Q2 2022 Flex Ltd Earnings & Anord Mardix Acquisition Call
Good afternoon, and welcome to the Flex second quarter fiscal year 2022 earnings conference call.
Call is being recorded 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 now like to turn the call over shoot Mr gained everything, let's just vice president of Investor Relations.
Sir you may begin.
Thank you Jenny good afternoon, and welcome to Flexes second quarter fiscal 2022 earnings conference call with me today is our Chief Executive Officer Ray with to you by <unk> and our Chief Financial Officer, Paul Lundstrom, Both will give brief remarks, followed by Q&A.
All is being webcast and recorded and if you've 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 actual events and results could differ materially.
Such information is subject to change we undertake no obligation to these forward looking statements for a full discussion of the risks and uncertainties. Please see our most recent filings with the SEC. It's call. It call references non-GAAP financial measures for the current period. The GAAP reconciliations can be found in the appendix slides in today's presentation as well as the Investor Relations section.
Our website also note on October 18th we announced we had entered into a definitive agreement to acquire Arnold on entered Martin excuse me guidance. We provide on this call excludes any impact from the pending acquisition last year with regards to flex next tracker business as we previously discussed on April 28, we announced that with confidence.
We submitted a draft registration statement on form S. One with the U S Securities and Exchange Commission relating to the proposed initial 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 made its announcement in accordance with rule 135 on the secured.
These act, but then you look to the market and will evaluate the right time to do transaction, but remain committed to doing one Boeing and FCC regulations, we will not make any further statements or answer any additional questions or next tracker filing at this time with that I'd like to turn the call over to our CEO remedy.
David.
Good afternoon, and thank you for joining us today for our fiscal Q2 earnings call. Firstly I want to thank our employees for their contributions this past quarter and I really appreciate how hard our teams are working to support our customers and truly make a difference I'm very proud of what we've accomplished together.
Please turn to slide three.
We achieved revenue of 6.2 billion that is up 4% year over year revenue came in slightly below the midpoint of our previous guidance of 6.3 billion get us some interruptions to production late in the quarter and I'll provide more context to that in a minute total flex adjusted operating margin came in at 4.6.
<unk> percent consistent with last quarter, but better than what we initially expected as you can see we continue to like execute exceptionally well our adjusted EPS was <unk> 48 cents up from 36 cents in Q2 of last year and up from the pre COVID-19 level of 31 cents in Q2 of FY <unk>.
<unk> 'twenty.
Adjusted free cash flow came in at $90 million that brings us to over 300 million in free cash flow generation for the air now going to the next slide let me start with a little bit of update on the supply chain situation.
We said last quarter that fiscal Q2 would be a more challenging quarter get a number of factors, we based our assumptions on a broad view of the supply situation and our demand analysis at the end market level.
You look at our results you will see that what was in our control we executed very well again delivering year over year growth and very strong margins. Despite some headwinds we saw late in the quarter like some last minute supplier decommit. Some further logistics surprises and short notice automotive OEM production shutdowns, which you all have heard of <unk>.
What about.
That is why we did not quite reach our revenue goal and we think it's prudent to revise our revenue targets for the remaining two quarters, despite our demand being very strong.
Now looking at the demand situation in past the supply situation I would say that we're in a great position. Firstly, our bookings are very strong driven by the commercial initiatives. We started driving last year as well as growth seems like technology transitions and regionalization.
As you are there are available markets are large and we're driving growth in end markets that help continue to shift our mix, which has been our stated strategy.
Secondly, channel replenishment needs across most of our end markets is driving strong near term demand.
So demand remains strong and we're continuing to navigate the global supply chain and logistics issues very well in fact, the current situation speaks to the increasing value. We can provide our customers given the value of our supply chain resiliency production regionalization and product redesign capabilities.
This value will only increase in the future with new waves of more advanced product outsourcing and sustainability and all of this is in line with our longer term growth strategy.
Now speaking of our growth strategy I have said in the past, we will invest in growth, whether it's organic or inorganic when we find the right higher margin opportunities, particularly in key growing verticals.
As you all have seen by now we recently entered into definitive agreement to acquire ignored Martin X. They are a leader in the critical power solutions market, especially going into large scale and modular data centers, such as Hyperscale and Colocation.
<unk> brings strong products services and incredible talent, including decades of engineering expertise.
They're all aware of the secular trends driving global demand for data center expansion.
How does this acquisition fit with flex.
As you look at slide five you can see that flex already has an important footprint in the data center core through our embedded power business as well as numerous data center and communications infrastructure offerings from sub components to systems to fully integrated racks and services from this position, we already have a broad cloud customer base.
Across the globe that is complementary to critical power. We can also leverage our expertise in efficiencies and advanced manufacturing and global supply chain. So I believe this is a natural extension for us to combine critical power with our core cloud offering to expand our footprint and increase the value we can provide our customers.
And of course, the deal make sense financially.
We think the combination will grow faster than the market and we expect the transaction will be accretive to adjusted EPS and will deliver mid teens EBITDA margin in our next fiscal year.
We have been clear throughout our strategic transformation. We have said, we would be improve our mix and our operational efficiency and you have seen it already show up in our margins. We said we would return capital when it was the right move and that would invest for growth and that's what we're doing now we will certainly continue to do all of these as we execute them.
Our longer term strategy with that I'll turn it over to pulse return through our financials. Okay. Great. Thanks for ABC and good afternoon, everyone. Please turn to slide seven for our second quarter income statement summary watch revenue was $6 2 billion in the quarter, an increase of 4% year over year, but down 2% sequentially.
Merely attributed to what everyone else is seeing with global supply chain disruptions.
Adjusted operating income was 286 million up 16% year over year. Adjusted net income was $233 million and adjusted earnings per share was 48 cents a year over year increase of 29 and 33% respectively.
Reconciling to GAAP second quarter GAAP net income was $336 million and Bennett from benefited from a 149 million dollar favorable VAT like indirect tax credit, partially offset by stock based compensation intangible amortization and other charges.
The credit, which you will see booked to the interest and other line in the P&L is the is the result of a favorable tax ruling in Brazil that benefited a number of other companies as well.
Please turn to slide eight.
Our second quarter adjusted gross profit was 481 million up 58 million year over year. Despite the challenging macro environment. Our disciplined execution delivered a Q2 gross margin of 7.7%, which was up 60 basis points compared to last year in.
In total SG&A came in at $195 million up 18 million from the prior year period and at 3.1% of sales within our targeted range of 3% to 3.2%.
Overall, adjusted operating income was 286 million up 16% year over year.
Although we faced headwinds brought on by COVID-19, along with industry wide disruptions flex achieved a 4.6% adjusted operating margin, which was up 50 basis points year on year.
Turning to slide nine to review segment performance and please note all growth metrics, we're going to discuss are on a year on year basis.
Flex reliability revenue was 2.8 billion an increase of 4.7% adjusted operating profit came in at $151 million with a 5.4% adjusted operating margin.
Margins decreased 130 basis points, mostly driven by two factors, namely continued freight and logistics cost headwinds at next tracker and numerous production disruptions within our automotive business.
In reliability automotive revenue grew 3% in the quarter with significant underlying demand, but was adversely impacted by the increase in unplanned OEM shutdowns late in the quarter.
As we pointed out during our last earnings call, our health solutions business faced a tough year on year comp this quarter driven by last year's Covid related critical care peak.
As a result, we experienced an 11% revenue decline in the quarter.
Lastly, industrial sales were strong up low teens led by growth in key areas, including EV charging and renewables semi cap and robotics.
Moving to agility segment revenue of 3.4 billion was up 3.6% year over year in total the agility segment delivered 153 million of adjusted operating profit a year over year increase of 73%, which led to a record 4.4% op margin.
With an agility CEC demand was healthy across the board, particularly in cloud five G. In optical but shipments were hindered by component constraints, which led to a modest sales decline.
In lifestyle revenue grew 16% driven by new product ramps, new customer wins and healthy underlying demand.
Finally, consumer devices revenue was up slightly with demand recovery in emerging markets, partially offset by component constraints and the beginning of a planned project completion.
Just picking up on rabies global supply chain comments, you'll notice each end market was impacted by the disruptions. We're all reading about in the headlines scarcity of components and raw materials chip shortages and logistical constraints at ports and warehouses are pervasive across the entire value chain.
We are closely monitoring the situation and because the dynamics change daily we are actively reevaluating our strategic approach when it comes to Resourcing production and delivery.
I'll also add that despite these challenges the team still delivered a fantastic fiscal fiscal Q2 adjusted gross margin.
And operating margin.
We're also working with customers to see how we can leverage our extensive global supply chain to help them address their own supply chain shortages. This includes dual sourcing regionalized production and product redesign all of which are significant value to our customers. The.
The far reaching effects of the supply disruptions have shown just how beneficial and critical it can be to produce closer to customers.
While the upside remains limited in the near term longer term. These important initiatives remain a tremendous opportunity for flex.
Now turning to slide 10, let's review our cash flow highlights.
Despite component shortages pressuring inventory, we generated $90 million and adjusted free cash flow in the quarter, our net capex for the quarter totaled 90 million as well and we continue to invest for future growth.
As many of you know following our annual shareholders meeting in August the Flex Board authorized a new $1 billion share repurchase program. This program is aligned with our strategic priorities and underscores our confidence in the business and commitment to enhancing shareholder value all while maintaining a strong balance sheet.
During the fiscal second quarter, we repurchased 18 million shares totaling approximately $328 million in total for the first half of fiscal 'twenty. Two we've spent $490 million repurchasing roughly 27 million shares.
Inventory at the end of the quarter was 5.2 billion with pressure from the continuing supply chain and logistics disruptions and.
Inventory turns were 4.8, which was down from 5.6 turns last quarter.
Overall, we're quite pleased with our cash generation over the last several quarters. Our first half was strong and over the last 12 months, we've generated over $730 million and free cash flow long term, we expect strong cash flow as we move through fiscal 'twenty 'twenty three however.
However, given the persisting challenges from a component shortage and logistics, we expect some pressure on working capital and cash flow as we move through the balance of fiscal 2022.
The situation is fluid is fluid, but at this point free cash flow of approximately 500 million is probably a reasonable expectation for fiscal 'twenty two but again this is a timing issue and not a fundamental change.
Please turn to slide 11 for our segment outlook for the third quarter and our year over year growth expectations.
As we look ahead, we expect our execution to remain similar to this quarter, though the fluidity and the fluidity of the supply chain challenges continues we expect.
Reliability solutions to be up low single to down mid single digits in Q3 within reliability solutions automotive revenue will be down low to high teens as OEM customers continue to face their own production disruptions and.
In health solutions demand is solid with chronic care remaining strong we're seeing heightened demand for COVID-19 testing and diagnostic solutions, though anticipate revenue to decline high single digits to low teens as critical care will again face a high comp against last year's strong COVID-19 related demand.
Industrial revenues should be up high single digit to mid teens with broad based demand steadily improving particularly within E V power gaming and semi cap equipment.
Guilty solutions revenue is this is expected to be down high single digits to low teens within agility lifestyle should be flat to up low single digits benefiting from new product ramps as companies returned to the office. There was some end markets will continue to be impacted by component shortages and logistics.
Constraints.
We expect C E C to be down low to high single digits due to component constraints. However, all long term secular trends, including cloud growth and growing five G adoption remains strong and we expect this demand to be preserved despite near term supply constraints.
Lastly, conservative voices as it is expected to be down double digits against a high comp that benefited from a rebound of consumer spending last year and a planned program completion.
Turning to guidance on slide 12, we expect the fiscal third quarter revenue to be in the range of 6.1 to 6.5 billion with adjusted operating income between 250 and $290 million.
Interest and other is expected to be approximately $40 million.
We expect our tax rate to remain at the high end of our 10% to 15% guidance range guidance range and we expect adjusted EPS to be in the range of 38 to 44 cents based on 487 million weighted average shares outstanding.
The adjusted EPS guidance excludes the impact of stock based compensation expense and net intangible amortization. Therefore, we expect GAAP earnings per share to be between 30, and 36 cents with that I'd like to turn it back over to Ray Betty.
Thank you Paul.
So as we all know the environment remains pretty fluid with the current issues in the supply chain, we're getting a more prudent outlook. Our second half revenue guide. However, we are maintaining iron earnings guidance as we continue to execute well at all levels.
So on behalf of the leadership team I want to thank our customers and our suppliers and our shareholders for their support where that will start the Q&A.
Again, if you have a question press star one.
Thank you Pat.
Your first question and shrimp briefly at Bank of America.
Thank you for taking my questions.
Based on the guidance for fiscal <unk> and the midpoint of fiscal 'twenty two it looks like fiscal <unk> is estimated to be up in the low single digits sequentially.
I guess my question is what is giving you confidence that the fourth quarter, which is typically a seasonally weaker quarter for flex.
Can be sequentially up given especially given these component constraints, which are likely to continue into calendar 'twenty two.
That's a it's a fair question route Blue and let's just give you a little bit of color So you're right.
Typically if you look back over the last number of years, our fiscal Q4, which ends in March tends to be a bit light of our fiscal Q3, which is the December quarter.
That pattern has been historically based on demand and so I would say a couple of things are different this year one.
Revenue is being constrained by supply not demand. The second one is we have a fairly significant new program ramp in the Hyperscale space, which starts ramping in Q3 and gets closer to stable as we move into Q4 and beyond so that adds to the top line as well.
Yeah, and look I mean, it's a pretty simple right. It's a different gear than it normally ban right. So seasonality is working a little differently.
And what's really happening in Q4 in a four for us is like.
Paul said the demand is strong.
<unk> inventories still needs to be replenished and we have got a couple of very specific large programs that are going into play.
In Q4 also that has started ramping up that would start ramping up in Q3. So that is also adding now a downturn.
Now to our traditional seasonality. So I think those are all the reasons why Q4 is looking different venue lab typically let's see Ed.
Okay. Thanks for the details there if I can just stuff on my follow up ask about you know.
The same question on guidance, but related to margins it.
It looks like based on your EPS guidance, you Didnt take that down I mean, you've taken down the revenue guidance, but the EPS guidance is still the same which implies better margins. So I guess my question would be again, what is giving you that confidence that you can have better operating margins given the lower revenues and I know you mentioned that demand is strong but again what is giving you that.
Confidence in that backlog, which is probably very high but if if you know if your customers are looking further out and giving you.
You know a larger forecast, but again their visibility is probably limited the farther out you go. So again, what is giving you the confidence in the backlog and what is giving you the confidence in the margin guide.
So Ricky let me, let me start with margin and then we can talk about the backlog and in just a moment. So on the margin front. So what we had originally said going back to April was we figured we'd we'd finish the year and this was at $25 26 billion top line somewhere between 4.4, and 4.6% that margin rate is intact, it's a little bit light.
What we talked about in July but at 4.4 to 4.66, I would say nice strong margins above last year's margins with 100 million of of operating profit growth.
If you look at the E P S, which to your point, we held versus our prior guide we're quite confident that we're going to end up in that $1 70 to 185 range based on a couple of things one as you saw last quarter, we bought back a meaningful amount of stock and so we're going to get a little bit of tailwind from the weighted average shares outstanding.
<unk> you've seen our count go from 507 to 499 to 47, a share counts coming down that helps a little bit of tailwind from from interest and other from from some FX and in a couple of minor things over the last couple of quarters that were essentially dropping through but again highly confident in that 170 to 185 range.
In terms of backlog there is talk in the industry about double ordering and all that but what I can say is flex has a tremendous amount of end market insight because in in most of our industries. We have numerous customers that service those industries and so the read through that we have in our data analytics is is quite strong.
And so just to give you. One example, rabies they mentioned a couple of minutes ago channel replenishment case in point would be automotive.
If you look at inventory sitting on a lot in the dealers worldwide. It is at two year lows that ultimately has to be replenished and we're seeing that same channel replenishment need across our end markets. So we feel quite good about the again about the sequential improvement and then looking forward frankly, I think topline.
Expectations will be high as we move into 2020 three.
I'll leave you with a couple of thoughts one is you.
You know I'd.
I'd say, if you look at our and I'll talk about margin for a second if you look at our performance.
So far it has been really executed extremely while our margin performance has been very good until we have room in our margin profile for for Q3 and Q4, that's what gave us confidence in our guidance in FY 'twenty. Two if you look at our midpoint of kind of four point.
That would be a pretty that'd be the highest.
Operating margin in a long time and based on our Q2 execution you can see that we are consistently delivering that's a ton of confidence in delivering that margin.
Our commitment for sure. The math is there really no brainer. If you look at Q2 I mean, we still grew 4% in a time like this right, which is probably the highest in the industry in a very very strong relative if you look at our demand profile. You know we have more than enough demand to have hit more than our top end of the guidance we had given earlier.
They should have been at 13, 14% growth year over year. So that demand is still there waiting for us to execute as the supply situation improves. So all of that really gives us confidence in Q3 and Q4 I think it just being prudent in revenues is the right thing to do right now.
Okay. Thanks for all the detailed appreciate it thank you.
Thanks for Glu.
The next question is from Matt Sheerin with Stifel.
Yes, yes. Thank you.
I'm, hoping you can comment more on regarding demand strength, but also the component constraints within the CEC.
Is that across.
The key platforms networking.
Servers storage et cetera.
And it sounds like the supply constraints are getting worse there.
Any signs of that abating.
You get into calendar 'twenty two.
Yeah, I would say, Matt first is you're right C. C is definitely I think that sector for us and for our customers is probably one of the most challenged because demand is the mouth strong narrowed so right whether it is all the prevailing reasons of the macros, whether it is hyper said our scale.
<unk> seen all the cloud guys report fantastic route whether it is in a five day starting to accelerate now so all the macros are driving a pretty significant demand profile for Ed is that when I talked about in our our demand profile would have been at the higher end of our guidance are more than that E. C would have been the bigger.
[noise] beneficiary, all fob of having that much kinder.
<unk> finished demand at this point in time I would say in terms of which sector would then see E. C is the most affected by supply chain constraint I'd say, they're all are this is a very cool opportunity issue here across every sector. Unfortunately, but the way I see it play out is I would say.
You know the biggest growth sits in cloud right and so in general the more growth you have the more pent up demand you have you're seeing it in cloud youre seeing it in networking.
And you're seeing it in servers and storage all of them have pretty significant supply chain constraints and also have strong man that is.
Not been met yet so we're seeing it across the board for CEC.
Okay. Thank you for that and then just on automotive.
We know that the headwinds facing all suppliers to that market right now, but beyond those supply issues. When you talked about an inventory replenishment, but could you talk about in terms of the content opportunity for flex, particularly in E B, where I know you've got some strong customers.
Yeah, one thing I'd start with saying as Mack our automotive bookings. This year is at record levels. So they've just had a fantastic year in automotive in terms of our overall bookings.
It's one of the strongest in a long time, what we like about it is also the mix of those bookings, particularly around autonomous and EV and autonomous space has said before were also more focused on kind of levels. One through four because that is more acts elevated lab revenue in that.
Near term and so our largest bookings has been in those two spaces.
And the other good news on those bookings are it's also the geography of those bookings are across the across the board until they've had a strong China growth on automotive bookings and we're also seeing that in Europe and North America. So we're really pleased what Canada pivot that has happened in our automotive business Center.
Himself, our focus around EV, we recently announced a partnership with AB.
With a battery company that has been looking at long range batteries and since we are so strong and B M. S.
We're partnering with them to provide our content for E V that we're quite excited about so really the focus is the right. One the bookings are showing the results and you know we're well positioned on the EV space and we also continue to look to add technology there.
Okay. Thank you very much.
Your next question is from Mark Delaney with Goldman Sachs.
Yes, good afternoon, and thanks for taking the questions. The first one is on the proposed an art Murdoch's acquisition, maybe you could talk a little bit more around how fox became familiar with that potential asset and then is this a signal of how the M&A strategy may progress going forward and that you know this is a product that type of business rather than at assembly.
Is that the type of acquisition you, we should expect flex to focus on longer term.
Yeah, So mark I'd start by saying is very Super excited about this acquisition is because it just fits really well with our wet flax and I'll explain that in a second but also importantly, I know this space really wild from my prior history, and then now I know flex, while it's the way it fits really well.
Flex does a lot of system integration work in afford the Hyperscale Colo space right. So we do racks and enclosures, we do server storage integration. They also have our own embedded power business that works in that space and Anr Martin eggs brings fantastic synergy with it because they bring critical power.
Two particularly to Hyperscale in Colo and that's also a lot of racks in enclosures and system integration along with the technology embedded within that system integration.
And the biggest issue that Hyperscale Colo people have is that you know it's hard for folks to scale up they find it difficult because when they scale up you know they usually the component suppliers are not able to and flex is really good at scaling up. So this is a really good combination of the product technology, we have in our ability to do logistics.
And modular solutions really fast.
For anr to be really successful with flex.
Really excited because hyperscale Colo is a fantastic place to invest in right now in terms of growth, we're seeing that in the base flex business.
And so bringing a business like this with high margin and a perfect fit both in technology and system integration is really and the kinds of acquisition, we'd like to see in flex moving forward.
That's helpful and a follow up question about the implied fiscal for Q guidance you already discussed.
Revenue is implied to be up a little bit quarter on quarter and fiscal for Q. If I just take the midpoint of EPS guidance for <unk> and for the full year.
Looks to imply a pretty flattish EPS quarter on quarter, despite the higher revenue so.
I might just putting the Harris teeter to finally, an unused he knows those calculations or are you in fact expecting some some incremental costs or margin pressure in fiscal <unk> the guidance seems to imply.
I don't I don't think we'll see I don't think so.
We will see a sequential deterioration.
I think what we've done here is put a prudent guidance out there that you know we think that we can hit them. There has been some some incremental challenges in the AR in the supply chain is as we've talked about in the prepared remarks. So as we move from from Q2 to Q3, where we will see a little bit of a margin bite. We expect some of that to continue as we move into.
Into Q4, but I don't think it will be significantly worse.
Thank you.
The next question is from Shannon Cross with Cross research.
Thank you very much I wanted to dig a little bit more into.
The logistics challenges.
The inflation that you're seeing and what I'm trying to figure out is because we've heard this from a number of companies you're obviously not the first but.
Now.
I guess, how much visibility do you have into knowing that.
Now that things aren't going to get worse with some of the vaccine mandates and other things that are going to come into play here in the next month or so.
What kind of workarounds can you do from a logistics standpoint, I don't know if you can just give maybe some some insight into what what's going on behind the scenes because I think everybody is somewhat struggling with with.
The the supply chain situation that exists today.
Yeah, Shannon I think that's a fantastic question, because we have a ton of visibility and we also have a lot of conversations with suppliers to really understand what's going to come in and when and how is that going to come together for the full bill of materials, what is tending to happen today is in.
In general is that even if you have like 99 of the 100 components available. If you have one component that is missing whether it's due to Malaysia or some other issue it stuck on a boat and you're really not able to put that product together. That's the reason you're seeing some of these supplier decommit sudden movements.
<unk> last minute because you know people have all the components and then you don't have one I think so projecting and that is not very easy, but that's you know that's the same thing that we're seeing is that we have the inventory we have the labor and the resources, but I have one part of it doesn't arrive and the automotive company announces it.
Down we are in no situation tail send the many product because at the very last minute issue. So I think that is just hard to predict Shannon no matter, what we try and that's why we have been somewhat prudent now in our revenue guidance because we.
We think those things are hard to predict in terms of.
Vaccine mandates I think that's a more hot topic I'd say more important for the U S, which is a small portion offered off our overall work force right. So really not a large portion of our overall work force.
And we think that the U S situation is manageable because it's in a less than 10000 people in our.
165000 people so our factories here, we already have a plan we've got a very good understanding about how many vaccinated how many not how to manage to that we have 84% who've already had one shot across the company. So it's pretty good metrics, we have but is that going to affect you know kind of <unk>.
Some sites, maybe but I think all that fits into kind of how we're prudently, giving the revenue guidance, which is what you are seeing all companies do Shannon.
Yeah.
It's definitely it's certainly this earning season on with regard to inflation.
How are the conversations going with customers how much flex is there in your contracts.
Given some of the increases we've seen and and you know labor costs and and that or.
Do we have to wait until you renegotiate contracts and sort of the next iteration before you're able to make up some of that thank you.
Now in the Shannon absolutely we don't have any concerns in part passing along inflation do you know what are we are we have become so good at executing through these ups and downs right, whether it's COVID-19 or whether it's trade issues and now the the supply chain. We reacted quickly to the inflation issues that have been very sick.
Thematic Lee passing along claims you know to our customers our pricing to our customers on these claims on these the inflation issue. So we're quite comfortable that we are tracking it well we're methodical in terms of passing it we have a high pass rate on our on our on our.
<unk> are things that we're seeing across the company, which is why our margins are performing so well and we're very comfortable that contractually and even outside of contracts that this is the time to to get pricing and where we're definitely seeing that in our business.
Great. Thank you so much.
Your next question is from Paul Chung with Jpmorgan.
Hi, Thanks for taking my questions. So just to follow up on the acquisition. So does the fiscal year 'twenty through your guide kind of include the cost impact there in <unk>.
When can we expect to see some margin contribution from that business believe you mentioned news.
You know in the mid teens, EBITDA, which is quite attractive and then it's been a while since you've acquired you know a large asset like this is is your cap allocation priorities kind of shifting I know, you've repurchased kind of quite a bit this quarter, but should we think about you know higher margin M&A as the bigger priority here moving forward.
Sure so maybe.
Paul I'll answer the Ana Marta question first so we have not baked that into our 2022 guide.
We'll expect to close that deal sometime towards the towards the end of of the calendar Q4 here in November December time frame.
<unk>.
Thinking about 2022 it'll probably add roughly 100 million to our fiscal Q4 is as we move into that that March quarter. Looking ahead to 2023 don't want to get too far over my skis in terms of incremental disclosure, but I'll say this I expect probably five to 10 cents of earnings accretion as we move into R. R.
Fiscal 2023.
In terms of capital allocation, what no no change from what we've said before we're going to be disciplined we're going to be opportunistic and we're going to balance internal investment extra investment and share repurchase or or share capital return.
You know, we're not gonna over constrain our own capex.
As we see good deals, we will be opportunistic in and get them, where we can get them at at good prices, We love the a Nord Martin deal, we think it's a great fit and its going to have nice financial returns.
But you know like like you mentioned, Paul a couple of minutes ago, We bought back a lot of stock last quarter, and we did that because we viewed the company to be pretty significantly undervalued.
So no major change to our capital allocation framework, we're going to continue to be opportunistic and we're going to continue to be balanced and you know we're gonna be thoughtful and think long term employees should be able to look at this and maybe profile. It moving forward because we've been very consistent in what we said we would do right till organically, we're in a great position right commercial.
With the strong we like our mix our execution and that is fantastic. So you're seeing the margin flow through on that which only gets better by the way because there's so much inefficiencies in the system right to that only gets better moving forward. If you think about our our balance sheet. It's in a strong position.
Got $1 billion authorization to buy back stock, we're executing on that really while we have room to do M&A, which is fantastic and if he can find deals like this you know it it's very easy to kind of see how this company looks moving forward. So we really think that we're prioritizing all the things we said we would prioritize.
Thanks for that and then just a follow up on on industrial can you kind of expand on the broad based demand there where you're seeing pockets of strength and are you seeing less impact.
On components and in this segment. Thanks.
Thanks.
Yeah, I'd say first it's two things one is industrial demand is broad based kind of across all sectors for us. So whether we have power with merion capital equipment, where just in kind of core industrial devices.
Demand is is very very strong we've had a fantastic bookings last year in industrial so we've been really steadily growing that business, which is now translating into this higher demand for us. So that's that's a big plus and we're seeing it across our targeted verticals.
And sub segments in industrial in terms of the.
A component shortage I would say because industrial is more kind of high mix low volume. It is kind of more dependent on the next set of semiconductor players voices kind of large scale ones that you typically see them.
So I would say it is getting its pretty fair share of pits write off your C. C. At the industrial and automotive are the two biggest that are constrained by supply.
But it may come out of that earlier, just because I would say those suppliers are committing to it into investments that is coming on earlier than the larger foundries right Phil.
I'd take you now our thinking is that industrial demand is strong so that plays through but the supply situation in terms of mix probably helps that because it's lower volume higher mix and those suppliers are keeping up a little better right now.
Okay, great. Thank you.
Thanks, Paul.
The next question is from Steven Fox with Fox Advisors.
Good afternoon I apologize if this is a positive I got cut off in the middle of one of the questions.
You I think I understand the.
The Delta in terms of how.
All of these issues are hitting sales I'm not quite sure I understand the math around.
The exact impact to the operating line you called out things related to that next tractor and auto which sound big and some other items and I was wondering if you could maybe quantify some of the impact to the bottom line.
From these issues and then I had a follow up.
Yeah, no problem, Steve and I assume you're talking specifically about Q2, because that's the only thing we're really given next stryker disclosure on am I correct, Yeah, whatever you can provide.
Yeah sure. Okay. So sure so so specific to a specific to Q2.
The I would say two thirds of the margin erosion that we saw in the reliability segment, specifically came from the cost headwinds that we've seen from logistics index tracker that that was the preponderance, we had a little bit of mix headwind there as well we talked about the the.
Health solutions business being off a little bit, but I think the bigger driver was automotive.
OEM shutdowns, which again is as we moved through as we moved through the quarter. They got progressively worse you know in September I think sort of being the hopefully the peak but.
As I think about the sequential change now moving from Q2 to Q3, here's what we're expecting at the midpoint of the guidance for Q3, we're expecting a 4.3% op margin rate that's down a little bit at the midpoint from the four six we did the prior quarter driven.
Driven by a couple of things largely the logistics cost headwinds that we know will continue as we move through the quarter.
In particular in the automotive business. The other pieces mix you know both auto and health solutions are going to be down a little bit and those are better than average margin rate businesses within the within the overall flex portfolio and Steve Let me just maybe I understood. Your question a little differently. So what I'd say is for Q2 straight for.
You're right, we did much better than what we saw.
<unk> said, we would do just because we're executing really well.
And margins came in strong at at 4.6% I think looking forward into Q3 and Q4, if we hit the guidance, we're giving our full year operating margin will be at 4.5 cents Iraq.
What we're trying to do with three and four is to continue to make sure that we're incorporating any of these ups and downs that we see and you know, we'll continue to execute really well and hopefully in a deal towards the higher end of the range that we've given you I think at this point in time with the complexities and in forecast.
Staying we're being prudent in our outlook, but do you have seen our methodology of how we've done it in Q2 and Q1 and you know you should apply that same logic as you think about three and four.
Yeah, that's really helpful and NAFTA.
Now for the hard question, which is the path out of this is is murky at best I mean, even if you say things don't get worse, there's still sort of playing catch up for quite a long time and understanding that.
Demand is very good is there something specific to flex. It may be you can outperform others and catch up quicker for your customers or do we think about it is this is a new base and youre growing from this space for the time being.
I'd say the first is you know at <unk> you know at this revenue that we have done in Q2.
<unk> of over 6.2 billion I would say and at a 4% revenue growth year over year, we'd still be very high compared to most of our peers in compare to why most companies that have that strong hardware composition are doing so we're definitely coming out at the high end of fed there is no question about that.
As a supply chain company, we're just executing just fantastically, well and we have more and with our suppliers and are able to understand you.
The investments and the commitments really much better than almost any company that I've seen and then I'd say the second reason why flex comes out very well is just what is happening on our commercial go to market strategy and all the new wins and the growth ramps that we're getting which is sitting in demand that needs.
To be shipped so the combination of those two things.
It really gives us tremendous.
Confidence in our forward looking forecast and then largely there's no question that we're executing well and with all the inefficiencies built into the system. So if you put all those together I think you should have a real strong confidence that flex is doing really well in our overall and we'll continue it out.
Perform.
That's really helpful. Thank you very much.
Thanks, David.
Your last question is from Jim Suva with Citigroup.
And a lot of the questions have been answered, but I have more of a strategy structural question and that is as we've now gone through trade wars.
Covid crisis, and now a supply chain challenge for every company in every end market.
As companies are we're hearing that they're more sourcing more local on the continent are closer to their home to get you know closer to the product and not deal with future issues like shipping and all of these things.
Does it make sense that flex could better utilize its factories that are underutilized, maybe like in Guadalajara, where Nike was planned to go to search and therefore on a cost plus model. Your operating margins have very much significant upside room for that because they've been underutilized.
Or am I missing some key components, there, but strategically instruction I'm just kind of curious about your reply to that.
Yeah, Jim It's a fantastic question. One is I would look historically and say if you think about 120 basis points of margin improvement that we've delivered over the last couple of years. All that has also been as a result of us being very focused on efficiency, but if you look forward you're absolutely right.
You'll see the shifting off our P. P E that is happening more to kind of North America, and that does drive tremendous productivity and utilization benefits in Mexico and in the U S that we should benefit from so we're doing well in terms of resizing and upsizing.
Our factories with a very forward looking view of how we should see things move our largest programs and ramps.
Are happening as a result of rationalization in North America.
And as you are there we have the room to do it but more importantly, we have a really fantastic team that can execute so our view is that yes. The margin upside potential is strong not only because revenue is going to be stronger and that'll drive better absorption through the system, but our efficiencies get better just like you.
F pointed out because.
Because of factory utilization.
We're going to get some upside from.
Thanks, Jim.
Okay.
And we then.
Okay. I think that was our last question. So thank you all for joining us and I Hope you all remain safe and in good health and I look forward to speaking to you again. Thank you. Thanks everybody.
Goodbye.
That concludes today's conference you may now disconnect.
Yeah.
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Uh huh.
Yeah.
Yes.
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