digits year over year.
Lifestyle should grow 10% to 25% year over year in Q2 with continued strong demand across multiple platforms and new biz.
And in the <unk>.
CEC should be flat year over year in the quarter, but continued but with continued pressure from clear to build.
Long term solid growth as expected in the second half for CEC.
Consumer devices is expected to be flat to up.
When low single digits year over year.
Turning to slide 11 overall, we we expect flex Q2 revenue to be in the range of 6.1 to $6.5 billion with adjusted operating income between $250 million and $290 million interest and other.
<unk> be roughly $40 million, we expect our tax rate in the quarter to remain at the higher end of our 10% to 15% guidance range, we expect.
Adjusted EPS to be in the range of 37 to <unk> 43 per share based on weighted average shares outstanding of $499 million or.
Our adjust.
<unk> EPS guidance excludes the impact of stock based compensation expense and net intangible amortization as a result, we expect our GAAP earnings per share in the range of 29.
To 35.
Per share with that I'll turn it back over to ABC.
Thank you Paul.
Turning to slide 12.
Bob.
Last quarter, we wanted to provide you as much visibility as we prudently could then give our outlook for fiscal 2022.
As Paul said, it's important to remember that there are still challenges and some uncertainty as to overcome but hopefully we'll all be film through the worst of Fad.
Now based on the current situation.
We're increasing our full year revenue guidance range to 25, 5% to $26.5 billion, our operating profit range to 4.5% to 4.7% on our EPS range up to $1.70 to $1.85.
Now on behalf of the entire leadership.
<unk> I want to thank my colleagues for their commitment and their hard work of course, our customized on suppliers for their trust and partnership and our shareholders for your support with that I'd like to turn the call over to start the Q&A.
At this time, if you would like to ask a question. Please press star 1 on your telephone keypad.
And your first question comes from the line of Matt Sheerin.
April.
Yes, Thank you and good morning.
Wanted to ask about the margin guidance for the September quarter.
Which is implied down sequentially, but still totally up year over year are you seeing.
Net pressure in both businesses and is it some of the reasons that you you talked about logistics on price cost as well as maybe some lower utilization levels on the healthcare side.
Yes, you're spot on that.
As we move from from Q1 into Q2, just like you said.
For 6%.
Our margins here in Q1 at the midpoint of our guidance set for 3 that would be down a bit sequentially.
I guess, what I'll say is youre, absolutely right a little bit of pressure in both businesses, we talked about it in the prepared remarks, there about some some pressure in CEC from clear to build.
We're doing.
Doing everything we can to get components available. So that we can ship because as I mentioned that the demand side is certainly there so a little pressure.
On the agility side, namely in the CEC business and then on the reliability side.
You know we have the automotive business in there and that 1 is.
For the whole industry is struggling a bit.
With clear to build and component shortages and that does create a little bit of.
For the inefficiency, but again, that's the midpoint of our guide I think Thats I think it'll be a pretty good pretty good performance. If we can nail that at $4.3 and as you mentioned and I think very important.
Very important point to our owners here, that's still up year.
With her and continues to be outstanding performance for for flex, particularly compared to the last several years and Matt I'll remind you that midpoint and now Q2 will still be the highest record for us in terms of operating margin for the guidance I've, given you and they're very upbeat and as you can see from how we have previously managed.
Year on year, the company and how they've managed through supply chain logistics always flagged that Q2 would be somewhat tricky and I think that's what we're seeing but we're very positive and very bullish about how do you look at how Q2 looks also average as being prudent in terms of our guidance.
Got it thank you and I just wanted to also.
Manish just about inventories relative to the supply issues that youre seeing it was up quarter on quarter.
What's the strategy there going forward in terms of working with customers, but also getting compensated whether it be in.
Deposits or other things so that so that you are still meeting your working capital goals.
So I'll just start by saying 1 is they're absolutely doing that that's why you see our cash flow is so strongly on getting compensated for inventory that we're putting in the system and we'll continue to do that we have extreme discipline about the amazing coordination between our supply chain teams and our commercial.
Yes.
And customers are very very open to try that's an industry wide.
Constraint that's going on so we think no issues in terms of translating what we're seeing in inventory.
Q getting advances from our customer assets, but they also think that there is room to continue.
To improve inventory as these things.
We get a little bit more stable in the future quarter. Its our goal is to still try to get inventory down not just for us but across the supply chain.
Thanks very much.
Your next question comes from the line of.
Team for about a char with bank of America.
Okay. Thank you for taking my questions.
I have 2 questions both on margins for us.
First 1 you mentioned higher freight costs impacted next tracker is there a way to quantify how much that impact was on an ex track for margins.
And on the.
Every 10, I think you mentioned that you expect logistics challenges to bottom in Q2.
What are some of the things that youre seeing that gives you that confidence because I mean from what we're hearing freight cost should remain high so.
Just if you can just give us more color on your thoughts on logistics costs.
Slide Yeah, absolutely group, who I'm happy to go through the first as you know I will tell you that.
In the next tracker as part of our Flex has really matured in terms of for supply chain company and having the right kind of hedging practices, but also how they pass on cost to customers is.
Very different than the rest of the industry. So I wouldn't let that cloud the judgment of how next tracker runs and operate I'd say it really operates as a world class supply chain company in managing through that and as you can see most of the commodity inflation as we've talked about has already been offset because they are.
2 on how they manage contract pass through on commodity is quite seamless and that's pretty incredible given the environment and how significant.
Commodity inflation has been on the side of logistics. The reason why they are very comfortable that that we lap that you know very soon is because it just has to run.
Pat on the existing contracts and then its priced into new contracts and by the way even in existing contracts.
Overcoming quite a bit of the freight increases with managing with customers in terms of renegotiating.
Price, so we see the logistics issue as being.
Being temporary even if the costs remain inflated, how we pass that through and contracts.
Well flushed through the system. That's why this is a very short term temporary thing and we're very comfortable that we'll lap that very quickly in the next couple of quarters.
Got it.
Thanks for.
On to sales on that that makes sense may.
Maybe maybe I'll ask you a different question then as my follow up.
You've outlined.
Both strategies and Youre focused on the longer lifecycle end markets.
At this point in the cycle does it makes sense to look at inorganic growth you know your thoughts.
On just looking at acquisitions and what are you looking for if you are in.
What end markets would you be.
So thinking about expanding thank you.
Yeah, that's it for us.
I'd say the most important thing route flow for for I think every company, including ours is to make sure we deliver really volatile in terms.
For all the day core on the organic side of the business and as you can see we really are hitting on all cylinders right. Every business is growing organically our growth rates are strong our pipeline and bookings have been the best ever and you can see that in terms of not only the quality of the bookings coming through.
But the segments that we're growing and it's consistent and I've always said that I want every segment to be doing well on its own whether its topline or bottom line and that's kind of what we're seeing right.
So organically I feel like the business is doing extremely well, but I also feel their debt, there's tremendous room for us to continue.
To grow organically and drive our continued growth strategy in the segments, we participate because our end segments are so big.
And there is so much room to just focus on where you deliver value and we're seeing that that is the case right. You can see that on our lifestyle segment, which is doing really well.
Agility, which is doing really well because it's focusing on the right segments and delivering growth.
If you look at you know how we are doing overall, even from a you know.
Bookings and pipeline perspective, we're expecting our growth to come in that's accretive to the margin levels and to our Rois C levels.
Which as you know around 20% right right now this quarter. So really we want to win in all segments organically and we want to invest organically really well that being said I would say our cash position is in the best that this company has ever been and so that's fantastic ride because even with all constraints of supply chain.
Things like that.
Cash flow is incredible in terms of how we have really managed this company. So we have tremendous optionality on how we use that and you know whether we focus on on buybacks because I'd say our stock is really trading at a low right. Now we think it's very valuable right now to continue to invest.
Investing in our stock so we'll balance that between you know do we do more buybacks or they do we invest in inorganic acquisitions. The fantastic news is optionality everywhere right organically growing very strong tremendous room in terms of our pipeline our bookings we want to invest more capital in terms of our growth strategy.
<unk>.
We think that our stock is undervalued and we need to focus on making sure that our buyback is strong and will continue to do that and if they have great technologies to investing we will.
So I think the good news group, who is we have options everywhere.
Okay. Thanks for all the details and congrats on the strong execution.
In the quarter.
Thanks for Blue.
Your next question comes from the line of Mark Delaney with Goldman Sachs.
Yes, thanks very much for taking the question I was hoping for.
To start on margins in <unk>.
Through the sustainability of margins over the intermediate to longer term margins.
As you pointed out a record high man, Germany in particular is very good and thats. Despite some of these temporary challenges around logistics and component volume. So maybe we could talk through some of the puts and takes to that.
I think perhaps on some parts of this that are more structural and sustainable around the mix and how the company structure and.
But are there any.
Any potential offsets that we need to be mindful of going forward.
Perhaps more cyclical components that are that are temporarily helping you in terms of where asset utilization is running or anything like that that we need to be mindful of as we're thinking about the longer term margin potential of the business.
No Mark on.
That's all for me is saying 1 is if you look at kind of you know our margin guidance for Q2 from the previous question.
That somebody asked it right I think Matt asked that yeah, there's inefficiencies that have built into that right in terms of our current situation, particularly for chasing expediting and supply.
It's got an issue. So obviously those are there on a go.
Go away and we're going to continue to improve margins. If you look at our guidance for the year right now.
At the midpoint at 4.6%, that's a pretty significant guide right in terms of how we see the full year come through and as you can see from our history of how we.
Think about these things were quite thoughtful in terms of how we provide these guidance I'd say first is from a margin perspective inefficiencies are there today from a supply chain perspective, we think that gets better. So if anything there is upside more than anything else.
I think more importantly, the way I think about long term is you know were a matter.
On a factoring company and we're kind of just started on the journey that we're getting really good at in terms of how we look at productivity and efficiencies across our factory.
And I'd say that if anything there's more room to continue to do that better and better you know I'd expect that.
Flex will be it'll be.
In terms of lean and productivity and efficiency and using things like our flex business system will continue to be world class on that so if anything I'd say, there's more room.
Just in terms of margin.
Diving more productivity and efficiency, managing our footprint better, but what's even better than.
All of that will be I would say if you look at our growth in the mix of our growth rates were very focused on the right kind of growth.
And and making sure that the mix is flowing through to our pipeline. So I'd say mark I have nothing to point to that you have to be thinking about in terms of that.
It goes down from here if anything I'd say, it's you know what we have to focus on is I would say our journey has just started you know it has to only get better from here you can see that right from where we were like I said couple of years ago at 3.4% to 4.6% gross margin on operating margin.
So I'd say the.
The tremendous room to continue to drive upside to this.
That's that's very helpful. Thanks, and for my second question on something you could provide some more details on what flex those expectations are on the component supply environment through the back half of this calendar year and into next year any details you can share about.
How do you see the supply hopefully improving when some of these.
Semiconductor and other component shortages are alleviated and any differences in terms of which end markets are perhaps currently most constrained and.
When various end markets could begin to be able to get the supply that they need.
On the Mark I'd say that.
There's nothing I'm going to add that you havent read and seen and heard from all the other earnings calls that you got before us right.
I think we had predicted just couple of quarters ago that we thought this particular quarter, we're entering which is Q2.
Would be probably the most challenging and we have done that based on our intelligence of lead times, what we had heard from chip companies in terms of how their capacity would start coming in particularly in the forms of assembly and test capacity. So I'd say, we had called US a long time ago to say that we think that this quarter will be the most.
And then you should start to see some recovery as.
As kind of assembly test capacity starts coming in in the future quarters, you are kind of hearing that across the board..1 is I'll say is we see this issue across every segment.
Some like medical and auto I'd say kind of gets better quicker.
Channel 1 is because their volumes are much lower compared to tech and industrial.
And as Paul pointed out in his comments right C. C. You know had constraints this quarter and we think tech and industrial will have kind of for a longer tail, but that's more because of the scale of those segments right.
And how the end markets.
In terms of the supply chain and the chip companies have volume associated with those end markets, but overall right I'd say this quarter is probably where we see some level of bottoming out.
And then we'd start to see it stabilize kind.
Moving forward and that's kind of where we're thinking those moves.
I'd say, but will it continue through next year I think there'll be some pushes and pulls through next year I think we'll just have to work through that.
Thank you.
Your next question comes from the line of Shannon Cross.
<unk> with cross research.
And thank you very much I was hoping you could talk a bit about how your conversations with customers have been going and where in theory exiting COVID-19 you know with regard to how they're thinking about.
Moving out of China, or other geographic geographies and.
And just in general how they're looking at outsourcing and then as a follow up thank you.
Thanks, Shannon I'd say, you know all our conversations with our customers are very focused on.
You know what can they do to make their supply chain more resilient right and whether you think about.
S trade issues that drive regionalization or now the pandemic drive different thinking around bringing the supply chain closer to the end customer and the end customer it could be any part of the world, whether it's Europe Asia or North America I'd.
I'd say our customers are driving.
More conversation.
Since then more decision, making around that today than we've ever seen before but what that has translated to already Shannon is that our pipeline of bookings if you look at the.
The focus on regionalization, and what's driving some of them for a pipeline that's pretty significant and we're seeing those actions already come through.
We have tremendous amount of product launches that are going on I'd say across the world, which is driven by some of the supply chain resiliency trends that we're seeing.
So I'd say the focus from our customers really is the conversation has gone into actions and the actions are driving our pipeline.
<unk> on bookings to be at this record level right now with a tremendous amount of program ramps going on across our organization. So.
I'd say and that is across all sectors that I couldnt point to 1 sector, where that conversation is not going on.
Okay. Thank you and then maybe you could talk a bit more about working capital.
You know on a.
On historical basis. It was quite strong this quarter is there anything we need to worry about in a reversion to the mean or anything within the various components and I know you mentioned getting from prepayments and is there anything else that you're doing that.
Is dragging us thank you.
Yeah. So appreciate the complements.
So on working cap in a in the quarter pretty good performance very good performance cash flow $219 million, we were quite pleased with that and perhaps even a little bit surprised to the upside is from inventory pressure in Q1, I think that will persist as we go into Q2, and we'll probably have a little bit of free cash flow pressure in Q2, because there's inventory receipts came in.
Half of the Q1 quarter you have to pay the bills for that as you move into Q2 that said for the full year.
Kind of hanging on to our free cash flow guidance, which was essentially in line with last year and I don't think there's anything rolling over a lot of focus on working capital management with within the business our incentive programs.
At the banner designed to drive strong working capital and cash flow performance. So I would say overall no change there, perhaps a little bit of pressure in Q2.
Great. Thank you.
Your next question comes from the line of Steven Fox with Fox Advisors.
Hey, good morning.
A couple of questions first of all I, just want to make sure I understand the math around some of the supply chain assumptions. So if sales are flat quarter over quarter, roughly speaking and your profits are down at the mid point of $20 million was up $20 million all related to supply chain or is there other stuff, we should consider and is it limiting your.
Your ability to upside to customer forecast and then a follow up.
I'd say, it's Steven run as you know, it's all around supply chain and I think thats kind of a no brainer and I think that doesn't limit our ability at all in on in terms of upside I think I would say would demand right. This is all a question.
Not just for the weekend find the components.
Components, but whether suppliers can find their other suppliers as our customers can find other suppliers, giving there there are components to come to final assembly. So I'd say all around supply chain and kind of how we manage that unclear that will kind of drive all the upside I'd say.
And I'd just add I think waiver that you've mentioned a couple of minutes ago as well, but at the midpoint of the guide and for 3% op margin in Q2 that would be the best Q2, we've seen an up 20 basis points year on year. Despite the challenges that we're seeing in the supply chain. So it is pressure, but still strictly on a really good performance by the the operating day and Steve I would.
I'd say that if you look based on the last quarter. Our supply chain team is just incredible right I mean, the things they can do what our customers rely on us in terms of finding components and dual sourcing and doing things like that they can do things that nobody else can do so.
I'm pretty comfortable that we've got.
Got a very solid game plan not just for Q2, but you know through the next few quarters and you know well, we'll do an amazing job managing through all of that.
Great I think I got it now and then.
Then as a second question.
Mentioned on the healthcare side that you continue to wind during the quarter on assuming the new program.
Programs I know you don't want to name customers or anything like that but can you give us a sense for.
What that exactly means and in the recent quarter any kind of color around how you or what kind of programs you are winning or what kind of success you are having on the engineering front et cetera. Thanks.
Yeah, I'd say, you know I'd say on terms of household.
<unk> solutions.
We've been driving this kind of focus around pipeline on bookings in or even just as COVID-19. It started because they knew that there was an incredible area for us to grow on our capability was something we're consistently hearing from customers that hey.
You know what as anything you'd do it to increase capacity.
<unk>.
In terms of your own commercial design capability, we're going to be able to fill that up and that's kind of what we're seeing right with the health solutions business and what we delivered last deal with customers in terms of ramping up for Covid care in such a short time really tremendously also.
<unk> changed our credibility in the industry in a big way and we're already such a significant player in terms of medical devices. So our wins that we're seeing.
As in every sector, we're seeing it and in critical care, we're seeing in like we've talked continuously about kind of diabetes care, we have run several.
Programs in that area I would say, we're 1 of the largest suppliers in that space today.
Everything around imaging, so all our key with baked in our for areas around health solutions and all of those we're winning very very focused large programs around and actually most of them are even ramping up right now.
So so the house solutions segment really taking in terms of all cylinders in terms of the pipeline bookings and then how we're ramping up all these programs.
Great that's really helpful. Thank you.
Thanks, Steve.
Your next question comes from the line of Adam Tindle with Raymond.
Yes.
Okay. Thank you read it that you talked about the opportunity to get more efficient and I look at the metrics or SG&A to revenue is below your target range. While the gross margin is healthy when I look on on Opex to G. P basis, I think it's at all time lows. So the operational model is being pushed more than ever right now and I wanted.
Raymond James first how specifically you can get more efficient and should we expect more restructuring opportunity what is the ultimate operating structure look like and lastly, what does this do to growth as you pursue that structure.
Yes, Adam I'll start by reminding you that the first thing is that our gross margin has grown.
100 basis points right in the last couple of years so.
We have done an incredible job in terms of.
Making sure that gross margin is improving with.
Driving the right kind of mix, but also driving the right productivity and efficiency in our in our factories for me on.
Opex efficiency you know we went through of course, the correction period, when we changed our revenue a little bit and adjusted our portfolio. The last couple.
A couple of years, but we want to continue to drive opex efficiency.
You know across our business and whether that's in our back office or things like that we can be doing incredible.
Bill job of driving on.
Opex efficiency to but our potential is in our gross margin rate, that's where we'll continue to drive improvements because we think there's tremendous productivity efficiency through footprint optimization restructuring. We think all of these should be managed through the business cycle. If there is any it'll be puts.
And takes out of 3 I would say.
Gross margin is where we think.
And through mix and for productivity efficiency will continue to see improvements.
I just wanted to double click on the margin ramp.
It's just that that.
Below the line.
It looks like if I compare revenue and operating profit in the back half versus the first half it's about a low double digit contribution margin, which is really healthy.
You talked about in the auto ramp that's coming that should be a little bit of a headwind in Q3 and Q4, maybe help us with the bug.
It could be on a key tailwind that drive that level of contribution in the back half of this year since you've got some really confidence. Thank you.
Yeah happy to do that so.
Alright, I think is rare for you had pointed out.
Robley the trough in terms.
Terms of supply chain challenges.
And that would include cost headwinds is probably at its worst.
Worst in Q2, and it gradually improves as we move into Q3, and Q4 and the challenge with the supply chain environment is it does create stops from start within it stops and starts.
Starts within our facilities and that just that leads to inefficiencies.
We feel confident in the back half and I, maybe just go back to the April April timeframe March timeframe as we were thinking about our full year guidance, we expected that Q2 supply chain challenges would be would be there in.
We figured that Q1 would be tough Q2 would be a little bit worse, but things that gradually start to improve as we moved into Q3 and Q4 and what I'll say is Fortunately that view hasn't changed if this was moving all over the place and we didn't have that sort of consistent expectation I guess I wouldn't be as confident as I am in the back half, but given that things are.
Are slowly starting to improve as we move through Q3, and Q4 will have less of that inefficiency.
And that coupled with new program ramps dropping in.
It will be I think we'll be right in the middle of that for 5 to 4.7% margin rate for the for the full year.
Okay.
Adam I'll just.
We point out that in the second half you know we've got a CEC is gonna be stronger because well have better components availability they've had tremendous new wins in that business, that's going to hop to hold returned to work is going to help that.
Also we've also said that auto wins or we will see more some of that coming up in our.
Our next fiscal year cycle.
But you know where we're quite confident that.
In terms of second half.
Where we're putting some supply chain issues behind us, but we also see mix you know being a good thing below our midpoint of our guidance is pretty strong I'd say it'll be.
Tab near for Us again.
And a quick clarification on.
Next tracker is that SEC review process complete and you are now just waiting on market conditions or are you still waiting on the SEC review.
Okay.
We're on the process.
Record on when when that situation changes rule, you'll know thanks David.
Okay.
And once again, if you would like to ask a question. Please press star 1 on your next question comes from the line of Paul Chung with Jpmorgan.
Hi.
Thanks for taking my questions. So on the customer side, you know, we're hearing a lot of pressure from surprising on shortages and higher freight costs.
Really hurting those Oems who have for Ltd product diversification. So are you starting to see accelerating customer interests looking to offload.
A lot of logistics and manufacturing.
And do you have any pricing power there given the urgency and if you could give some.
Examples that would be helpful. A follow up.
Yeah, Paul I'd say Mike.
Definitely from customers and more customer conversations on holiday.
Ill be thinking about their supply chain.
You know in terms of having us help them think about the risks associated with it and how do they plan for it.
It's coming through across the board, whether it's associated with freight and logistics or whether it's associated with components itself that is an outdated too.
<unk>, alright that needs to be second sourced.
All of these conversations because it's not 1 conversation right. If it's an auto it probably is about outdated tooling and outdated components that needs debt that needs a new design and then you saw it right.
In the in the Tech World It could be.
Be a whole different conversation because it could be focused on just developing second sources than having.
Inventory and product available closer to their point of view. So every single business. All a question of making sure. We're finding the right solution for each customer and that they value our expertise and experience.
Quite a bit to help.
You can see from the supply chain issues.
On and be in that situation again, so he using suppliers like flex to help them redesign that and make sure that they provide them. The right solution is worth a lot because nobody wants to be in this situation again.
So I'd say, yes, absolutely and then in terms of examples I'd say.
I can give you examples in the in the in our lifestyle segment, which is very consumer driven where our customers are very very clear that from not only the.
The product availability being closer to.
The point of use is very important to them and as they are willing to give.
Pay the price to make that happen, but then also full lifecycle for dried where they're able to bring in product to be you know to be fixed when the customer returns than a full lifecycle solutions for that segment is superb.
<unk> important and we are seeing customers really drive to that to say, hey, Mike seizure or in North America.
On a full lifecycle solution I Wanna be closer to the point of views and how can flex do that for them.
Example, in almost every segment on those Paul it's across the board.
Okay.
That's very helpful. And then just a follow up on free cash flow. I mean, you mentioned you know free cash would be kind of in line with fiscal year 'twenty 1.
On your revenues and margins are expected to be higher why aren't you kind of expecting you know free cash flow on conversion.
It would be higher as well.
If you could expand there I know you mentioned, some Q2 headwinds on working cap and whatnot and your Capex guidance would be helpful. As well. Thank you.
Yeah, no problem. So as I mentioned, we will have a little bit of the.
Free cash flow pressure in Q2.
What I would say about the.
On the supply chain environment component shortages in particular as it is and continues to be a fluid situation.
If the if the outlook improves as we move through the back half of this year well, we'll certainly update.
Update that guidance, but I think that.
Free cash flow in line with last year, which by the way it was a very good free cash flow generation.
<unk> on year for US I think is prudent guidance at this at this point in time.
In terms of Capex I've mentioned before Capex to sales about 2% is probably a good placeholder for you guys and allows us to prudently invest in strategic growth for the business and I don't think it constrains.
Anyway.
Thanks, Greg I appreciate it.
Your next question comes from the line of Jim Suva with Citigroup.
Thank you and are ready for you and Paul you mentioned that there were some transition Tory costs were all very familiar of the shortages in semiconductors and also.
This isn't the expediting costs or freight shipping costs, where there'd be containers or airplanes from China or Asia or around the entire world.
Are you specifically talking about the ones about for.
Right and you think that those are going to subside or are you talking about more about also the component costs like speed.
So ill copper resins plastics and aluminum have recently rallied and do you expect those to kind of subside in the next couple of quarters.
So I think Jim what I would say in terms of the commodity and the component side is that in the semiconductor space.
Space itself the component price increases that are being passed through we're passing those 2.2 and those are going to stick for a period of time. So it goes through another cycle, Jim as you know this very well in terms of commodities like steel.
Yes, they are rallying, but our ability.
<unk>, particularly our biggest use of that is on our next tracker business, we basically pass through that like for like through our contracts.
We don't carry any headwind because of that and if that recover its I would say it will go through that same process right in terms of customer negotiation. So.
I would say, it's afraid that's probably the only place and that also on only in the next tracker business, where it takes a couple of quarters to work through the contract headwinds.
And so I'd say that that's what happens in terms of pricing, but if you look forward and think about you know how long inflation.
Across all these end markets do I'm not sure I I I can call that you know very easily today I said all I can say is that we're passing through pricing as quickly as we can in all segments and they're sticking.
Great. Thank you so much for the details on clarification, it's greatly appreciated.
Stays high.
And your next question comes from Christian Schwab with Craig Hallum Capital.
Hey, guys congratulations on another great quarter.
Regarding your guys' ability to prove out over the last few quarters in a challenging environment.
To be.
You know a very trusted supply chain partner.
You know when you highlighted many different examples of that as we look to the mid term you know beyond this fiscal year do you guys think given that.
That kind of example of a partnership with your.
Where's that youll be position to an asset.
Outgrow the industry as we get to that.
Kind of debt terms as far as the top line.
Yeah, I don't think either absolutely.
Absolutely I'd say, Craig there's no question about that right I mean, even if you think you know.
This quarter as you can see our overall growth rate right and compared to the rest of the industry is very very strong.
I'd say in the midterm I have no doubts about that our pipeline is very strong our bookings have been fantastic even with our focus on the right kind of bookings.
So I'd say in the.
The midterm, our ability to grow and grow.
In our end markets in our sub segments, we want to grow.
You know it is extremely strong I'm very bullish about it.
And feel very very comfortable that customers are coming to us because they know that we execute well.
We really are a good trusted partner for them in terms of being able to grow with them.
So no question about that our I'd say our growth focus from where we are right now it looks very bullish moving forward.
Fantastic low other questions. Thanks.
Thanks Christian.
And no further questions at this time do you have any closing comments.
No I'll just say thanks, everyone for joining and you know be.
Safe and healthy thank you.
Thank you for participating this concludes today's conference call you may now disconnect.
Goodbye.