Q4 2022 Flex Ltd Earnings Call
Their continued dedication helped us deliver strong performance this fiscal year.
I also believe that in the midst of crisis as went through partnerships or belt, and we have significantly strengthened our partnerships with our customers and suppliers as we navigated through the dynamic supply chain environment.
While delivering record performance. This year, we have kept our eyes focused on the longer term direction of our company. We laid this out for you in our most recent investor day, which sets the stage for our next phase of profitable growth now going to the next slide let's look at some of our accomplishments.
Q4 was up over 9% year over year and over 3% sequentially.
As you all know seasonally this is usually our weakest quarter with overall revenue typically down about 10% sequentially our ability to deliver revenue growth shows the continued strength in demand across the portfolio as well as the team's incredible execution, while operating in this environment.
A good example is in our automotive business. Despite the major industry disruptions, our automotive business grew both sequentially and year over year, while S&P global auto production volumes declined.
Both industrial and CEC also had very strong quarters, all of which led to strong revenue and record adjusted EPS levels in the quarter.
For the full year revenue was up about 8% year over year, and we delivered record full year adjusted operating margins as well as a record EPS on both an adjusted and GAAP basis.
Our industrial business was also very strong for the full year with ramps in a number of key markets, including next generation robotics, EV charging stations and multiple ramps in renewables and power technologies.
Remember these ramps and renewables are in addition to our next tracker business, which is now its own separate segment. As you will see next tracker also saw very strong revenue growth this year.
<unk> strength continued driven partially by strong current demand, but more importantly, much of this is from winning new business as we solve increasingly complex challenges and provide customers with value added services, such as logistics and fulfillment and expanding our circular economy activities.
I will also point out that we executed on our capital allocation strategy. This year as we stepped up our investments in future growth, we increased capex by about 60% with over 60% of that allocated specifically for funding anticipated organic growth. We also completed our <unk> acquisition.
<unk> expanding our presence in datacenter critical power, which creates cross selling opportunities with our core data center business.
And in addition, we repurchased a record $686 million worth of stock.
Now turning to slide four.
As we covered in our recent Investor day, there are several macro and secular trends driving growth in outsourced manufacturing at its core. These trends are about increasing complexity that many companies are finding more difficult sometimes have an impossible to solve by themselves.
This complexity is creating higher value growth opportunities for flex because we have the right capabilities, we have the global footprint and the scale to solve these challenges for our customers.
We have transformed into a more adaptable a resilient advanced manufacturer and in recognition of our progress. We are honored to have been recently recognized with three manufacturing leadership award for outstanding leadership and achievements in the categories of enterprise integration and technology operations.
<unk> and sustainability.
Our focus on strengthening our core capabilities in each of our six business units and delivering in key end markets continues to manifest the new wins.
That will drive growth in the years to come.
At our Investor Day, we highlighted just three of these key end markets that we have doubled down on they were the next generation mobility, the digital healthcare and cloud expansion.
Now putting these three markets in perspective Nextgen mobility. For example is fueling our growth with new wins in support of EV and autonomy technology transitions are technological knowledge and domain expertise is leading to new opportunities and expanding collaborations.
Of course, an exciting example of this is our recently announced partnership with Nvidia is drive program for level, two plus level five autonomy.
We also recently announced a major win with Enphase, a leading global energy technology company and Thats expanding on 15 years of partnership where we have been selected to support end phases European market expansion for micro Inverters solar solutions.
In our health solutions group. This year, we began several medical device ramps addressing multiple aspects of chronic care and these wins will drive growth through the next few years.
And in our cloud business, we initiated multiple new ramps within with a few of our Hyperscale partners late in the year, which led to strong growth for CEC in Q4, but more importantly will contribute to accelerating growth for fiscal 2023.
Again. These are just a few examples from the diverse end markets. We play in we're in a strong position to capitalize on these long term opportunities through our continued focus on manufacturing and supply chain technology and targeted growth markets.
We remain focused on the factors that will drive sustainable growth.
Margin improvement and creating shareholder value with that I'll turn it over to Paul to take you through our financials Paul.
Okay, great. Thanks, Robert and good afternoon, everyone.
I'll begin on slide six with a review of our fourth quarter results. Please note all remarks will be based on non-GAAP results unless stated otherwise the GAAP reconciliations can be found in the appendix of this presentation.
Fourth quarter revenue came in at $6 9 billion up 9% year over year.
Operating income was $295 million with earnings per share at <unk> 52 for the quarter or year over year increase of 6% free.
Free cash flow was $252 million up year over year.
Just taking a step back and looking at our full year performance on slide seven with focused execution throughout a very dynamic environment. We delivered full year revenue of 26 billion up 8% year over year.
Operating income for the fiscal year 2022 totaled $1 billion 169 that was up 13% year over year. Despite the challenges caused by component shortages and COVID-19 flare ups.
For the full year flex achieved record EPS of $1, 96, which was up 25% year over year.
<unk> 2022 free cash flow was $593 million.
Turning to our fourth quarter segment results on the next slide reliability revenue was $2 8 billion, an increase of 12% year over year, driven by improved execution against strong demand in auto and industrial and with some tailwind also from <unk>.
Operating income was $140 million.
Operating margin was four 9% with pressure from material shortages that created some inefficiencies in industrial.
And agility revenue was up $3 6 billion up 4% year over year, driven by strong demand across lifestyle and CEC, partially offset by planned declines in consumer devices.
Operating income was $152 million up about 12% year over year with nice margin expansion up almost 30 basis points to four 2%.
And finally next tracker revenue was $440 million up 38% year over year due to continued strong demand.
Adjusted operating income for <unk> was $22 million with pressure on margins from higher freight and logistics costs.
On slide nine looking at performance for the full year reliability revenue was $10 6 billion with operating margins up slightly at five 1%.
Within reliability automotive revenue was up 15%, primarily due to new program ramps reflective of the growing demand for our Nextgen mobility portfolio.
Health solutions was down slightly against a tough compare recall that in 2021 health solutions was up 25% with record growth driven by critical care products. There were instrumental at the height of the pandemic.
Now that we've lapped the comp we expect health solutions to be growing in the range that Randy outlined at our Investor day.
Lastly, industrial had a strong year with revenue up 17%, primarily from solid organic growth and with some tailwind from <unk>.
Just moving down the page here agility segment revenue came in at 14 billion delivering a record $4, 3% op margin that was up one full point for the year.
With an agility CEC was up roughly 3% with growth from new project ramps, but had some headwinds due to the continued component shortages.
Consumer devices revenue was down mid single digits caused largely by planned contract completions and is representative of our active program management.
And finally lifestyle had record performance with revenue, increasing 14%, primarily due to outstanding execution successful program ramps and robust end market demand.
<unk> completed the year with revenue of $1 5 billion a year over year improvement of about 22% and ended the year with a six 2% operating margin driven by higher freight logistics costs overall solid performance with all segments returning to revenue growth. This year and we have some great momentum as we head into the fish.
Full year 2023.
On slide 10 cash flow.
Net capex for the quarter totaled $108 million and for the full year came in at $431 million. It was about one 7% of revenue free cash flow was $252 million for the quarter and $593 million for the full year free cash flow conversion for the year was 63%.
For the quarter, we repurchased 6 million shares totaling about $105 million for the full fiscal year, we spent $686 million repurchasing 38 million shares and that represented about 8% of the shares outstanding.
We closed the quarter with inventory of $6 6 billion inventory turns were down to 4.1 indicative of the dynamic supply chain environment, that's challenging the industry.
Please turn to slide 11 for our segment outlook for the fiscal first quarter and our year on year growth expectations.
Beginning with reliability solutions, we expect revenue to be up high single digits to mid teens with healthy demand across all three business units automotive and industrial will have multiple program ramps beginning this quarter as well.
Turning to agility solutions revenue is expected to be up low to high single digits year over year as rabies. He had mentioned the significant macro trends driving robust cloud demand should fuel strong growth in CEC. We also expect positive demand trends to continue into the quarter for lifestyle offset by.
<unk> devices, which is facing a tough prior year comp that includes a program that we wrapped up in Q2 of last year.
On to slide 12 for our quarterly guidance, we expect revenue in the range of six 6% to 7 billion with adjusted operating income between 285 and $315 million.
Interest and other expense is estimated to be between 40 and $45 million and the tax rate should be within that 13% to 15% range.
We expect adjusted EPS between <unk>, 44, and 50 cents a share based on approximately 471 million weighted average shares outstanding.
On the following slide we have our fiscal year 2023 guidance. We walk you through this it at our Investor day that our Investor day, So I won't spend a lot of time on it but I'll remind you that we're expecting 8% year over year revenue growth at the midpoint of our guidance of 27, 7% to $28 7 billion.
Adjusted EPS is expected to be between $2 nine.
And $2 24, a share that's about $2 16 at the midpoint.
To wrap it up before we begin Q&A.
Closing out a tremendous fiscal year 2022, we remain focused on driving profitable growth as we execute on the high value opportunities presented by long term secular trends, we've demonstrated that our strategic initiatives have established a solid foundation and flex is uniquely positioned within the industry.
<unk> to serve those growth markets with that I'd like to turn the call over to our operator to begin Q&A Carl.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer portion of today's call.
If you have question. Please press star one on your phone.
If you would like to withdraw your question. Please press the pound key.
As a reminder, we ask that you please limit yourself to one question and one follow up.
One moment please for the first question.
Our first question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.
Yes, good afternoon, and thank you very much for taking the questions looking at the fiscal 'twenty three outlook relative to what was discussed about a month ago at the analyst day, it looks like the revenue and the midpoint of the EPS guidance are both slightly higher and thats. Despite some of the continued challenges around COVID-19 and particular in China.
And hoping you can better understand whats driving.
The updated view on fiscal 'twenty three.
Yeah, I'll start that Mark and if David wants to chime in here she'll do that as well, but relative to the analyst day, we came in Q4, a little bit better than what we had expected and so we dropped some of that revenue through so you'll see the midpoint of our guidance did come up a little bit for the year.
At this point, we held EPS flat to what we had indicated at the Investor Day I think we had said $2 16 really Didnt give you a range right now I would say $2 16 is still the mid point.
Pretty upbeat about.
That high single digit topline growth that we had messaged in and.
A pretty good EPS.
Okay. That's helpful and my follow up question, hoping to better understand some of the headwinds that are weighing on EBIT margins, you talked about some of the cost and logistics.
Headwinds could give you a little bit more specific on how you expect those to trend over the course of fiscal 'twenty three because I think you need to go from.
The lower 4% range at the midpoint of the fiscal <unk> guidance.
And see that improve over the course of the year in order to get the full year to the 47 to 49, So maybe talk a little bit about what youre seeing and then how you expect that to abate over the course of the year. Thank you.
Yeah, Mark I'll start by saying that in the last few years, we have shown our ability to really continuously improve our margin dollars or margin rates. So we're really in a shown while in the middle of all the ups and downs and all the macro challenges that we have been really good at.
Driving the right mix, the right kind of growth and managing through all our efficiencies that happened as a result of supply chain and pandemic and all of that so I'd say, it's a fiscal 'twenty two again very good margin improvement our fiscal 'twenty three guide right now still shows very good margin improvement and I would say that that would.
Move around a little bit in the quarters, just because we continue to work through some of the supply chain inefficiencies, whether it's China shut down or things like that and we have to ramp up and down as we see availability of critical products and so.
That will tend to happen, but we feel very good about kind of first is the mix of our bookings that converts to revenue that is improving our overall margin profile.
<unk>, which really gives us confidence in our ability to guide where we are guiding right now for fiscal 'twenty three I would say, yes, it will move around a little bit in the quarters based on how much inefficiency happens and what supply chain disruptions and things like that.
In our history shows that we managed it extremely well and we will continue to field strong about how we can deliver the rest of the year.
Our next question comes from the line of Matt Sheerin with Stifel.
Please ask your question.
Yes, Thank you and good luck.
Afternoon, I'm just following up on that question regarding supply chain challenges and the component constraints. It seems like you over delivered and a lot of your peers did too and of course, you and your peers have built inventory over the last few quarters is that starting to benefit you where you are.
We're putting.
Materials in place for orders a month two months out and you're now helping fulfill that.
And is that your strategy going forward with that inventory build.
Yeah, Matt So says in a spot on right I mean, the idea always is this inventory built up we said before that it's all about kind of that Golden screw mindset, where it's waiting for one component and as that component clears up we want to be able to meet the demand for our customers right and thats, what youre seeing us.
Execute to with the revenue upside that we're seeing in these quarters that as products comes in and were able to free up the bill of materials and build a product we're able to execute really well I'd say the inventory buildup itself I expect that it'll start balancing out right towards the end of the year and youre going to see that happen.
And that's the right thing to do because my eventual focus will always be to get turned back to where we think we wanted to be and this is a very unique situation with what's happening with the supply chain congestion and so we're very committed to delivering the growth of our customers want us to that's why you see the inventory buildup, but the strategy won't be to continue.
To keep inventory at an inflated level to meet that demand. The hope is that the supply chain congestion at some point and starts to ease up. So you can get to the right level of turns to deliver the.
The growth that we're looking for.
Got it and just regarding the inventory.
Sure.
Customers are paying unit advance are you seeing an increase in customer deposits.
Yeah, Matt I'll take that one.
I wish it was a dollar for dollar offset but if you look year on year at our working capital advances coming in from customers Q4 of 22 versus Q4 of 2021 were up almost three X. So I would say close to $1 billion worth of help in terms of that offsets.
To inventory growth. So they are helping I wish it was dollar for dollar, but it certainly has helped to mitigate the impact.
Okay. Thank you.
Yeah.
Yeah.
Our next question comes from the line of Steven Fox with Fox Advisors.
Ask your question.
Hi, good afternoon.
Questions first off the cash balance.
It is up substantially into the end of the year approaching $3 billion can you sort of talk about what's behind that and you guys Youre investors don't want either hoard cash what you are thinking about dealing with it in the coming fiscal year, especially with regard to the guidance whether any other usage of cash. It is factored in and then I had a follow up.
Yes, sure it's all yours.
Sure. So I'll, just maybe start with us.
On free cash flow.
You didn't hear us talk about the script, but I'll just kind of voice. It over just so everyone is clear $550 million of free cash flow expectation for.
For 2023 here that will likely be.
More backend loaded as David had.
Alluded to I mean, I think we'll continue to see some pressure on inventory for the next couple of quarters, but I would expect that to start to abate, so probably more a back half loaded free cash year for us in terms of the cash on the balance sheet itself look we've been we've been operating in a very unusual environment over the last few years, you've got Covid, you've got shortages you got logistics constraints now you have.
War.
And I think we've all concluded with that backdrop, it's it's.
Smart to have flexibility and have some liquidity and that liquidity has been beneficial for us when you look at the intra quarter working capital requirements. The cash requirements from from peak to trough, they're more significant than what they've been in the past couple of years that peak to trough.
For us typically is I don't know, 30% plus of our of our inventory level and so you kind of do the back of the envelope math on it that's a fairly high peak to trough use of cash throughout the quarter.
Inventory as you know it's significantly higher than it was at that sort of that pre COVID-19 level and there is we need some we need some balance sheet support.
Balance sheet strength to support that.
I'll say this we like where we are we're in a very strong financial position to manage through what is a as you know very dynamic environment because of the liquidity that we have.
We don't want to be in a position to pinch ourselves here should should things soften up a little bit so we like where we are.
It's a high balance as I see today, but I think it's appropriate given the dynamic environment and what we've been seeing with inventory.
And the.
Guidance for the full year doesn't assume use of cash.
For anything outside of working capital and organic.
So we.
You are correct, we are assuming that share count is flat and so the 2016 EPS that we're guiding to here at the midpoint.
Presumed that we take care of things like dilution from equity comp, but we have not baked in.
Share count declines.
Great and then just as a follow up on the like you pointed out the auto.
Your auto sales are significantly outgrowing vehicle production right now and I'm just curious if we if we start to assume whatever normal production looks like maybe later in the year hopefully.
Does that outgrow sort of normalize also or should we think of the alcohol if youre having right now.
As sustainable.
Sustainable in the subsequent quarters, and if so why or why not.
We had said in the Investor day, we spend a lot of time talking about our focus on kind of the.
EV space and Nextgen mobility, and we feel very strongly and we did a deep dive on it for the reason that we really feel strongly that we are outperforming the industry because our technology is very strong and were very.
Getting rewarded in terms of bookings.
For this next Gen mobility. So our reason for outperforming I feel is two fold. One is we're always able to perform <unk> in terms of supply chain shortages in how we manage that they have a strong relationship with our Oems and suppliers. So that definitely helps but I feel comfortable with our outperformance.
The sector, even moving forward just because of the thesis we laid out in the Investor day that this is a high focus area for us lot of new wins, you saw the kind of estimated EUR number that Mike <unk> laid out for this space.
So our view is that we'll continue to outperform.
IHS guidance for this space.
Great. Thank you so much.
Our next question comes from <unk> <unk> with Bank of America. Please ask your question.
Hi, Thanks for taking my questions.
With that you took up the fiscal 'twenty three revenue guide by $400 million.
Can you talk about which end markets are outperforming versus what you thought at the analyst day and this might be nitpicking, but you kept the EPS guidance at $2 16.
That $400 million, probably translates to about <unk> <unk> in EPS is there any.
Further headwinds to margins than what you had thought at the analyst day or or is it just you being conservative on the on the EPS given the macro situation.
Andrew Thanks for the question I would say the first thing in terms of overall lifting our revenue guide.
Really outperformed our Q4 number as you saw right in that.
Looking at that and our ability to just manage this whole shortage clearance and everything for the year. We felt like we had to take up revenue for FY 'twenty three right now even though it's early in the year, we feel really good about how we're clearing shortages and how we're managing demand and so that was kind of the overall.
View and the sectors I would say is across the board and the reason I'd say that the cases, because we have demand backlog in all of our six segments, it's not one or the other so because of that I would say overall all six segments are outperforming to what our original thesis for the year was.
We feel quite comfortable that we will continue to see that over the next few quarters that we'll be clearing shortages and improving our demand outlook pretty well to the guidance. We have given I'd say in terms of EPS Paul will jump into this that this is just a little early in the first is we feel very comfortable about our margin guide, let me be very clear about that or.
<unk> percent, we have shown our ability to deliver that.
Yeah, well there'll be inefficiencies two quarters, because of China shut down or something else, yes, absolutely that's going to happen.
But we always come through in terms of how we manage the combination of kind of productivity and managing this efficiencies. So feel very comfortable about our adjusted operating margin guide of four 8% I think just little too. We've shown that we have given you a very nice EPS guide year over year improvement.
A little too early to start changing our numbers for <unk> for fiscal 'twenty three.
<unk>.
How we are in terms of how we guide group Lou I think we feel like it's first quarter, it's too early to do that so.
Well well look through the year and see how it comes through and then hopefully EPS will move up with the rest of the numbers.
Paul anything to add just a couple of minor things you are blue for modeling purposes, as you probably want a model a little bit more interest cost that's probably a couple of cents of headwind in probably the higher end of that.
1% to 15% tax rate given what we know today.
That's the sort of the offset to incremental margin that you would expect from that $400 million more in revenue. So it all kind of.
Wrenches out.
Yes.
Makes sense. Thanks for the details on that and then just on some of the investments you're going to make in fiscal 'twenty. Three I think you had said capex of 2% is that still the case and what areas are you going to be investing in organically and then any thoughts on M&A I mean do you think that's feasible in this environment.
So any thoughts on the capital allocation. Thank you Yeah, I would say, let me start with overall Capex, yes, we're going to have to continue to invest in the Capex range. We committed to just because our organic growth is so strong right, we're going to have to invest in growth.
To deliver the bookings, we're seeing and then the commitments that we've given to our customers. So absolutely I would say in terms of the areas itself.
All of our five segments I'd say outside of consumer devices will show strong year over year growth and will need to have <unk>.
Capital invested for those businesses, we always tend to see a little bit more in the liability just because of the capital intensity of that business will also be looking to add square footage in areas that we are running out of space and it tends to be all the places where you see the whole reassuring regionalization trend, but that's not the.
America or parts of Europe parts of Southeast Asia. So we'll continue to look at adding that we're also making some strong productivity investments I talked about how we feel very good about our manufacturing technology excellence and so continuing to invest in that to really drive the productivity investments where we can.
See that long term, 5% margin growth.
Margin percent that we talked about is important so I'd say, we'll see a little bit of everywhere is kind of how we're thinking about investing for growth Paul you want to take the yes.
Yes in terms of M&A, we want to leave the door open to that and you never know when opportunities arise at fair price, but I would say on balance priority for us is more stock buyback right now than than M&A.
Okay. Thanks for all the details and congrats on the strong execution.
Thanks, Thanks, Rob appreciate it.
Our next question comes from Jim Suva with Citigroup. Please ask your question.
Thank you and my question as well as the follow up on kind of the same question. So I'll kind of pose the same questions that rate would be and Paul with just kind of a different angle.
And that is now that we've had multiple years.
Trade wars shipping costs Covid outbreaks component shortages power outages. All these challenges I'm wondering first for rates would be do you think the just in time delivery model needs to be adjusted permanently build in some buffer and then kind of the same question to Paul.
Is it worth your contracts of instead of just doing a straight cost plus model now.
Not knowing what the future shipping inbound steel costs outgoing steel costs or is it worth building in contracts that are different than in the past with like some type of indexing or is that just too forward looking thank you.
Hey, Thanks, Jim I'd say, let me start with the just in time delivery model.
My entire career in operations supply chain and at many other end markets outside of kind of what flexes and and what I see with with what is happening today, which is such a shift in glass and moving to the.
Right.
Spring manufacturing to the point that to the to the point of use.
Huge trend right and then you combine that with the supply chain congestion that people are learning from which all of the things you talked about whether it's trade or pandemic issues. Then there is a view of hey should I have more buffer inventory to manage for all of that and is it just in time delivery model dead right I would say.
Jim My thesis on all of this and we will say time plays out in terms of how all this works is that we'll land somewhere in the middle I think customers all of us, including will be a little bit more reticent to have very lean inventory models, right and that'll be important, particularly when you have products.
That have long supply chains, but on products that are have shorter supply chains, because youre reassured them or bring them closer to the point of views. There that just in time models will have some justification to continue so it'll really depend on the product in the end market that you're in and I'm very sure you're going to end up.
With a blended model based on the complexity of the supply chain. So I wouldn't say all dead, but definitely in some cases, there's long complex supply chain, everybody is going to be talking about that more in saying, let's build a different model than we had before and where we look at that very very closely in terms of our planning process.
And what would provide the best value for us and customers and how can you get the best level off.
Livery performance with kind of all of this volatility built and so I would say my view is it's going to end up somewhere in the middle and it'll depend on the products and the complexity of the supply chain. Paul do you want to jump in on the contract, yes happy too. So I'm glad you asked the question Jim because it's helpful to maybe demystify this a little bit for <unk>.
Investors if you look at the model the contracting model in this industry.
Like you said it is largely cost plus.
When you have episodes of higher than higher than usual inflation or micro shocks to the system. A good example would be a big shutdown in Malaysia in July of last year June of last year, which basically shut the country down for a month.
Similar to what we're seeing here in Shanghai.
There's various mechanisms in our contracts today and contracts in the future to protect us from those headwinds.
Hard pegged costs, so very specific component inflation cost specific expediting fees those are fairly easy to contractually just pass right through.
We unfortunately don't have the benefit of <unk> 15, 15% <unk> margins to absorb all of that we just can and so that's the nature of the industry. Those costs again that you can hard peg get passed back to the customers and that protects the overall margin dollars for companies companies like flex.
The softer costs things that you'd mentioned COVID-19 the stops and starts inefficiency from from under absorption, that's a little bit more difficult to hard peg, we work on ways to mitigate that.
I think for the most part we've got really good relationships with their customers and we find ways to work things out.
But that's kind of how it works for the most part.
Those incremental costs do get passed through directly as often as we can so largely protected you bring up another interesting point when it comes to inventory look as the just in time model broken is there going to be more inventory in the system going forward, particularly as we continue to see trends where things like regionalization.
No, but that's a it's a very interesting question because we're seeing it today with the support that we're getting from our customers in the form of working capital of answers I think I had mentioned to Matt that we've got significant year on year growth and working capital advances, it's almost it's up almost three X.
That's an operating model difference.
Our customers in the past haven't haven't been asked to help share the burden of that inventory growth because I don't think we've been in a situation like this in a very very long time that is a potential shift in the operating model and what I would say is.
This is to lean a margin business to bear all of that inventory cost ourselves.
If something does happen structurally will need customer support continued customer support on that and I would say that's no different than anyone else in the industry, but very good question.
Thank you ray could be and Paul for the details that's greatly appreciate it and congratulations.
Thank you Jim.
Our next question comes from Paul Cheng.
With Jpmorgan. Please ask your question.
Hi, Thanks for taking my question and just want to Echo very nice execution here.
So first just wanted to talk about the the redesign opportunities you mentioned.
Driven by some of.
The legacy component constraints.
So are you seeing opportunities to reach and capture higher margins here.
Key products doing expanding some of our design Oregon.
Is this dynamic kind of expanding across all your products or are you seeing.
This is more so in health solutions.
Yeah, Paul I'll answer that I'd say first to the redesign opportunity is across the board I see that in lifestyle.
I see that in health I see that and.
In automotive and industrial and the reason is because as our customers are understanding the kind of the platform effects of how their chip design is the significance of that they are really relying on flex to provide them a new solution that longer term will provide them.
Edwards zillions than where they are today right. So I'd say this redesign opportunity for us is across the board and we are being asked to do that every day or we are providing that to customers. All the time I'm seeing that in small medium sized customers and lifestyle or very large kind of health solutions customers everybody is asking.
About hey, how do I do this differently and how can you do this for me so I would say.
This is really good work because this is the kind of complexity that I talked about that now customers are relying on us to solve for them and it is of course.
Our job to make sure that these redesigns also work in a way that it's a win win for our customers and for us in longer term, it's better margin for all of us.
So Paul I'd say this is definitely happening and happening across the board.
Great and then my follow up on consumer devices.
<unk> customers going if they don't make the cut.
But on your kind of profitability hurdles.
Are you seeing some customers actually come back after shopping around an.
As this thing kind of improving the overall pricing environment in your view for the for the overall industry. Thank you.
Yeah. Thanks, Paul what I'd say is I'd say in general I would say.
The overall EMS industry has become disciplined right. So let me start with that I would say in my last three years.
Across the board, we have seen disciplined emerge in this industry.
<unk> in how we look at projects or how we execute.
Thank God, we have seen general discipline, and you've seen that in the margin rates of the industry itself right. Everybody has started improving in the last few years in terms of margin rate I'd say for consumer devices itself.
There's enough people and I'm not going to name names of people, who would buy these hurdle rates would be fine for them right and they will they are the ones, who will win and take that business and it works for their business model, where they have a different cost of capital are theyre fine with working with those margin rates.
In some cases, we do have customers, who come back to us and we work with the parameters that we have laid out and what flex offers as a solution and thats a win win for both of US right because they saw something in flex that works for them.
But we're very good at do you will you have seen in the last few years, we've become really good at managing the consumer device business to within the parameters of what we want to see so that's why overall margins improved for that business.
It is contained in terms of the type of growth that the mix within that consumer device business is changing.
We like the more mid sized customers for that.
So I would say yeah, there's always people to take the business that we may not want.
In some cases customers come back and we welcome that because that's a win win for both of us.
Okay, great. Thank you.
Thanks, Paul.
Our last question comes from the line of Melissa Fairbanks with Raymond James You May ask your question.
Hi, everyone. Thanks, very much glad to make it in under the wire.
I think you referenced some of the inefficiencies related to China shutdowns.
That have happened. Most recently just wondering if you could quantify the headwind this quarter or what's baked into the <unk> outlook.
If anything.
Yes, Melissa I'll start Paul can jump in one eye.
I'd say I am not sure I want to quantify like on it on a case by case basis, but we expect some of these inefficiencies to continue at least for the next quarter you have seen that China is definitely not freed up and.
And particularly where this kind of impacts us in areas like our industrial business, which has got a lot of kind of lower volume higher mix right. So managing that mix with the shortages becomes really really tough and they have a lot of supply chain dependency on China in particular.
I'd say, we kind of expect these inefficiencies to continue through next quarter, because China is not easing up anytime soon.
But that's why we have a diverse portfolio, we have a diverse portfolio and you've seen it's played out well for us over the last few years right. One segment one business unit is down the other is up we get to it we are able to manage that mix through all of that but at the end of the day right highest EPS ear that we've ever had iOS EPS quarter.
Our guide for Q1 is still very strong full year. If we have a very strong EPS guide, so I'd say youll see some.
Pluses and minuses and inefficiencies some more in the near term, but we expect that we're very good at managing them so well.
We will see that margin rates continue to move up through the year.
I'd say, so very excellent execution in the face of all of these challenges.
And then if I could just one quick follow up.
The detail that you gave us for next tracker is extremely helpful.
Obviously, a question that we get asked about quite a bit.
Italy, just wondering if as that business starts to gain scale does it become lumpier in nature or in in.
In nature as you get to larger scale deployments or for the near term should we just kind of assume just kind of the steady state growth rate.
Uh huh.
Yeah, I think steady state is more likely and Melissa.
Ex tracker is a project business.
But as as you as you see the scale of that business continues to grow you would get a bit of a portfolio effect. So yes, there will be large projects that ramp up and ramp down.
But one the nature of the accounting, which is percentage of completion accounting sort of helps to smooth that a little bit and also again back to the portfolio theory.
It's such a large base that becomes a little bit more immune to project specific stops and starts yeah. This is.
It's got so much backlog in so much growth in it Melissa that at this point, we're just expecting that growth to be more steady state. So we think that just as you clear that pipeline and backlog, which is there for the next few years it'll be steady state as we go through that.
Perfect. Thanks, very much that's all for me Tonight.
Thanks, Melissa Okay, Great Hey, Thank you everyone I just want to close by saying on behalf of my leadership team want to thank all our customers and our trust and partnership and our shareholders of course for your support and most importantly, the flex team for all their hard work and their achievements from this past fiscal year. So thank you everyone for joining us.
This concludes today's conference call. Thank you for joining you may now disconnect.