Flex Ltd. Q2 FY2023 Earnings Call

Good afternoon, and thank you for standing by. Welcome to Flex's Fiscal Second Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to turn the call over to Mr. David Rubin. Sir, you may begin. Thank you, everyone. Good afternoon, and welcome to today's 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. Slides for today's call as well as a copy of the earnings press release and summary financials are available in the Investor Relations section at flex.com. This call is being recorded and will be available for replay on our corporate website. As a reminder, today's call contains forward-looking statements, which are based on our current expectations and assumptions. These statements involve risks and uncertainties that could cause actual results to differ materially. For a full discussion of these risks and uncertainties, please see the cautionary statements in our presentation, press release or in the Risk Factors section in our most recent filings with the SEC. Note this information is subject to change, and we undertake no obligation to update these forward-looking statements. Unless otherwise specified, we will refer to non-GAAP metrics on the call. The full non-GAAP to GAAP reconciliations can be found in the appendix Slides of today's presentation, as well as in the summary financials posted on the Investor Relations website. As previously disclosed, the draft registration statement on the Form S-1 relating to the proposed initial public offering of NEXTracker's Class A common stock remains on file with the U.S. Securities and Exchange Commission. The initial public offering and its timing are subject to SEC market and other conditions. Following SEC regulations, we will not make any further statements or answer any additional questions on the NEXTracker filing at this time. With that, I'd like to turn the call over to our CEO, Revathi.

Thanks, David. Good afternoon, and thank you for joining us today. So jumping right in, fiscal Q2 was another strong quarter for Flex. Looking at Slide 4, revenue grew 25% year-over-year with growth in 5 out of 6 of our core businesses. As expected, consumer devices was the only business down year-over-year. Overall, we continue to see a combination of strong demand in many of our served markets and sustained strength in customer backlog. Adjusted operating margin came in at 4.8%, which is a nice improvement versus last quarter. This strong performance overall drove another quarter of record adjusted EPS at $0.63, up 31% year-over-year. Turning to Slide 5, as we have focused the portfolio, we are confident in our market position and the macro and secular tailwinds remain in our favor. We're seeing continued strength in many of the end markets we participate in, where demand continues to outpace supply. Now this is a very dynamic environment, so we continue to closely monitor demand signals, and we are engaged with our customers and suppliers to navigate what is still a very unusual time. Recently, we have all seen headlines talking about the improving supply chain, and overall, it has improved. Total shortages have been cut roughly in half compared to this time last year. Now that being said, we continue to face shortages in certain areas, primarily the larger geometry node semiconductors, which mainly impact our reliability end markets such as automotive, healthcare and industrial. We expect constraints to continue to be a challenge as demand and supply remain out of balance. Now looking past the cyclical concerns, the longer-term trend is still towards increasing semiconductor content in almost every device regardless of the industry. This is primarily driven by OEMs, who want to create products with digital features that customers highly value. They also want more agility and resiliency in manufacturing and products that are made more sustainably. This trend of technology transitions driving increased product complexities is consistent with the industry growth themes we laid out at our Investor Day earlier this year. We also talked about regionalization, as it relates to customers moving their production closer to demand and improving business resiliency. Now our ability to deliver along these themes has already directly led to share gains and expanding business for us. Now let me just give you one example. Last quarter, we mentioned that we baked in weakness in our consumer device and lifestyle outlook, assuming they would be the most sensitive to the macro environment. Now this is still the right conservative assumption. However, our lifestyle business grew again this quarter year-over-year despite weaker end markets. This is a result of our advanced capabilities, our ability to navigate complexity and our ability to expand production in multiple regions across our geographic footprint. Our renewables business inside our Industrial Group is another great example, where our unique capabilities and global footprint align really well with both secular technology transitions and regionalization needs. I would say that the Inflation Reduction Act will also contribute to the strong growth opportunity in renewables, as companies now look to move to domestic production to capture the tax credits, as well as increase their resiliency. Again, we have the expertise and the footprint to help our customers take advantage of these opportunities. Now speaking of solar, looking at the NEXTracker segment, revenue growth reaccelerated this quarter due to strong demand. Margins also improved again, as we slowly work through those contracts that were impacted by the surge in shipping costs during the onset of the supply crisis. Now obviously, renewable energy overall is a very exciting area to me, and we're seeing very strong growth. Now not to be cliche, but it's also important to remember that energy transition is a marathon and not a sprint. The industry is still dealing with near-term solar panel and component shortages, which could also limit the speed for some program ramps. Regardless, we see this as a strong multiyear growth opportunity, and we are very excited about it. Now moving to Slide 6, we had several notable industry accomplishments this quarter, one, in particular, our team in Sorocaba, Brazil was selected by the World Economic Forum, as a new member of the Global Lighthouse Network. This is our second facility to be selected. As you may recall, our team in Althofen, Austria was recognized last year. This recognition is important for us because it demonstrates our industry leadership, our technology innovation and the many talented people in our company. We are proving that you can deploy leading-edge automation to improve safety, data technologies to improve operational efficiency, and at the same time, you can upskill employees to increase their opportunities. Building on our automation and data technology skills, deploying solutions inside of Flex has become a virtuous cycle. As partners and customers see our expertise, this leads to new product wins such as advanced robotics, which is also a fast-growing area for us. We are very focused on achieving zero waste by prioritizing sustainability as part of our operations, which helps our customers see our circular economy solutions in action, and this is just a part of this story. I'm very excited about these advancements, and we will continue to push the boundaries of what our manufacturing and services can accomplish. Now with that, I'll turn it over to Paul to take you through our financials.

Great. Thanks, Revathi, and good afternoon, everyone. I'll begin on Slide 8 with a review of our second quarter results. Please note, all results provided will be non-GAAP, and all growth metrics will be on a year-over-year basis unless stated otherwise. The GAAP reconciliations can be found in the appendix of the earnings presentation. Revenue came in at $7.8 billion, that was up 25%. Gross profit totaled $599 million and gross margin was 7.7%. We had another quarter of impressive operating profit dollar growth, up 31% at $375 million, with operating margin at 4.8%, improving 25 basis points year-over-year. Lastly, earnings per share came in at $0.63 for the quarter, an increase of 31%. Collectively, solid execution and growth across the portfolio contributed to the strong results, and overall, we're pleased with our performance this quarter. Turning to our second quarter segment results on the next slide. Reliability revenue was $3.3 billion, an increase of 34% year-over-year. Operating income was $175 million, up 38%, and operating margin for the segment was 5.3%. In Agility, revenue was $4 billion, up 16%. Operating income was $170 million, up 11% with an operating margin of 4.3%. Finally, NEXTracker revenue came in at $473 million, that was up 40% year-over-year. Operating income at NEXTracker was $43 million, up 76% with nice sequential operating margin expansion up to 9.1%. Overall, demand was resilient across most end markets, but semiconductor shortages persisted in the quarter, especially at the larger nodes. These constraints primarily affect businesses in our Reliability segment and tempered growth and margins. Still, in automotive, customer backlog remained robust, and we gained ground in EV, power electronics and ADAS, consistent with the themes we outlined at our Investor Day. Industrial had a great quarter with healthy demand across our focused markets and demand in the healthcare space remains strong. As I mentioned, Agility revenue was up 16% despite some consumer-related weakness as expected. Consumer devices was down against softer markets. And in lifestyle, the consumer-related slowdowns were more than offset by new program wins and ramps. Finally, CEC delivered another strong quarter led by triple-digit growth in cloud and solid double-digit growth in comms and in enterprise. Moving to cash flow on Slide 10. Q2 net CapEx totaled $187 million or 2.4% of revenue. Free cash flow was an outflow of $84 million for the quarter, and we continue to anticipate free cash flow for the year to be back-end loaded. We returned $72 million to shareholders this quarter through share repurchases. Please turn to Slide 11 for our segment outlook for the fiscal third quarter and our year-over-year growth expectations. For Reliability Solutions, we expect secular trends to support growth and share gains with revenue up mid to high teens. A great example of this is within industrial, where investments based on longer-term cloud expansions, renewables and automation should continue. The health solutions pipeline is strong. And in auto, we expect to see solid growth as customers increasingly favor our next-gen mobility products that support new technologies, and we continue to expect to see growth in content per vehicle. For Agility Solutions, revenue is expected to be up mid-single digit to low teens, driven by sustained strength in CEC, particularly within cloud and communications. We expect consumer devices to be down in Q3, driven by continued weakness in consumer end markets, and we'll see some of this in the lifestyle business as well, but we expect share gains to partially offset the softer consumer spend. On to Slide 12 for our quarterly guidance. We expect revenue in the range of $7.3 billion to $7.7 billion with adjusted operating income between $345 million and $375 million. Interest and other expenses is estimated to be around $55 million. We expect the tax rate to be closer to 10% this quarter, driven by the timing of a few discrete items. And we expect adjusted EPS between $0.57 and $0.63 based on approximately 460 million weighted average shares outstanding. In general, our outlook for the fiscal third quarter anticipates similar demand trends to what we saw in the September quarter with the supply situation remaining the gating factor. Now let's go over our full year guidance on the following slide. In short, our expectations for the second half of the year are the same as what we talked about last quarter, around 8% year-over-year growth. With that in mind, given our strong performance for the first half of the year and our current outlook on the third quarter, we increased our fiscal '23 revenue expectations to $29.1 billion to $30.1 billion. We expect adjusted operating margins to be around 4.6% to 4.8% and adjusted EPS between $2.20 a share and $2.35 a share. In closing, although we're navigating a complex macro environment, our first half performance shows that our strategic focus on high-growth and profitable end markets is the right one. As you know, over the last several years, we changed our portfolio mix, purposely deemphasizing the most volatile and shortest cycle businesses. We strategically focused on aligning our portfolio mix with our core capabilities and large, diverse end markets with strong long-term growth drivers. And importantly, the trends supporting these growth opportunities are unchanged. We're confident that our consistent execution that we've demonstrated these last few years will continue, as we remain focused on capturing these opportunities and delivering on our long-term commitments. With that, I'd like to turn the call back over to the operator to begin Q&A.

Your first question will come from Mark Delaney of Goldman Sachs.

Congratulations on the strong results. First question, just hoping to better understand the company's comments on the end market trends in the macroeconomic environment and what's implied in your guidance. If I understood the comments by end market, consumer is one of the only markets, where there's been some softness observed so far. But if I look at the guidance on a sequential basis going forward, I think next quarter and implied in the fiscal fourth quarter as well, there's some sequential revenue moderation quarter-over-quarter in both quarters. So it seems even though demand trends that the company has seen are still pretty strong, you're trying to bake in the potential for orders to slow more broadly given the macroeconomic backdrop, but if you could elaborate a little bit more on how you're trying to handicap some of these weaker macroeconomic data points and what the company could see going forward? And then how you put that into your guidance, that would be helpful.

Yes, you're absolutely right, and that's a good question. What I appreciate about the Flex portfolio right now is its broad and diverse nature. We are indeed noticing some softness in consumer-oriented markets, particularly in consumer devices and lifestyle segments. However, as mentioned in the prepared remarks, we've been able to counterbalance that weakness in the lifestyle business with gains in market share, which is a positive outcome. Without that, we likely would have seen a decline in that sector as well. The other four areas of our business are currently performing exceptionally well. When you contrast the lagging consumer markets with ongoing growth in the cloud, renewable energy, and the automotive sector, it paints a promising picture. Not only is IHS up 26%, but we are also seeing increased content per vehicle. Overall, we feel well-positioned. While no one is completely shielded from market softness, we are confident in our position, and we believe the diverse nature of our portfolio has provided some insulation against declines in other areas.

Mark, the only thing I'd add is, first is we're coming off of like strong quarters after quarter, right? 24% year-over-year growth this quarter, which is fantastic. We're still guiding to a very strong Q3. And I think you all will know that we like to be somewhat prudent in our assumptions and particularly with all the macroeconomic noise going on. But what's really great about it is what Paul just said, 5 out of our 6 core businesses and NEXTracker, all growing year-over-year, which is great in the midst of what you're hearing across other businesses. And what we think the reason for that is, of course, all the macro stuff we talked about, but also the share gain we are seeing even in areas like lifestyle. So I would say, you have to think about our future guide that there is some amount of prudence in our guide, and we need to do that with all the noise you're hearing. But we feel very good about the growth we just posted and the guide we're giving you for Q3, we feel really good about that. But overall, there will be strong growth here in the second half for us.

My second question was just on the IRA, and maybe you could elaborate a little bit more on what you've seen from end markets, where there's potential tailwinds from the IRA, as that goes into effect and perhaps how that's evolved. But if you could also perhaps comment on to the extent Flex is manufacturing products in the U.S. that should be eligible for certain tax credits, do those credits flow to Flex? Do they flow to the customer? Or do those get shared?

Yes. I want to start by saying that we see significant benefits from the IRA for our NEXTracker business as well as our overall renewables segment within our Industrial Group, which we've discussed previously. Starting with NEXTracker, its growth remains strong, and it will continue to benefit from the IRA. There are some short-term challenges like solar panel shortages, but we anticipate a growing backlog and positive momentum for NEXTracker as the IRA takes effect. Regarding tax credits, discussions are ongoing about who qualifies for them, how they apply to our manufacturing, and how we can move operations to the U.S. There’s some uncertainty regarding the specifics of the tax credit allocation, but we expect this to lead to increased revenue and profit opportunities for Flex. Similarly, our renewables business, which includes inverters and storage, is experiencing robust growth, and we expect this trend to continue with the IRA. We are actively engaging with customers and implementing manufacturing strategies in the U.S. to support their needs. The situation with tax credits is still evolving, but overall, it represents a positive trend for both revenue and profits.

Your next question comes from Ruplu Bhattacharya of Bank of America.

Congrats on the quarter. My first question is on margins. You reported 4.8% operating margin. What was the impact from inflation pass-through? And for the full year, you're raising revenues $700 million, EPS $0.11 and keeping the 4.7% operating margin. So what is factored in, into the full year guide from an inflation pass-through impact? If you can give us any quantification on that.

Sure. No problem, Ruplu. Let’s first discuss the second quarter. The 4.8% operating margin experienced some pressure from low-calorie pass-through due to inflation, which illustrates the impact of this factor in Q2. Of the 25% sales growth we achieved this quarter, about 5 percentage points were related to inflation pass-through. This has had a slight effect on our margins, which could have been better without that low-calorie pass-through. However, I am pleased to report a 25 basis points margin expansion year-on-year for the quarter, which is encouraging. Looking ahead to the second half, especially Q3, I expect it to be quite similar to Q2 in terms of business composition, mix, and margin profile. We anticipate another 4.8% in Q3, which translates to an additional 30 basis points of margin expansion. There will be some inflation pass-through in our guidance for the second half, but it is expected to be minimal.

Paul, and if I can for my follow-up, ask you a question on inventory and free cash flow. It looks like inventory was up 6% sequentially in the quarter and free cash flow was negative slightly. Are you still maintaining the full year at $550 million of free cash flow? And how should we think about that? And specifically, I think you called out for the Reliability segment, you're still having issues with getting semiconductors is part of the inventory build because of that segment. So can you just talk a little bit about how you think inventory unwinds over the next couple of quarters if it does? And how should we think about free cash flow for the third quarter and fourth quarter?

Yes, cash flow in the third and fourth quarters will be positive, and we still expect to reach $550 million for the year. It's not surprising that free cash flow was slightly negative in the second quarter, which we had communicated earlier. The negative cash flow was primarily due to increased capital expenditures. Our CapEx rate from the first quarter to the second quarter has approximately doubled as we invest in several next-generation projects that support our current top-line growth. This 25% top-line growth requires some additional investment in working capital and capital expenditures, contributing to the cash flow pressure. Regarding reliability and chips, larger or lagging edge technologies are more impactful to our industrial, automotive, and health solutions segments. We have not witnessed a significant easing of constraints in these areas compared to what we see in our more agile businesses. We did notice some improvement in the quarter with CEC, which was encouraging, but we still face considerable constraints, especially in the automotive and health solutions sectors.

I think Ruplu, the only thing I would add is, first is you have to think about just the fantastic growth we're having this year, right? First quarter 16%; this quarter 24%, 25%; Q3 guide is 13%, obviously, can be a lot more of supply chain constraints clear. So our focus really is on meeting demand for our customers. And right now, demand is strong across most of our end markets. And so that has to be the most important factor for us, as we are bringing in inventory and trying to clear demand. And we talked about Reliability, which is the most impacted, even though they had a fantastic growth quarter in Q1 and Q2, they're still the most impacted. You've been hearing from automotive, you've been hearing from other health companies in terms of how supply chain is impacting them. So demand is strong. Backlog is super strong. You can see Reliability margins continue to improve quarter-over-quarter, year-over-year. So it's all focused on let's make sure that we are able to meet the demand for our customers because that's what they're looking for us to do, and we're comfortable our inventory will flush through, as we work through that.

Your next question comes from Steven Fox of Fox Advisors.

I was curious about two end markets in particular. During your prepared remarks, you talked about triple-digit growth in cloud. I was wondering if you could dig into what's going on there? And then secondly, how long do you think that you could sort of stay ahead of the weakening lifestyle demand trend with new programs? Is this something that continues only for another quarter or so as you ramp these new programs? Or is there more behind that?

Yes, let me start with the cloud. We discussed our focus on cloud not only within CEC but across our entire portfolio since we also cater to hyperscale customers and data centers through our industrial offerings, including Anord Mardix and our base power business. Our extensive portfolio supports data centers and cloud, not just through CEC. We're concentrating on gaining market share and leveraging the full cloud market opportunity. Despite discussions about a slowdown in cloud growth, it's important to remember that the market is still significant, growing at over 35%. We have much potential for share gain, and our backlog remains strong. We are confident in our cloud capabilities, which stand out from traditional EMS due to our robust power portfolio alongside conventional storage networking. We're optimistic about our cloud focus and growth prospects, supported by the end market. Regarding our consumer lifestyle business, a few years ago we shifted our strategy to focus on major lifestyle brands, aiming to create a portfolio around high-end and more complex products. This approach is yielding results, as we've gained share with key customers and capitalized on our regionalization strategy and circular economy initiatives. The growth in share is driving our success in this sector, allowing us to navigate through current market challenges effectively. We are confident that we will outperform the market in this area and successfully manage through upcoming years due to our strong program ramps and favorable backlog.

Your next question comes from Jim Suva of Citigroup.

Maybe my observation is wrong, but it seems like all the contract manufacturers, I guess, specifically to you, Flex is seeing operating margin improvements and actually look quite sustainable and not just a supply chain driven shortage boost. Can you help us confirm that or not? And is onshoring turning in from more now just discussions to actual reality and that could help you out with some of your utilization at some of your other factories.

Yes. Jim, I'll start, and I'm sure Paul has a lot to say on this. I'd say first is, we are very pleased to see the industry as a whole continue to improve in terms of operating margin improvement. I think Flex, we started talking about this 3 years, 3.5 years ago, and it's really great to see the whole industry go in the right direction in terms of focused on growth, the right kind of growth, and that drives operating margin improvement for us and for the industry as a whole. We feel that we're very comfortable that it's sustainable margin improvement because one is for us, our mix is definitely changing. The types of end customers that we're going after, who want to pay for our services is definitely changing. So that is one reason we feel really good about the continued margin improvement. And our story is not just based on, hey, good growth and good absorption, but mix shift is a significant part of why you see our margin continuing to improve. And then I'd say on the onshoring discussions, I think it has become a reality in the last couple of years. A lot of our programs are related to either new products being ramped up in a different area or existing products being moved around and distributed to create resiliency. So a lot of programs are driven by this whole onshoring opportunity that's going on and bringing it close to consumers. So Paul, would you make any other comments on the margin improvement?

No, just maybe a proof point on your comment on regionalization, which is what we saw in the lifestyle business this quarter. We talked about softer consumer end markets, but lifestyle actually grew, and a large part of that was the regionalization phenomenon that we've been talking about over the last year or so.

Yes. So Jim, I think you're spot on. I think both of those things bode well for the industry and for Flex, a good macro tailwind in terms of growth due to onshoring, but margin improvement, we feel very good about. I think we've been on that track record now for almost 4 years, and we continue to show great room for improvement.

Your next question will come from Shannon Cross of Credit Suisse.

To go back to your growth this quarter and just ongoing for the year. Can you talk a bit about, maybe on a segment basis, how much of the growth is from new customers? How much of the growth is coming out of current programs and maybe how much of the growth is coming out of customers that have a program with you and are expanding it? Is there a difference between your segments? Or is it sort of just strong growth across the board? And then I have a follow-up.

Sure. First of all, Shannon, it's great to hear you on the live line again. Regarding growth, let me provide a different perspective on the 25%. If you look at the market individually, there’s a significant range. On one end, we discussed consumer markets and on the other end, automotive, which is likely in the 20s overall. The 25% we experienced this quarter included a few points from inorganic growth, particularly due to the Anord Mardix acquisition. We also gained a couple of points from NEXTracker, which, as you noted, increased by 40% year-over-year, contributing positively to overall performance. About 5 points can be attributed to inflation, representing cost pass-throughs. This leaves 16 points from a mix of share growth and market expansion. We estimate that the overall market across our portfolio grew in the mid-single digits, suggesting that the rest was derived from market share. There are many new labels and products driving this sales growth, which aligns with our comments regarding expansions and other developments. When we analyze end markets, there is a broad mid-single-digit growth, reflecting a diverse landscape with some consumer markets declining while others are experiencing robust growth. A prime example is the IHS data indicating that light vehicle production in the automotive sector rose by 26%.

I was wondering also if you could talk to some of the investments you've made and maybe advanced manufacturing technologies, whether it's AI and ML or 3D printing, robotics, I'm just wondering, as the larger EMS companies get bigger and have more capabilities, is there going to just continue to be more of a differentiator when you go out to sign new contracts versus maybe some of the smaller players or frankly, even some of the in-sourcing opportunities, where they don't have the same capabilities.

Yes. Shannon, thank you for that question. First is, I love the opportunity that exists in manufacturing as you go into not just factory automation, but like you talked about AI ML, which is just to use good data to run our factories better. I still believe that where manufacturing is today is really has tremendous runway to grow. So one way is just factory automation, what do you do in a smarter way, whether it's through robotics or cobots and all of that. But the AI ML layer, which is how do you overlay smart software to run your machines better, to have more proactive decision-making, all of that will be a huge part of the kinds of investments that we're making today that continue to pay off in the future. And they are a big differentiator because our customers will say that they rather like to come to Flex because the way we can deal with redesigning their product or way we can deal with running their product more efficiently to solve some complex issue they have, it's just much better than everybody else. So whether that comes because of our capabilities or because of the AI ML layers that we are building into our manufacturing systems and thinking is a big part of that. So I feel like everything we've talked about in terms of Lighthouse Network and Industry 4.0 and all that is just the starting of the conversation in terms of what big manufacturing companies will do around automation and really taking advantage of full manufacturing capabilities. So a lot to come on that. It will be a big storyline for what drives our productivity and our margin improvement, and it definitely helps if you're a big company and you can invest more, right? So I think those are all part of a very strong storyline.

I was on mute. So just on the operating margin improvements here, you've seen kind of a big step-up here in Agility over the years, but also some step down in Reliability. So can you talk about the dynamics there? And is there a path for Reliability to kind of rebound back north of 6%? Just talk about the dynamics there, would be helpful.

Sure. First of all, Reliability improved compared to last year during the quarter, which I was pleased to see. However, that business aims to achieve more than just low 5% margins. We have faced some challenges with this business in recent quarters due to supply chain disruptions. Some aspects are ready for production but are held back by missing components, leading to absorption headwinds. We've experienced this over the past few quarters, as previously mentioned. Nevertheless, it's a strong business, and referring back to our Investor Day narrative, we expect Flex margins to grow over the coming years, driven by that Reliability business. While I can't provide an exact timeline for when Reliability margins will reach 6% and in which quarter that will happen, I believe that margins in Reliability should improve as we clear inventory and as the component shortages begin to resolve.

And Paul, the thing I'd say is, one is our storyline on overall kind of how operating margin improves for this company has been very consistent. We started the story 4 years ago. We talked about how we will build our operating model for how we run these businesses on improving mix on how the kinds of customers will go after an Agility that is a lot easier to do than it's in Reliability because Reliability's long programs take a long time. And we've made a very conscious decision that we will go after complex automation, complicated products in these end markets because those are the ones, we feel are good for our businesses long term. So whether it's in automotive, we have our own design EV products or in health, where we have very complex things that we make for our customers. So it's a combination of what Paul said, which is lots of stops and starts happening there now, which is hard to do with higher capital intensity, but also the continued investments. But we just stand by our goal that our goal is for longer-term margins for Agility and for Reliability to keep going up. We said 5-plus for Flex. We said high single digits for Reliability, and that's kind of what we're pushing towards, and we're very comfortable that it's heading in the right direction for that.

And then just a follow-up on inventory levels. They're at their highest levels ever. It kind of makes sense given the growth you're seeing in some component constraints, but how should we think about kind of the pace of harvest here? Or are we at competitive new elevated level of inventory? And then any update on some of the golden screw issues you were mentioning, are you finding it a little bit easier to source some of those components now?

Yes. So Paul, I'll start with kind of supply issues and what we're seeing. We're definitely seeing supply constraints start to clear in parts of the Agility business. So consumer, lifestyle, our CEC business have more clearing of semiconductor availability that's happening, and that's consistent with what we are hearing. And we're excited that, that's what's driving a lot of our growth for Agility. On the Reliability side, where we have kind of the more lagging edge semiconductors, those are still struggling. You're hearing that from automotive customers. You're hearing that from health customers that those investments have not come up as they were planned and they're still delayed. So we expect that those will continue to be challenged all through kind of next year, calendar year. And so I would say the way we're thinking about it is that we have great relationships with these end suppliers, and we work to get our share of them for our customers. And that's why our growth is still very strong in Reliability. But is there going to be continued backlog in those businesses, I would say, absolutely. So in terms of inventory and clearing inventory, our focus is really on this growth opportunity that we have to take advantage for our customers is the single most important thing. We are very comfortable that the inventory we buy is on behalf of our customers, and we will clear that as the backlog starts to clear more in Reliability than we have seen before. So really comfortable with the pace of the change we're seeing. And we'd say, as kind of the growth continues, we'll manage the inventory down in the coming quarters.

There are no further questions from the phone lines. At this time, I will turn the conference back to the CEO for any closing remarks.

Well, thank you so much. Thanks, everyone, for joining. I would just take a minute to thank my leadership team, of course, all our customers, right, and our partners and our shareholders for your support, most importantly, to the Flex team for working so hard through these complex times. So thank you for your contributions and their commitment to Flex. Thanks, everyone. Thanks for joining.

Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank everyone for participating, and you may now disconnect your lines.