Flex Ltd. (FLEX) Q1 2022 Earnings Call Transcript

Thank you, Rebecca. Good morning and welcome to Flex’s first quarter fiscal ’22 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 them, slides for today’s presentations 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, with regard to Flex’s Nextracker business, as we previously discussed on last quarter on April 28, we announced that we confidentially submitted a draft registration statement on Form S-1 with the US Securities and Exchange Commission relating to the proposed initial public offering of its Class A common stock. The initial public offering and its timing are 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. We continue to look at the market condition and we will evaluate the right time for a transaction and we remain committed to do so. Following SEC regulations, we will not make any further statements or answer additional questions on the Nextracker filing at this time. With that, I’d like to turn the call over to our CEO, Revathi.

Thank you, David. Good morning everyone and thank you for joining us today on our Q1 earnings call. Of course, I have to start off by giving a shout out to all my Flex colleagues across the world for once again staying focused and delivering solid results. So, let's turn to slide 3 to review our financials. We achieved a revenue of $6.3 billion, which is up 1% sequentially, a little better than typical seasonality, and up 23% year over year. Our total Flex adjusted operating margin came in at 4.6%, and core Flex operating margin, excluding Nextracker contribution, was 4.4%. Similar to last quarter, our adjusted operating margin includes the absorption of costs related to a challenging components supply and logistics environment. Our adjusted EPS was $0.46, up from $0.23 in Q1 of last year and also up from the pre-COVID level of $0.27 in Q1 of FYI 2020. Our adjusted free cash flow came in very strong at $219 million. Now moving on to the next slide, I'd say demand across the enterprise remains very strong and as you can see, the team executed extremely well again this quarter. Global supply chain and logistics issues remain a challenge and add a layer of uncertainty to the near term. However, we continue to expertly navigate through the environment with an army of supply chain professionals, which is almost 10,000 people strong, and of course, decades of experience, all supported by world-class systems and tools to provide the best visibility and agility. This is a real competitive advantage for Flex and for our customers. Our ability to quickly adapt to global changes is unrivaled. The proof, of course, is in the results, especially when you look at the improvements we have made across the organization over the last two years. The June quarter of calendar 2019 was my first full quarter with Flex. Our adjusted operating margin at that time was 3.4%. Fast forward two years, and it is now 4.6%, which is after two previous record quarters. If you look at our gross margins, you'll see similar improvements. When I joined, our June quarter gross margins were 6.5%, and this quarter it was 7.5%. So we're simply operating at a better level. I'm very proud of how well we are executing on our near-term and our longer-term goals. We continue to land, expand, and elevate our relationships with our customers. We're winning in the key areas we've talked about before, such as diabetes care, medical imaging, and throughout the electric vehicle ecosystem in ADAS and on premium durable goods, cloud, and renewables. The circular drivers for the next wave of outsourcing are now very clear, with the need for more resilient and agile supply chains, the requirement for additional regionalized production, and the demand for more sustainable approaches. We are winning new businesses as well as expanding our footprint with current partners. This performance is all a testament to our goals of deeper relationship with our customers and suppliers, and a continuous steady shift to higher value businesses. All of this is leading to a higher quality of pipeline and bookings across both our segments. Now, while we have made good progress, we’re certainly not done. With that, I’ll turn the call over to Paul to walk you through our results in more detail, and then I’ll come back with some closing remarks. Paul?

Okay. Thanks, Revathi, and good morning, everyone. I'm on slide 6. Flex revenue was $6.3 billion in the quarter, which was up 23% year-over-year and 1% sequentially, better than our typical Q4 to Q1 seasonality. Adjusted operating income was up 78% year-on-year to $290 million, with 140 basis points of margin expansion. Obviously we're lapping COVID year comparisons, but I'll note that we saw material sales and profit growth compared to the quarter two years ago as well. The 4.6% operating margin rate was the highest Q1 margin rate we've seen here at Flex. Our profit growth came from drop-through on significantly higher volume, continued improvements in the mix of our business, and our constant push for productivity gains. There were some headwinds in the quarter. We continue to see COVID-19 disruptions, industry-wide component shortages, and cost pressures on logistics did affect our business in the quarter. Adjusted net income was $230 million, with adjusted earnings per share of $0.46. Year-on-year, those were up 98% and 100%, respectively. Reconciling to GAAP, first quarter GAAP net income of $260 million was $24 million lower than our adjusted net income, primarily due to $20 million of stock-based compensation and $13 million in net intangible amortization, partially offset by a net credit in taxes. On slide 7, our first quarter adjusted gross profit was $476 million, up $158 million year-over-year. Execution was solid, with 130 basis points of adjusted gross margin expansion compared to last year, but also a full point higher than what we saw pre-COVID in the June quarter of calendar 2019. In total, adjusted SG&A spending came in at $186 million, up $31 million from a year ago but at 2.9% of sales, down year-on-year and slightly below our targeted range of 3% to 3.2% of sales. So for the quarter, adjusted operating income of $290 million led to a solid 4.6% operating margin rate. On slide 8, we saw better-than-expected top-line strength in both reliability and agility in the quarter with both growing double digits year-on-year despite component shortages in the industry and logistics cost headwinds. I said last quarter, and I'll say it again, credit to the Flex supply chain organization for solid execution in a very challenging environment. Flex Reliability revenue was $2.9 billion in the quarter, up 30% year-on-year. Q1 performance for all three business units within reliability was up year-on-year. Automotive revenue was double that of a year ago, up 100% year-on-year with strong execution against the industry's continued global recovery and, of course, aided by the easier comparative from last year’s shutdowns. These were strong results and better than what we saw in the June quarter of calendar 2019. Health Solutions revenue was up 9% year-over-year this quarter, chronic care strength continued and coupled with improving elective procedures offset the normalization we are seeing in the critical care space, as it returns to pre-COVID levels. We continue to win in Health Solutions, which lends confidence to our strong longer-term outlook in the space. Lastly, Industrial grew 20% compared to the prior year, led by strength in core industrial and renewables. Industrial continues to be a bright spot for Flex, up year-on-year, but up significantly for the two-year period as well both with and without Nextracker. Looking at profits, the reliability business generated $170 million of adjusted operating profit and a 5.8% adjusted operating margin rate. Margins improved by 70 basis points year-on-year but were tempered by higher costs due to inefficiencies created by the current supply chain and logistics environment. Moving to Agility, segment revenue of $3.4 billion was up 18% year-over-year. Within Agility, CEC was flat year-over-year but recall that strengthened cloud infrastructure and 5G rollouts remained strong through COVID last year as data centers and networks had to quickly adapt to the changing workloads created by work and learn from home. Lifestyle was up 36% year-on-year with new ramps and current customer expansions driven by our strong value proposition, as well as an increase in customers looking to broaden their regional manufacturing presence. Lastly, Consumer Devices benefited from continued recovery and consumer spending in developing markets and grew 50% year-over-year. Turning to profitability, the Agility segment generated $137 million of adjusted operating profit and a 4% adjusted operating margin rate for the third consecutive quarter. This is well beyond a COVID recovery. Looking back to pre-COVID levels, our Agility business historically operated at margin rates lower than this. So I would say it's very nice to see the traction in that business. Agility is firing on all cylinders. Last year, Agility margin expansion was driven by a continued push for new business wins and renewals that have accretive margins, as well as continued cost management discipline from our Agility operating model. On slide 9, for the quarter, adjusted free cash flow of $219 million was up substantially compared to the prior year, which was severely affected by COVID and the shutdowns in global automotive production. Looking ahead to the full year 2022, we still expect adjusted free cash flow on a dollar basis to be roughly in line with 2021, albeit with some pressure in Q2. We closed Q1 with inventory of $4.4 billion, resulting in inventory turns of 5.6, down from 6.1 turns last quarter, but up from 5.3 a year ago. We continue to see component shortages in the supply chain and although it was manageable in Q1, we do expect continued working capital pressure as we move through Q2. Our net capital expenditures for the quarter totaled $115 million. As I mentioned last quarter, CapEx of roughly 2% of sales is a reasonable expectation for 2022 and we remain committed to responsibly investing in strategic growth. Lastly, on share buybacks, we stepped up our share repurchase program in the quarter, spending on repurchases was $162 million, which amounted to 9 million shares. If you could turn to slide 10, and as you'll hear from Revathi in a couple of minutes, we're upbeat on the year. That said, we expect component shortages and logistics headwinds, as well as persistent waves of COVID-19 to remain a headwind in Q2, but the demand side is there, and all of our underlying demand signals remain strong.

Thank you, Paul. Now turning to Slide 12. Last quarter we wanted to provide you with as much visibility as we prudently could and give our outlook for fiscal 2022. As Paul said, it's important to remember that there are still challenges and uncertainties to overcome, but hopefully, we will all be through the worst of it soon. Based on the current situation, we're increasing our full-year revenue guidance range to $25.5 billion to $26.5 billion, our operating profit range to 4.5% to 4.7%, and our EPS range up to $1.70 to $1.85. Now, on behalf of the entire leadership team, I want to thank my colleagues for their commitment and hard work. Of course, our customers and suppliers for their trust and partnership, and our shareholders for your support. With that, I would like to turn the call over to start the Q&A.

Your first question comes from the line of Matt Sheerin with Stifel.

Yes, thank you. Good morning. I wanted to ask about the margin guidance for the September quarter, which is implied down sequentially, but still certainly up year-over-year. Are you seeing that pressure in both businesses and is it some of the reasons that you talked about with your fixed price costs, as well as maybe some lower utilization levels on the healthcare side?

Yeah, you're spot on Matt. As we move from Q1 into Q2, just like you said, with 4.6% margins here in Q1, at the midpoint of our guidance set for Q2, that would be down a bit sequentially. I guess what I'll say is, you're absolutely right, a little bit of pressure in both businesses. We talked about it in the prepared remarks about some pressure in CEC from clear to build. We're doing everything we can to get components available to ship because, as I mentioned, the demand side is certainly there. So a little pressure on the Agility side, namely in the CEC business, and then on the reliability side, as you know, we have the automotive business in there, and that whole industry is struggling a bit with clear to build and component shortages, creating a bit of inefficiency. But again, that's the midpoint of our guidance. I think that'll be a pretty good performance if we can nail that at 4.3. And as you mentioned, that’s still up year-over-year and continues to be outstanding performance for Flex, particularly compared to the last several years.

And, Matt, I'll remind you that at that midpoint, Q2 will still be the highest record for us in terms of operating margin for the guidance they've given you. We're positive, and as you can see from how we have previously managed the company and how we've managed through supply chain logistics, we always flagged that Q2 would be somewhat tricky, and I think that's what we're seeing. But we're very positive and very bullish about how the year looks and how Q2 looks. We're just being prudent in terms of our guidance.

Got it. Thank you. I just wanted to also ask about inventories, relative to the supply issues that you're seeing. It was up quarter-on-quarter. What's the strategy going forward in terms of working with customers, but also getting compensated, whether it be in deposits or other things, so that you're still meeting your working capital goals?

Yes. Sorry.

Matt, I'll just start by saying that, absolutely, that's why you see our cash flow is so strong. We are getting compensated for inventory that we're putting in the system, and we'll continue to do that. We have extreme discipline about this, with amazing coordination between our supply chain teams and our commercial teams. Customers are very, very open to this; right? It's an industry-wide constraint. We're seeing no issues in translating what we're seeing in inventory to getting advances from our customers. We also think that there is room to continue to improve inventory as these things get a little bit more stable in the future quarters. So our goal is to still try to get the inventory down, not just for us, but across the supply chain.

Thanks very much.

Hi. Thank you for taking my questions. I have two questions, both on margins. First one, you mentioned higher freight costs affected Nextracker. Is there a way to quantify how much that impact was on Nextracker margins? And on slide 10, I think you mentioned that you expect logistics challenges to bottom in Q2. What are some of the things that you're seeing that give you that confidence? Because, I mean, from what we were hearing, freight costs should remain high. So just if you can provide more color on your thoughts on logistics costs.

Yes, absolutely, Ruplu. Happy to go through this. First is, I'll tell you that Nextracker, as part of Flex, has really matured in terms of the supply chain, with the right kind of hedging practices, but also managing how they pass on costs to customers is very different than the rest of the industry. So I wouldn't let that cloud the judgment of how Nextracker runs and operates. I’d say it operates as a world-class supply chain company managing through that. As you can see, most of the commodity inflation has already been offset because they pass through, and how they manage contract pass-through and commodities is quite seamless. That's pretty incredible, given the environment and how significant commodity inflation has been. Regarding logistics, the reason why we're very comfortable that we will lap that very soon is that it just has to run through existing contracts, and then it's priced into new contracts. Even in existing contracts, we are overcoming quite a bit of freight increases by managing with customers in terms of renegotiating price. So we see the logistics issue as temporary; even if the costs remain inflated, how we pass that through and contracts will flush through the system. That's why this is a very short-term temporary thing, and we're very comfortable that will lap that very quickly in the next couple of quarters.

Got it. Yes, Revathi, thanks for all the details on that; that makes sense. Maybe I'll ask you a different question then as my follow-up. You've outlined your growth strategies, and you are focused on the longer life cycle and markets. At this point in the cycle, does it make sense to look at inorganic growth? Your thoughts on just looking at acquisitions and what are you looking for if you do, and what end markets would you be thinking about expanding? Thank you.

Yes, I'd say, first is, I'd say the most important thing for every company, including ours, is to deliver really well in terms of the core and the organic side of the business. We really are hitting on all cylinders, right? Every business is going organically; our growth rates are strong, and our pipeline and bookings have done the best ever. You can see that in the quality of the bookings coming through and the segments that we're growing in is consistent. I've always said I want every segment to be doing well on its own, whether it's top line or bottom line. That's kind of what we're seeing, right? So organically, I feel like the business is doing extremely well, but I also feel there is tremendous room for us to continue to grow organically and drive a continued growth strategy in the segments we participate in because our segments are so big. And there's so much room to just focus on where you deliver value. We're seeing that in our lifestyle segment, which is doing really well, agility, which is doing really well because it's focusing on the right segments and delivering growth. If you look at how we are doing overall, even from a bookings and pipeline perspective, we're expecting our growth to be accretive to the margins and to our ROIC levels, which is around 20% right, this quarter. We want to win in all segments organically, and we want to invest organically really well. That being said, I would say our cash position is the best this company has ever been in. That's fantastic because even with all constraints of supply chain and things like that, our cash flow is incredible in terms of how we manage the company, so we have tremendous optionality on how we use that. Whether we focus on buybacks because our stock is trading at a low right now, we think it's very valuable to continue to invest in our stock, so we'll balance that between more buybacks or invest in organic acquisitions. The good news is we have options everywhere.

Okay, thanks for all the details, and congrats on the strong execution in the quarter.

Thanks, Ruplu.

Thanks very much for taking the question. I was hoping to start on margins and think through the sustainability of margins over the intermediate to longer-term margins, as you pointed out at a record high. I mean, Agility in particular is very good and that's despite some of these temporary challenges around logistics and component buys. So maybe we could talk through some of the puts and takes to that? I think perhaps some parts of this are more structural and sustainable around the mix, and how the company is structuring its operations, but are there any potential offsets that we need to be mindful of going forward that are perhaps more cyclical, temporary factors or anything like that that we need to consider as we think about the longer-term margin potential of the business?

No, Mark, I'll start by saying that if you look at our margin guidance for Q2, it means from the previous question that somebody asked, right? I think Matt asked that there's inefficiencies we've built into that, particularly for chasing, expediting and supply chain issues. Obviously, those are going to go away, and we're going to continue to improve margins. If you look at our guidance for the year right now at a midpoint of 4.6%, that's a pretty significant guide in terms of how we see the full-year come through. We’re quite thoughtful in terms of how we provide these guidance. I'd say first is from a margin perspective, inefficiencies are there today from a supply chain perspective. We think that gets better. So, if anything, there is upside more than anything else. The way I think about long-term is, we're a manufacturing company, and we're just starting on this journey that we're getting really good at, in terms of how we look at productivity and efficiencies across our factory. I'd expect that Flex will be in terms of lean and productivity and efficiency, using things like our Flex business system, will continue to be world-class. If anything, I'd say there's more room to continue to drive improvements. Our growth and the mix of our growth, right, we're very focused on the right kind of growth, and making sure that the mix is flowing through our pipeline. So I'd say, Mark, I have nothing to point to that you have to be thinking about in terms of that going down from here. If anything, I'd say our journey has just started; it has still only be better from here. You can see that right from where we were, like I said a couple of years ago at 3.4% to 4.6% gross margin and operating margin. So there's tremendous room to continue to drive upside to this.

That's very helpful. Thanks. And for my second question, I was hoping you could provide some more details on what Flex’s expectations are on the component supply environment for the back half of this calendar year and into next year. Any details you can share about how you see the supply hopefully improving when some of these semiconductor and other component shortages are alleviated, and any differences in terms of which markets are currently the most constrained and when various end markets could begin to access the supply they need? Thanks.

Yeah. So, Mark, I'd say that there's nothing I'm going to add that you haven't read, seen, and heard in other earnings calls. I think we predicted a couple of quarters ago that we thought this particular quarter, Q2, would be probably the most challenging, based on our intelligence of lead times and what we had heard from chip companies about their capacity starting to come in, particularly in assembly and test capacity. We had called this a long time ago, recognizing that we think this quarter will be the most challenged, and we should start to see some recovery as some of the test capacity starts coming in future quarters. You are hearing that across the board. One, I'll say is, we see this issue across every segment. For some, like medical and auto, I'd say they get better quicker, because their volumes are much lower compared to tech and industrial. As Paul pointed out in his comments, CC had constraints this quarter, and we believe tech and industrial will have a longer tail, but that's more because of the scale of those segments and how the end markets in terms of the supply chain hold. Overall, I'd say this quarter is probably where we see some level of bottoming out, and then we start to see stabilization moving forward.

Thank you.

Thank you very much. I was hoping you could talk a bit about how your conversations with customers have been going, as we're in theory exiting COVID with regard to how they're thinking about moving out of China or other geographies and just in general, how they're looking at outsourcing? And then as a follow-up. Thank you.

Thanks, Shannon. I'd say our conversations with customers are very focused on what they can do to make their supply chain more resilient. Whether you think about trade issues driving regionalization or the pandemic prompting different thinking about bringing the supply chain closer to the endpoint. The end customer could be any part of the world: Europe, Asia, or North America. Our customers are driving more conversations and decision-making around that today than we've ever seen before. What that has translated to already, Shannon, is that our pipeline of bookings reflects this focus on regionalization, which is significant. We're seeing those actions already come through. We have a tremendous amount of product launches going on across the world driven by these supply chain resiliency trends. I'd say the focus from our customers is evident. These conversations have gone into actions, driving our pipeline and bookings to record levels across all sectors, so I couldn't point to one area where that conversation is not happening.

Okay, thank you. And then Paul, maybe you could talk a bit more about working capital. On a historical basis, it was quite strong this quarter. Is there anything we need to worry about reversion to the mean or anything within the various components? And I know you mentioned getting some prepayments; is there anything else that you're doing that is driving this? Thank you.

Yeah. So appreciate the compliments on working Cap in the quarter. Pretty good performance, very good cash flow at $219 million, we were quite pleased with that. Maybe even a little bit surprised to the upside, given some inventory pressure in Q1. I think that will persist as we go into Q2, and we will probably have a little bit of free cash flow pressure in Q2, because as inventory receipts came in in the back half of the Q1 quarter, you have to pay bills for that as you move into Q2. That said, for the full year, we’re hanging on to our free cash flow guidance which was essentially in line with last year. I don't think there's anything rolling over, with lots of focus on working capital management. Our incentive programs are designed to drive strong working capital and cash flow performance. Overall, I'd say we anticipate a little bit of pressure in Q2.

Great, thank you.

Hi. Good morning. A couple of questions, first of all, I just want to make sure I understand the math around some of the supply chain assumptions. So if sales are flat quarter-over-quarter, roughly speaking, and your profits are down at the mid-point $20 million, is that $20 million all related to supply chain or is there other stuff we should consider? And is it limiting your ability to upside to customer forecasts? And then I had a follow-up.

I'd say, Steven, one is, it's all around supply chain. That's kind of a no-brainer. And I think it doesn't limit our ability at all to upside; I think that's a question of not just whether we can find the components, but whether customers can find other suppliers to provide the components to come to the final assembly. So I'd say it’s all around supply chain, and kind of how we manage that will drive any upside.

Yeah. I think Revathi was even mentioned a couple of minutes ago as well, but at the midpoint of the guidance, a 4.3% op margin in Q2 would be the best Q2 we've seen and up 20 basis points year-on-year, despite the challenges that we're seeing in the supply chain. So it is pressure, but still strict really good performance by the operating team.

And Steve, I would say that, if you look based on the last quarter, our supply chain team is just incredible. The things they can do, what our customers rely on us for in terms of finding components and dual sourcing and doing things like that. They can do things that nobody else can do. So, I'm pretty comfortable that we've got a very solid game plan, not just for Q2 but through the next few quarters, and we'll do an amazing job managing through all of that.

Great. I think I got it now. And then as a second question. You mentioned on the healthcare side that you continue to win during the quarter. I assume you mean new programs. I know you don't want to name customers or anything like that. But can you give us a sense of what exactly that means in the recent quarter? Any color around the kinds of programs you are winning or what kinds of success you’re having on the engineering front, etc? Thanks.

Yeah. I'd say with health solutions, we've been driving this focus around pipeline and bookings even just as COVID started, because we knew there was an incredible area for us to grow, and our capability was something customers represented that anything we do to increase capacity in terms of our commercial design capability, we're going to be able to fill that up. That's kind of what we're seeing with health solutions and what we delivered last year with customers in terms of ramping up for COVID care in such a short time really tremendously, and that also changed our credibility in the industry in a big way. We are a significant player in terms of medical devices. Our wins are reflecting this across every sector. We're seeing it in critical care, in diabetes care; we've run several programs in that area. We're one of the largest suppliers in that space today. Everything around imaging, all of our key wins are evident in our four areas around health solutions and all of those are winning, with large programs ramping up right now. The health solutions segment is really picking up in term of pipeline, bookings, and ramping up all these programs.

Great, that's really helpful. Thank you.

Thanks, Steve.

Okay. Thank you. Revathi, you talked about the opportunity to get more efficient, and I look at the metrics, your SG&A revenue is below your target range, while your gross margin is healthy. When I look on an OpEx to GP basis, I think it's at all-time lows, so the operational model is being pushed more than ever right now. I wanted to ask first, how specifically you can get more efficient? Should we expect more restructuring opportunities? What does the ultimate operating structure look like? And lastly, what does this do to growth as you pursue that structure?

Yes, Adam, I’ll start by reminding you that the first thing is that our gross margin has grown like 100 basis points in the last couple of years, so we've done an incredible job in terms of making sure that gross margin is improving by driving the right kind of mix and productivity and efficiency in our factories. For me, OpEx efficiency, we went through, of course, the correction period when we adjusted our portfolio the last couple of years, but we want to continue to drive OpEx efficiency across our business, both in our back office and other areas. Our potential lies in gross margin, which is where we'll work to drive improvements through productivity efficiency and footprint optimization. We don't see any major restructuring. We believe all of these should be managed through the business cycle. If there is any restructuring, it'll be calamitous, but gross margin is where we think the mix and productivity efficiency will help us see improvements moving forward.

Okay. And maybe as a follow-up for Paul, I just wanted to double-click on the margin ramp that's implied in back half guidance. Just the back of the envelope, it looks like if I compare revenue and operating profit in the back half versus the first half. It's about a low double-digit contribution margin, which is really healthy. I think you talked about an auto ramp that's coming that should be a little bit of a headwind in Q3 and Q4. Maybe help us with the buckets of key tailwinds that drive that level of contribution in the back half of this year since you guys sound really confident. Thank you.

Yes, happy to do that. The supply chain challenges and that includes cost headwinds are probably at their worst in Q2. They will gradually improve as we move into Q3 and Q4. The challenge with this supply chain environment creates stops and starts within our facilities leading to inefficiencies. We feel confident in the back half, and maybe just go back to the April timeframe for our full-year guidance. We expected that Q2 supply chain challenges would be there. We figured that Q1 would be tough, Q2 would be a little bit worse, but things would gradually start to improve as we move into Q3 and Q4. Fortunately, that view hasn't changed. If this was moving all over, I wouldn't be as confident in the back half. Things are starting to improve as we progress through Q3 and Q4, and we'll likely have less inefficiency. New program ramps are coming online as well. I think we'll be right in the middle of that 4.5% to 4.7% margin rate for the full year.

And then we've got, Adam, I'll just point out that in the second half, strength in the critical care business will return; we'll have better components. There are tremendous new wins coming into that business. Overall, our auto winds should come up in our next fiscal year cycle, but we're quite confident about the second half of this year. We're putting some supply chain issues behind us and see improved mix trends as well. Our midpoint of guidance is strong, and we anticipate it will be another record year for us.

Right. And a quick clarification on Nextracker: is the SEC review process complete? Are you now just waiting on market conditions, or are you still waiting on the SEC review?

Yeah, we really can't comment on the process other than we're in the process with the SEC, so when that situation changes, you'll know.

Hi. Thanks for taking my questions. On the customer side, we're hearing a lot of pressure, not surprising, on shortages and higher freight costs really hurting those OEMs with limited product diversification. Are you starting to see accelerating customer interests looking to offload a lot of the logistics and manufacturing, and do you have any pricing power there given the urgency? If you could give some examples, that would be helpful. I'll follow up.

Yeah, Paul, I'd say what we're hearing definitely from customers is more conversations on how they should be thinking about their supply chains in terms of having us help them think about the risks associated with it, how to plan for it. This is relevant whether related to freight, logistics, outdated tooling, or components needing to be second-sourced. This means that every business and customer base is having this conversation. For us, it's all about finding the right solution for each customer, and they value our expertise and experience to help them design these solutions. And yes, pricing power absolutely exists because customers are very clear; they do not want to find themselves in this situation again. Using suppliers like Flex to help them redesign that and ensure they have the right solution is valuable because nobody wants to be caught off-guard again. We are seeing customers clearly driving home for lifecycle solutions, and we're experiencing an interest in regions relocated closer to point of views. I could give you examples across every segment.

Great. Thanks; that’s very helpful. And then just a follow up on free cash flow. I mean, you mentioned free cash would be in line with fiscal year '21. Now your revenues and margins are expected to be higher, weren't you kind of expecting no free cash flow and conversion to be higher as well? If you could expand there? I know you mentioned some Q2 headwinds on working cap and whatnot and your cap ex guidance would be helpful as well? Thank you.

Yep, no problem. As I mentioned, we will have a little bit of free cash flow pressure in Q2. What I would say about the fluid situation remains in the supply chain environment, particularly component shortages. If the outlook improves as we move through the back half of this year, we'll certainly update that guidance. But I think saying free cash flow will be in line with last year, which was a very solid cash generation year for us, is prudent guidance at this point. In terms of CapEx, I would mention, CapEx to sales about 2% is a good baseline for you and allows for prudently investing in strategic growth without constraining us.

Thanks. Great. Appreciate it.

Thank you. Revathi and Paul, you mentioned that there's some transitory costs; we're all very familiar with shortages in semiconductors and also the expediting costs, whether in freight shipping costs from Asia or around the entire world. Are you specifically talking about freight, and do you think those are going to subside? Or are you also talking about the component costs like steel, copper, resins, plastics, and aluminum, which have rallied recently, and do you expect those to kind of subside in the next couple of quarters?

So I'd say, Jim, regarding the semiconductor space, the component price increases being passed through will stick for a period. It goes through another cycle. In terms of commodity prices like steel, yes, they are rallying, but in our Nextracker business specifically, we pass through like-for-like through our contracts. We don't carry any headwinds because of that. If that recovers, it'll transition through the same process in terms of customer negotiation. The only place to see temporary delays may be in freight where it takes a couple of quarters to manage headwinds. Overall, however, we feel passing through pricing across segments is happening quickly and sticking.

Great. Thank you so much for the details and clarifications. It's greatly appreciated.

Guys, congratulations on another great quarter. Regarding your guys’ ability to prove out over the last few quarters in a challenging environment to be a very trusted supply chain partner, and you highlighted many different examples of that. As we look to the mid-term, beyond this fiscal year, do you think considering the example of partnership with your customers, that you will be positioned to, in essence, outgrow the industry in terms of top-line growth?

Yes, I would say absolutely. There's no question about that. Even if you think this quarter, our overall growth rate compared to the rest of the industry is very strong. In the midterm, I have no doubts; our pipeline is very strong, and our bookings have been fantastic, even with our focus on the right kind of bookings. I would say our growth focus from where we are right now looks very bullish moving forward, and I'm very confident that customers are coming to us because they know we execute well and are a trustworthy partner for them. There’s no question about that; I would say our growth trajectory looks very promising.

Fantastic. No other questions. Thanks.

Thanks, Christian.

And there are no further questions at this time. Do you have any closing comments?

No, I'll just say thanks everyone for joining and be safe and healthy. Thank you.

Thank you for participating. This concludes today's conference call. You may now disconnect. Goodbye.