Flex Ltd. (FLEX) Q4 2021 Earnings Call Transcript

Good afternoon and welcome to the Flex Fourth Quarter Fiscal Year 2021 Earnings Conference Call. Today’s call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. At this time, for opening remarks, I would like to turn the call over to Mr. David Rubin, Flex’s Vice President of Investor Relations. Sir, you may begin.

Thank you, Denise. Good morning and welcome to Flex’s Fourth Quarter Fiscal 2021 Earnings Conference Call. With me today is our Chief Executive Officer, Revathi Advaithi; and our Chief Financial Officer, Paul Lundstrom. Both will give brief remarks, followed by Q&A. This call is being webcast and recorded, and if you have not already received it, slides for today’s presentation are available on the Investor Relations section of our flex.com website. As a reminder, today’s call contains Forward-Looking Statements, which are based on our current expectations and assumptions, and are subject to risks and uncertainties, so actual events and results could differ materially. Also, such information 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 be found in the appendix slides of today’s presentation as well as on the Investor Relations section of our website. Lastly, a word on our NEXTracker business: on April 28th, we announced that we confidentially submitted a draft registration statement on Form S-1 with U.S. Securities and Exchange Commission relating to the proposed initial public offering of its Class A common stock. The initial public offering's timing is subject to market and other conditions, and the SEC’s review process. We made this announcement in accordance with Rule 135 under the Securities Act. Following SEC regulations, we will not make any further statements or answer additional questions on the NEXTracker filing at this time. With that, I would like to turn the call over to our CEO, Revathi.

Thank you, David. Good morning and thank you for joining us today for our Q4 earnings call. I hope you and your families are all safe and healthy. Before we discuss our results, I want to start by thanking our Flex colleagues for their incredible dedication and contributions during this very unusual year. So, let’s talk about business. Throughout our last fiscal year, Flex proved that it was able to deal with a global health and humanitarian crisis. We continued to adapt and improve by ramping our health and safety levels to protect workers, enabling work-from-home orders, and, most recently, dealing with global component shortages and logistical disruptions. Flex’s people, processes, and systems have proven to be very resilient, and the entire Flex team has done an amazing job overcoming these unusual obstacles and supporting our customers. Our procurement and supply chain teams especially have made a truly Herculean effort to track down every component and every shipping container to keep our factories running and supporting our customers. Now let’s turn to Slide 3 to review some of our key financial highlights from the quarter. Our revenue was $6.3 billion, down 6.8% sequentially, which is better than typical seasonality, and up 14% year-over-year. Our adjusted operating margin came in at a record 4.9%. This figure includes the absorption of costs related to the challenging components supply and logistics environment. Our adjusted EPS was $0.49, up from $0.28 in Q4 of last year. This is the third quarter in a row of record EPS. Our adjusted free cash flow came in at $135 million. Now for our fiscal 2021 results, please turn to Slide 4. Our full-year revenue was $24.1 billion, essentially flat year-over-year despite all the challenges this year. We achieved a record full-year adjusted operating margin of 4.3%, a 60 basis point improvement year-over-year. Our adjusted EPS for the year was $1.57, a 28% year-over-year improvement. And throughout this year, we generated adjusted free cash flow of $677 million. Now moving on to the next slide. A year ago, we laid out our strategy for a multiyear transformation. Over that time, we have overcome significant challenges. While it is still too early to sound all clear, particularly regarding the global component-constrained situation and the continued pandemic, we think these are transitory challenges. There is much to be excited about in the future. We made tremendous progress in our long-term strategy, redefining our end market focus, continuing to improve our mix, enhancing our operational execution, and cultivating an inclusive, high-performing culture. Through these efforts, we delivered record results, improved the quality of our earnings, and strengthened our cash position. Redefining our market focus, particularly since we have large end markets, has helped us concentrate on areas where our combined capabilities in technology, commercial excellence, and operational execution are rewarded by customers. As we said before, we will combine this with continued investment in certain technologies and products using the strength of our balance sheet. This combination allows us to specialize and expand in targeted sub-markets with significant long-term secular drivers. The leverage and scale of this combination, along with the Flex delivery model, creates lasting competitive advantages that will only strengthen over time. We are already seeing the early fruits from the strategic shift. Our efforts have already led to successes manifesting in both program expansions with current customers and wins with new customers. These successes continue to strengthen customer trust and expand our experience and portfolio of offerings, creating a virtuous cycle. Now, a bit more detail on our segments. In our Health Solutions business, we discussed our focus on medical equipment, devices, and next-generation drug delivery. Earlier this year, customers approached us with challenging and urgent requests. We quickly ramped multiple ventilator programs, achieving one of the fastest large-scale medical device ramps in history. While this was a temporary project, it demonstrated our versatility and ability to operate at scale and speed. When global supply chains were in chaos, our customers needed us, and lives were at stake; we delivered, and our improved model allowed us to do so in a fiscally responsible way. I would also point to our global leadership in chronic care-related medical devices, where we executed on a multi-year, truly paradigm-shifting medical device manufacturing program. This success shows the market that we can manufacture highly complex essential products at scale. I am very proud to say our previous success has led to significant new long-term program wins in the chronic care-related space that we have begun to ramp. Now, automotive is a sector undergoing significant transformation; the steady shift to electrification and the inevitable move towards autonomy means increased complexity and new modes for value creation. We are focused on where the market is going, emphasizing economies, connectivity, electrification, and smart systems, what we refer to as our ECES focus. This focus has paid off with wins this year in all four of these business pillars. This quarter alone, we ran several new programs in auto connectivity. In fact, strong execution by our automotive team, supported by our exceptional supply chain and logistics teams, delivered above-market results in both Q4 and the calendar year based on IHS data. In automotive, we highly value our long-term customer partnerships and look forward to deepening these relationships as we enable their technology transformations. We are also broadening our partnerships with new industrial players due to our leading-edge capabilities. One recent example of this was the announcement of our partnership with Inceptual, supplying their LC autonomous driving controller for trucks scheduled for production by the end of 2021. You may also recall our collaboration with LIDAR Tech focused on supporting that automotive front LIDAR solution and open sensing platform, as well as our collaboration with EV manufacturer, Nio. The latter resulted in an innovation partner Pace Award in 2019. Actually, on that note, I also want to offer a big congratulations to the automotive team as they were recently named finalists for this year’s Pace Award for not just one, but two product innovations, one in the electrical vehicle space and another in the autonomous driving space. In our Industrial business, we focused on industrial devices, capital equipment, power systems, renewables, and grid edge. We continue to increase our business in these sub-segments, but our focus on specific areas has led to wins in new verticals, such as next-generation robotics that we are ramping this year. In our Agility segment, you will recall we previously discussed our two-pronged strategy for driving productivity and cost discipline, as well as wins in key growth markets that have long-term secular drivers, such as 5G cloud and increasingly complex consumer durable products, where we think Flex can provide differentiated value to our customers. The teams have made exceptional progress on all these goals. And as you can see in our results, as evidenced in the growth in Lifestyle and CC, as well as the very strong margin improvement from the entire segment. I’m very proud of the Agility team's work here. So the key takeaway here is that our strategy of defining and focusing on specific end market segments is working. While our end markets are large, we have picked the sub-segments where we want to win and are investing to improve our share in those areas. We are closely monitoring the demand environment, which looks positive in both the near-term and for the longer term. There are some near-term challenges, but we are experts at navigating uncertainty and will control the things we can. The teams are executing very well. This was another strong quarter showing the potential of our company as we continue down our transformative path. Now turning to the next slide, I want to cover one more thing before I turn the call over to Paul. Last quarter, I mentioned that I would talk more about our ongoing ESG efforts. I want to point out that our ESG focus is certainly nothing new for Flex. We have been at this for nearly 20 years. These years of effort and accomplishments are reflected in our improved performance, our Dow Jones Sustainability Index scores, and being included in the S&P Sustainability Year Book for the second year in a row. What we have done moving forward is to set out even more ambitious goals across all aspects of ESG for 2030, building on a broad foundation that we have set. In the spirit of consistently raising the bar, Flex was recently accepted into the very rigorous Science-Based Targets Initiative. We are excited to join this ambitious global effort to drive meaningful reductions in greenhouse gas emissions across the value chain. I encourage you all to visit flex.com to see our 2030 environmental, social, and governance goals and look for our new Sustainability Report in June to see the details of our full sustainability efforts and results, as well as our upcoming 10-K and proxy statement for additional progress and commitments to human capital management, and of course, inclusion and diversity. With that, I will turn the call over to Paul, who will walk you through our results in more detail, and then I will share some closing remarks.

Okay. Thank you, Revathi, and good morning, everyone. I’m on Slide 8. Flex revenue was $6.3 billion in the quarter, which was up 14% year-over-year and down 7% sequentially, better than our typical Q3 to Q4 seasonality. Adjusted operating income was up 50% year-on-year to $310 million, with 110 basis points of margin expansion. Profit growth was bolstered by improved year-over-year volume, better mix, and continued productivity gains. We did have some headwinds in the quarter, namely, the continued cost pressure from COVID-19, as well as some incremental costs associated with ongoing challenges in the supply chain. As a result, our adjusted net income was $248 million with adjusted earnings per share of $0.49. Year-on-year, those were up 73% and 75%, respectively. Reconciling to GAAP, fourth quarter GAAP net income of $240 million was $8 million lower than our adjusted net income due to $18 million of stock-based compensation and $13 million in net intangible amortization, partially offset by a net credit in restructuring and other costs. Restructuring charges were $26 million. However, we had a gain from a facility exit and a favorable adjustment on the tax line, which more than offset restructuring costs in the quarter. Global restructuring costs for the year were $101 million, but again, as I mentioned, with some nice offsets from other items. On Slide 9, our fourth quarter adjusted gross profit was $505 million, up $113 million year-over-year. Strong discipline in operating performance drove one full percentage point of adjusted gross margin expansion to a record 8.1% in the quarter. In total, adjusted SG&A spending came in at $195 million, up $10 million from a year ago, but at 3.1% of sales, down year-on-year and within our targeted range of 3% to 3.2%. So, for the quarter, adjusted operating income of $310 million led to a record 4.9% adjusted operating margin rate. Turning to Slide 10, we saw top-line strength in both Reliability and Agility in the quarter, with year-over-year growth in both, and with a typical seasonal Q3 to Q4 contraction being better than we anticipated. Flex Reliability revenue was $2.8 billion in the quarter, down 2% sequentially, and up 11% compared to a year ago. Q4 performance for all three business units within Reliability were up. Automotive revenue was up 20% year-on-year with strong execution against the industry’s continued global recovery, as well as several new program ramps. This was the strongest top line quarter in three years for the automotive business and a pleasant surprise given the global parts shortages the industry continues to struggle with. Credit to the Flex supply chain organization for very solid execution through a difficult period. Health Solutions revenue was up 25% year-over-year this quarter. Critical Care continues to operate at heightened levels due to persistent COVID challenges. However, we also saw the beginnings of a return to normalcy in areas such as elective procedures. We continue to progress with our ramps in chronic care-related products, and the long-term outlook remains strong. Lastly, the industrial segment returned to growth this quarter with revenue up low single-digits compared to the prior year. Core industrial improvements remained steady while our prior customer-specific headwinds in power are behind us. Renewables was down in the quarter due to difficult year-on-year comparisons related to ITC Safe Harbor. Turning to profitability, Flex Reliability Solutions generated $190 million of adjusted operating profit and a 6.7% adjusted operating margin, which was up 20 basis points year-on-year due to tailwinds from continued improvements in productivity and mix, but tempered slightly by new product ramps in Health Solutions. Moving to Agility, both revenue and profit were up sharply from the prior year with sales growth across all three business units. Segment revenue of $3.4 billion was up 17% year-over-year and down just 10% quarter-over-quarter. CEC was up 11% year-over-year, led by continued strength in cloud infrastructure, 5G rollouts, and enterprise IT spending showing improvement. Lifestyle was up 22% year-over-year with new business ramps and continued demand strength for high-end durable goods with premium brands and audio for care and appliance and markets. Lastly, consumer devices benefited from continued recovery in consumer spending and grew 24% year-over-year albeit on an easier compare. Turning to profitability, the Agility segment generated $136 million of adjusted operating profit and a 4% adjusted operating margin for the second consecutive quarter. This margin expansion was driven by new business wins at accretive margins, tailwinds from productivity programs, and continued cost management from our Agility operating model. Turning to Slide 11, we wanted to look back on 2021 and share with you some supplemental business unit disclosure. So for the year, total Flex revenue ended flat in spite of the many challenges. You can also see that our segment mix continues to shift towards our higher margin Reliability segment. Our Reliability segment revenue grew around 5% year-on-year, driven by strong growth in Health Solutions, which grew 25% year-on-year to $2.5 billion based on strong critical care demand. Our rapid ventilator project ramps earlier in the year, as well as continued growth in chronic care. Automotive revenue was down 7% year-on-year to $2.5 billion, with substantial disruptions from the industry’s production shutdowns in the June quarter of last year. Lastly, industrial revenue grew 3% year-over-year to $5.6 billion. That industrial number I will add includes about $1.2 billion in revenue for the NEXTracker business at around a 15% EBITDA margin. NEXTracker grew about 2% last year on a tough comparison from ITC Safe Harbor. This will be the full extent of our commentary on NEXTracker for now. For Agility, due in part to COVID-related impacts in the first half of the fiscal year, our Agility segment revenue declined 4% year-over-year to $13.5 billion, but returned to revenue growth and margin expansion in the second half. For the year, a 25% decline in consumer devices was driven by a combination of strategic disengagements we have discussed before, as well as the COVID impact. This was partially offset by growth in CEC and Lifestyle. CEC revenue grew 2% year-over-year driven by cloud and infrastructure spending, while Lifestyle was up 5% year-over-year due to strong bookings with new customers and continued market strength, driven by work, learn, and live from home trends. Turning to Slide 12, for the quarter, adjusted free cash flow of $135 million was up slightly compared to the prior year. All things considered, adjusted free cash flow for the year was strong at $677 million. If you recall, we spoke before about targeting 80% or greater free cash flow conversion on an adjusted basis. For the 2021 year, we finished at 85%, and adjusted free cash flow to GAAP net income was 110%. So all things considered, I would say strong conversion and high quality of earnings for the year, particularly given the component shortages we are seeing in the industry. Looking ahead to 2022, although I will say it is a little early to call, we expect adjusted free cash flow on a dollar basis to be roughly in-line with 2021. Back to Q4, we closed Q4 with inventory of $3.9 billion, which was up 5% sequentially and 3% year-over-year resulting in inventory turns of 6.1 times, down from 6.8 turns last quarter, but up from five and a half a year ago. We continue to see component shortages in the supply chain, and although it was manageable in Q4, we do expect continued working capital pressure over at least the next couple of quarters. Our net CapEx for the quarter totaled $31 million, which was light in the quarter due to cash inflow from a building sale as part of a facility exit. Proceeds from that sale were about $60 million and drove the gain I mentioned just a couple minutes ago. For the year, CapEx was lower than usual driven by some delays created by COVID-19 and also the natural ebb and flow of large projects. But looking forward to our fiscal year 2022, we have a number of high-priority investments lined up for the business and do expect to grow CapEx this upcoming year. CapEx of roughly 2% of sales is a reasonable expectation. And as we have said before, we remain committed to responsibly invest in our strategic growth plans by increasing our technology and capabilities in the higher value end markets as Revathi has outlined. One last comment on cash: share repurchase remains an important consideration in our capital allocation strategy, and we did step up our buyback program in the back half of the year. Our spending was $146 million in the quarter, which bought back 8.1 million shares. Onto guidance, on Slide 13. We see two notable potential headwinds moving forward, namely, component shortages and persistent waves of COVID-19. That said, all our fundamental demand indicators remain strong. So we will continue to monitor the risks and adjust as necessary, as you have seen us do before. Starting with Flex Agility Solutions, we expect fiscal Q1 to be up low to high teens year-over-year on continued improvements, but also against an easier comp. Lifestyle is expected to grow 30% to 40% year-over-year in Q1. CEC should be up low to mid-single digits year-over-year for the quarter, with continued cloud and 5G demand, along with improved enterprise IT spending. Lastly, consumer devices are expected to be up 25% to 35% year-over-year in Q1 on an easy comparison. We expect consumer devices to be one of those end markets most sensitive to industry component constraints. Turning to our Flex Reliability Solutions segment, we expect revenue to be up 15% to 25% year-over-year. First-quarter automotive revenue will nearly double year-over-year as this compares against last year’s global auto production shutdowns. Health Solutions will be flat to up mid-single digits year-over-year against a very difficult comparison, reflecting continued strong demand. Lastly, our industrial business will be up mid to high single digits year-over-year from steady improvements and an easier comparison. On Slide 14, overall, we expect Flex Q1 revenue to be in the range of $5.9 billion to $6.3 billion. Our adjusted operating income is expected to be in a range of $240 million to $280 million; interest and other should be roughly $40 million, and we expect our tax rate in the quarter to remain at the higher end of our 10% to 15% guidance range. Adjusted EPS guidance is in the range of $0.34 to $0.40 per share, based on weighted-average shares outstanding of about 507 million. Our adjusted EPS guidance excludes the impact of stock-based compensation expense and net intangible amortization. As a result, we expect GAAP earnings per share in a range of $0.26 to $0.32 per share. With that, let me turn it back over to Revathi.

Thank you, Paul. Now turning to Slide 15. We would like to give some guidance for fiscal 2022. Please know we are doing this with some uncertainty in the market due to component constraints and some countries still battling COVID. Based on our current visibility, we believe these uncertainties are baked into our guidance. Our fiscal 2022 revenue will be somewhere between $25 billion and $26 billion with an adjusted operating margin of around 4.4% to 4.6%, and full-year adjusted EPS will be in the range of $1.60 to $1.75 per share. The GAAP EPS guidance is in a range of $1.30 to $1.45 per share. At our Investor Day just a year ago, we gave our long-term financial framework also on this Slide. Even with COVID and the portfolio shifts we are making, we believe our performance this year and our guidance keeps us on track to reiterate our targets. Of course, these targets assume no further investments using our strong balance sheet, beyond what we were planning at that time. So, summarizing all this, I have to say I’m proud that we have validated and executed our strategy. Well, in a difficult year, our results clearly demonstrate the path we are taking is correct. We will continue to execute with discipline, invest to maximize value, and deliver profitable growth. On behalf of the entire leadership team, I want to thank our customers for your trust and partnership, and our shareholders for your continued support. With that, we will start our Q&A.

Thank you very much. I had a question on IT spend. In talking to some of the other OEMs, it seems as if datacenter should start to improve in the second half, and obviously, you have got some 5G benefit in there as well. How are you thinking about where enterprises are at and the opportunity for spend? And then my second question is regarding stimulus; how should we think about the opportunity for stimulus to run through your model as we look to 2022 and beyond, given all of the dollars that will be out there fairly soon? Thank you.

Yes, sure. So thanks, Shannon. First, on our enterprise spending, as you pointed out, CEC was up 11% in the quarter, so that was nice to see. I will say that a large portion of that growth came more from the comps side and from cloud. Enterprise spending was up, which is great, but up mid-single digit. You could kind of look at it—I would kind of joke the quarterbacks about CFOs not wanting to spend a whole lot on enterprise with everybody still working from home. Our more macro view would be that we will pick up as we move forward over the next several quarters. So I would say I’m bullish on the space, albeit only seeing early signs of growth at mid-single digits. In terms of stimulus spending, look, the rising tide lifts all boats, and we are certainly hopeful that we will see some of that, but I don’t see a direct correlation at this point in time.

Yes, thank you for taking my question. I think people are curious about the kind of role you believe you will play in the auto vertical moving forward, Revathi. Will you be a sub-component EMS provider or do you expect to be a direct OEM supplier moving forward?

Yes, thanks, Paul. The answer is that, within our auto business, even today, I would say, part of our auto business does pure contract manufacturing, a part of our auto business does joint design and manufacturing, which is a pretty important part of our offering. Additionally, part of our auto business does our own design, as you can hear from the Pace awards that we are winning, both last year and this year. I would say we already have quite a mix in terms of the automotive business itself and how I see the change going on in the auto space. As you are all aware, the increased electronics content—both in electric vehicles and autonomy—give us the opportunity to play a more significant role in design and our own products. We think that we will continue to move up the value chain in the auto sector, ramping up our presence in the EV space. We already have a strong presence in the autonomous space, and we will do so by being more of a component player to the automakers directly. But we will continue to support them in any EMS projects that we already do. So it will be a mix, but it will be trending towards more EV, autonomy, and more of our technology focus.

Great, and if you look at the pipeline opportunity there, is it really with traditional OEMs or with the new players? There has been a proliferation of new logos recently.

Well, it is definitely a mix, Paul. It is hard to be in the auto space and not engage with the new players that you are hearing and seeing; we just recently announced a win with one of the newer players. You have seen a mix of both. One of our Pace Award winners this year is a project we are working on in China with a newer automotive player. So, it is a blend. We think it is important to participate in both traditional and new spaces.

Thanks. Good morning. And thanks for all the color with the guidance. Two questions, if I could. First of all, just big picture, Revathi, you and Paul both used the words quality of earnings a couple of times during your prepared remarks. And obviously, there are things you can point to for this year. As you improve the quality of earnings next year, what would sort of be the input focus there, and what would you say we should look at as key metrics to indicate that there is a higher quality of earnings in fiscal 2022?

Maybe I will take a stab at that. I think there is a broad indictment on the industry over the last decade. People have talked about EBBS as earnings before bad stuff. I don’t love all the adjustments that I think the industry has sort of tossed into the P&L and the economic reality is that whether it is non-GAAP earnings or GAAP earnings, eventually all those adjustments ripple through cash, and it has an economic effect on the company. We are going to push really hard to be sensitive to that and print high quality earnings quarter after quarter. You saw it over the last couple of quarters with restructuring costs being fortunately offset by some one-time gains. Our hope for 2022 would be that as restructuring projects arise, perhaps there are one-time offsets, so it doesn’t muddy the waters too much. We are going to continue to focus on this multi-year margin expansion journey that we are on, which includes some investments in restructuring. So as opportunities arise for high-return restructuring, we won’t hesitate.

Great. And as a follow-up, could you talk to the Q1 guidance? It is flat to down off of what was a very big beat in Q4 and a broad set of good demand drivers. Why wouldn’t it be growing quarter-over-quarter?

Yes, sure. So, sequentially we are off a little bit, as you pointed out. I would say Q4 was particularly strong. One of the benefits we saw in Q4 was favorable mix; very strong margins were driven by a positive outlook in the Agility segment. As we move from Q4 to Q1, there is a mix headwind on the mid-point of our guidance, where Reliability businesses are down about 5%, and Agility businesses are flat, which gives us a little bit of a mix headwind. We also have profit headwinds moving from Q4 to Q1 from challenges in the supply chain. Component shortages are requiring us to spend incremental dollars that impact profit for things like expediting fees and logistics costs. So, we do see additional cost pressure moving into Q1 compared to Q4.

The most important takeaway, Stephen, is that seasonality drives kind of a 1% down for us quarter-over-quarter. It is a prudent outlook based on managing shortages and COVID-related challenges. Year-over-year, it is still a very strong performance, even though it is on easier comparisons. We think this is an outlook that prudently factors in seasonality and shortages.

I have got two questions as well. Just to follow up on the prior question about margins. Between the third and fourth quarters, you had a revenue headwind of about $450 million sequentially, and yet you had very strong performance. Paul, was the 60 basis point sequential margin decline in fiscal Q1 related all to mix? Should we think of fiscal Q1 as a tough operating margin and then sequential improvements for the rest of the year?

Yes, sure. I appreciate the question, Ruplu. Q4 was a very strong quarter, and everything was firing on all cylinders. Mix was advantageous as we squeezed spending to ensure we finished strong. My comment on Q1 is that we certainly have a mix headwind going from Q4 to Q1. There are incremental costs associated with pressure from component shortages and inefficiencies from turning lines on and off. What I will say is, at the midpoint of our guidance, 4.3% margins would be the strongest Q1 in the history of the company. We are pleased with the outlook.

The way to think about six distinct segments is that the sequential change does significantly vary with mix since each segment behaves differently in terms of quarter-over-quarter shifts. Yet again, it is a strong guide, with record margins for Q1, while prudently factoring in shortages and cost pressures.

Thank you for all the details on that. As a follow-up to your comments about the six segments, what are your thoughts on investments in fiscal 2022 in those segments? If I look at the numbers you gave for NEXTracker, it looks like the industrial segment, NEXTracker, is growing faster at about 3.2% from last year. In terms of the business mix between Agility and Reliability for fiscal 2022, are there preferences for which segment you want to invest in?

Yes, Ruplu. I want every segment to define the right mix of customers within that segment, driving continued year-over-year and long-term improvement in their performance. That is how we want to think about each individual segment within our business. We want each segment to hold their own in terms of performance. Regarding investments, we are proud of how the Agility team executed, changing their mix and demonstrating success. Our large CapEx investments and any new M&A that we do is considered more in the Reliability segment because that is the nature of the business. Think about core industrial and the power side; we expect to add investments there. Automotive, focused on improving our content on electric vehicles, leads to more product R&D and CapEx investments. Health Solutions also shows robust growth, and we're continuing to seek new investments in that space. We expect our investment profiles to lean more towards Reliability while still providing strong support for Agility.

Thank you, very much. Great results and outlook. My question concerns the full-year outlook. We are in a world of COVID, semiconductor shortages, increased shipping costs, and uncertainty. It sounds like you prudently considered these in your outlook. But what is the rationale for providing a full-year outlook when some companies aren’t even giving quarter guidance? Do you have commitments or visibility, or do you think consensus is mis-modeling improvements?

Yes. Jim, thanks for your comments on our performance and outlook. Why we are giving guidance? I have been at this only for two years. The first year was about navigating trade issues, and even then we provided an EPS range. Last year due to COVID, we held back guidance. We feel it's important to provide indications of where we see the year heading, and that satisfying benchmark is crucial. Importantly, we believe we have enough visibility to factor in uncertainties.

Yes. I think the biggest thing is that we will be lapping some unusual comps in Q1, along with some unusual in Q2. As we look ahead into Q3 and Q4, it normalizes, but Q3 and Q4 of 2021 were particularly strong, meaning normal comps could get a bit harder. We expect things to normalize and we are generally upbeat.

Yes. Thank you. First question regarding the strength in your cloud segment for the last couple of quarters. Could you talk about the growth rates, specifically in customer concentrations? Are you seeing market share shifts from the traditional ODMs in Asia? What gives you an edge for continued market share gains?

Yes. Overall growth in the cloud is large enough that we need to focus on customers we can provide significant value to while growing profitably. We are not focused on winning from ODMs in Asia, rather prioritizing key customers with supporting margins and balance sheets to meet our hurdle rates. The industry's trends, like data center growth, are beneficial and support our ongoing demand.

Regarding free cash flow projections for next year, we aim to keep it on par with 2021. If you do the math at the midpoint of our guidance for 2022, it estimates about 80% conversion rates. We foresee working capital impacts in the early quarters of 2022 from inventory buffer requirements, especially to support the automotive industry. While we endeavor to maintain cash flow guidance, it will involve careful inventory management. The balance sheet is strong.

Thank you, and congratulations to you and your teams.

Thanks for squeezing me in. I just had one more question on your ability to give guidance for the year. Should we think about this as evidence that your management's plan from a couple of years ago to become a preferred supply chain partner is leading to a backlog of work that gives you the conviction to provide such a long-term outlook?

Yes, Christian, that is totally fair. You've summed our key points well about visibility in segments, reducing volatility, and the importance of providing guidance as a good business practice. Our strong pipeline shows no cancellations and solid demand signals. We believe our performance affirms this approach. Thank you all for joining us. I’m excited and confident about the future for FLEX. I wish all of you continued safety and good health, and we will speak to you in the next quarter. Thank you.

This concludes today’s conference call. You may now disconnect. Goodbye.