Flex Ltd.

Good afternoon and welcome to the Flex second quarter fiscal year 2020 earnings conference call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. Slides for today's discussion are available on the investor relations section of the flex.com website. As a reminder, today's call contains forward-looking statements based on current expectations and assumptions and these statements are subject to risk and uncertainties that could cause actual results to materially differ. Such information is subject to change and the company undertakes no obligation to update these forward-looking statements. For discussion of the risks and uncertainties, see Flex's most recent filings with the SEC, including current annual and quarterly reports. If this call references non-GAAP financial measures for the current period, those measures can be found in the appendix slides. Otherwise, they are located on the Investor Relations section of the FLEX website along with the required reconciliations. With us on today's call are Revathi Advaithi, Chief Executive Officer, and Chris Collier, Chief Financial Officer. After the speaker's remarks, there will be a question and answer session. I will now turn the call over to Revathi Advaithi, Chief Executive Officer. Please go ahead.

Hey, thank you. Hey, good afternoon, everyone, and thank you for joining us on the call today. As we reach the midway point of our fiscal year, I'm really excited to share the progress for second quarter and talk about how we move forward. While I reflect on this last six months, we set about a journey to shift our portfolio mix while improving margins and delivering appropriate levels of adjusted free cash flow. I'm really happy that our results this quarter are showing that this can be done. Our second quarter performance, like Q1, is another step in the right direction. Of course, I want to start off by thanking our nearly 200,000 Flex employees who have worked really hard and further build on the legacy of this great company. So I want to thank the Flex team. Let's start with slide three. This has been a very dynamic and exciting period for Flex, and we have done a lot of transformational activities that we've been managing through. What I'm really pleased is that this has been capped off with a really strong financial performance. So let me talk you through the financial metrics. We achieved revenue of $6.1 billion, and this reflects our underlying mixed change strategy and displays growth in core areas like industrial and energy. We realized an adjusted operating margin of 3.7%, showing significant gains in our conversion and benefits of our portfolio mix. We delivered adjusted EPS of 31 cents, and this is right where we committed, and our adjusted free cash flow generation of 187 million, resulting in an adjusted free cash flow conversion that's returning to historical performance levels and where we are targeting to operate our business. So let's go to slide four. We've done a lot this quarter, building on what we started in first quarter. Firstly, our teams have done an exceptional job executing on our mixed strategy, as we've been reducing exposure in India and China and reaching an amicable and swift settlement with Huawei. At the same time, we focused on our core growth segments and getting back to enhancing our sustainable, disciplined execution efforts. We've had many new business wins this past quarter, and there are a few wins in particular that highlight our technology leadership and global capabilities, and I want to share some of those with you right now. So the first example is one of a design-led win in our CEC space where we designed and manufactured a storage media solution that transfers stores and catalogs media within the data center. This solution is one of several design-led wins we have with this customer and is going to be deployed across the customer's data center network. We continue to increase our geographic penetration with significant design-led wins in Europe and China, and that expands our position in autonomous and electrification outside of North America. And in addition, our communications and connectivity know-how have led to a new major win in the automotive space for an integrated connectivity module for a major North American automotive manufacturer. And then in our health solutions area, we continue to secure many design-led wins in point-of-care diagnostics and drug delivery. We solidified our lead in the diabetes market with a significant continuous glucose monitoring device win. Additionally, we are encouraged by the increases in customer outsourcing we are seeing that reinforce a market trend that really bodes well for us in this space. But in all these examples, we're leveraging our deep experience across design and manufacturing capabilities, along with our strong customer collaboration to provide meaningful solutions to their manufacturing and design challenges. So in April, six months ago, when I first talked to all of you, we committed to doing four things. Managing our mix, driving disciplined execution, winning more design-led businesses, and consistently driving free cash flow. Now, the reason we chose those four areas was because it was clear that growth is not the challenge in our industry, but delivering incremental margin with EPS growth and the right levels of free cash flow typically has been. and doing so consistently really matters. So our performance this period across these four elements really demonstrates that we're executing and our work's paying off. Now combining these four priorities with the right type of profitable growth will be the powerful story as we move forward. We believe this disciplined approach that we have created will create a lot of positive momentum for Flex and will drive shareholder value. So I want to take a few minutes to share with you some thoughts on our strategy going forward. You know, we've talked a lot about optimizing our mix and improving our execution, and we have accomplished a lot in these areas and will continue to refine and optimize. Customers are telling us that we have outpaced the industry in technology innovation, particularly in health solutions and automotive, in our energy and power sector, as well as 4G and 5G. So technology leadership is very important, and we plan to maintain our leadership position. Our goal is to ensure that our commercial plans and the segments focus on driving growth and technology to win the right type of business. And operationally, we'll simplify and optimize our factories to the high-scale, efficient, agile model, or the high-mix, lower-volume, longer life cycle model. The great news is that we know how to do this really well and we have a pedigree like none other to meet these demands. Our plan moving forward is to run end-to-end business segments with emphasis on differentiated engineering and operations manufacturing service models which are tailored to meet individual customer needs. Of course, at the core of our strategy is always the enthusiastic and passionate flex culture that makes all of this possible. I'm very excited about this path that we're taking and we're looking forward to hosting an investor and analyst day in fiscal year 20 Q4 where we'll further expand on our approach. I'm really pleased with our performance this quarter. We've taken another big step in the right direction and our plan is working. I'd like to turn the call over to Chris who will walk you through our financial results in more detail and then I'll come back with some closing remarks. Chris?

Thank you, Revathi. Please turn to slide six for our second quarter income statement summary. Our second quarter revenue was $6.1 billion, down 9% versus a year ago, and at the low end of our guidance range. Our Q2 adjusted operating income was $227 million, which was within our guidance range and up 2% year over year. Our adjusted net income was $158 million, resulting in an adjusted earnings per share of 31 cents, which was at the midpoint of our guidance range and up 7% year over year. Second quarter gap net loss was $117 million and was lower than our adjusted net income, primarily due to $19 million of stock-based compensation, $14 million in net intangible amortization, and 226 million in net restructuring and other charges as we accelerated our strategic decision to reduce exposure to highly volatile products in China and India and we undertook targeted actions to reduce, streamline and align our operating cost structures. We previously guided to a range of 145 million to 265 million for these charges, the bulk of which we incurred in our second quarter. Now please turn to slide seven for our quarterly financial highlights. This quarter, while our adjusted gross profit was down 5% year over year to $414 million, our adjusted gross margin improved a healthy 30 basis points year over year to 6.8%, reflecting our improving mix of business and benefiting from operational efficiencies. We continue to manage the enterprise with a strong cost discipline. Our second quarter adjusted SG&A expense declined 11% year over year to $186 million, even as we further invest and reposition spending to support and extend our design and engineering capabilities. Our SG&A as a percentage of revenue is expected to remain in the 3 to 3.2% range. thereby providing sustainable operating leverage. The combined impact of our improving business mix, operational execution, and strong cost discipline translates into improving operating margin and profitability. Our quarterly adjusted operating income was $227 million, which was up 2% from the prior year. Our year-over-year operating margin expanded by 30 basis points to 3.7%, which reflects our fifth straight quarter of year-over-year margin expansion. Please turn to slide eight for our second quarter business group performance. During the quarter, our revenue reflected expected pressure from our restructuring actions as we proactively reduced our high volatility, short cycle, low margin business. as well as weakness in certain end markets. Revenues for high reliability solutions, industrial and emerging industries, and the consumer technology group met or exceeded our prior guidance. HRS revenue was $1.2 billion, declining 2% year over year. Health Solutions was down 5% as it experienced minor timing pushouts or weaker than forecasted demand for a small subset of products, which combined resulted in a temporary slowdown this quarter. Otto was up 1% as it continues to ramp new business across its portfolio and navigates a slower growth environment. Our IEI group grew revenue 14% year over year to $1.8 billion and benefited from strong performances from home and lifestyle, and energy customers and programs. Even a semi-cap equipment remains muted. CTG declined 21% from the prior year to 1.4 billion, reflecting anticipated revenue reduction as we lessen our exposure to high volatility, low margin, short cycle businesses. We've made good progress on our repositioning and anticipate that these activities will lessen as we complete the targeted portfolio rationalization by the end of this fiscal year. Lastly, CEC revenue declined 19% year over year to $1.7 billion as a result of reduced demand with certain telecom and networking customers and the impact from our Huawei settlement. The underperformance was broad and encompassed some of our largest customers. The reduction in our customers' forecasts is consistent with the indicators we're seeing from the market and signaling a near-term slowing of telecom capex. Turning to profitability, we were pleased to deliver 3.7% adjusted operating margin in the quarter, even on the lighter than expected revenue. Profitability of HRS was solid and resulted in a 7% adjusted operating margin, reflecting our conscious decision to accelerate investment and a very strong 6.2% adjusted operating margin for the quarter. CEC's 1.8% and CTG's 1.9% adjusted operating margins remain pressured as we transition our portfolio and reposition our operating structure. We want to reiterate that enterprise margin expansion remains a cornerstone of our strategy, and we are driving commercial discipline and operational efficiencies in order to deliver profitability. Turning to slide nine, let us review our cash flow generation highlights. Our second quarter performance displayed solid cash flow execution, consistent with our expectation to return to positive adjusted free cash flow generation in fiscal 2020. We continue to operate with disciplined networking capital, which remains inside our targeted range of 6% to 8% of revenue. We are confident in our ability to manage the business within this range. In particular, inventory management remains an area of focus and one where we believe we can further optimize. This quarter, we ended with 3.7 billion or 60 days worth of inventory, down 16% or two days year over year. We expect to further improve our inventory management as we continue to drive better demand planning activities across the enterprise. Our net capital expenditure totaled $95 million for the quarter, its lowest level in over three years, and was lower than our depreciation for the quarter. We are operating a well-built out global infrastructure and benefiting from prior year's investments that are now supporting new technologies, products, and programs. Another strength of our global system is our ability to redeploy installed capacity where it is needed, among different sites and businesses, which enables us to optimally leverage existing assets. Taken together, these factors contributed to decreased capital expenditures for the quarter, even while we continue to invest in the capex necessary to support our higher margin Long Life Cycle Programs in our IEI and HRS businesses. We remain confident that we have sufficiently invested to support the profitable long-term growth. As we enter the second half of fiscal 2020, we expect that our CapEx will continue to closely align with our annual depreciation level, thereby benefiting adjusted free cash flow. This quarter, we generated 187 million in adjusted free cash flow. Our adjusted free cash flow generation for the last 12 months is $548 million and results in an adjusted free cash flow conversion of 89%. We continue to make progress to operate with discipline and strive to generate free cash flow conversion in line with historical levels. Lastly, we remain focused on delivering shareholder return. as we repurchased roughly 6 million shares for $60 million during the quarter. And we have repurchased 241 million over the last 12 months. Please turn to slide 10 for our third quarter guidance. Revenue is expected to be in the range of $6 to $6.3 billion and reflects the impacts of our targeted actions to reduce our high volatility, short cycle, low margin business. and continued weakness in certain end markets. HRS revenue is expected to be flat to up low single digits as we anticipate modest auto demand expansion due to ramping new programs coupled with a stable demand in our health solutions business. We expect ongoing strength in IEI with 10 to 15% growth as we continue to ramp business in home and lifestyle and energy. CEC's revenue is expected to be down 20 to 25 percent, reflecting the distinct reductions in customer demand, continued softness in end market demand in our telecom and networking offerings, on top of a difficult year-over-year comparison as we had a peak third quarter last year. And for CTG, we expect revenue to be down 25 to 30 percent, reflecting the targeted reductions of highly volatile products due to distinct actions resulting from the pruning of our consumer portfolio. Our adjusted operating income is expected to be in the range of $230 to $255 million, which reflects continued adjusted operating margin expansion. Interest in other expense is estimated to be in the range of $45 to $50 million. We expect our tax rate in the quarter to remain in the mid-range of 10 to 15%. Adjusted EPS Guidance is for a range of 32 cents to 36 cents per share based on weighted average shares outstanding of 512 million. Our Adjusted EPS Guidance excludes the impact of stock-based compensation expense, net intangible amortization, and the impacts from restructuring other charges. We've completed the bulk of our targeted restructuring and other actions as we have swiftly moved to align our operating costs. We expect that we will incur the remaining estimated charges over the remaining quarters. As a result, we expect a gap earnings per share in the range of 21 to 25 cents. With that, let me turn it back over to Revathi for some closing comments before we open the call for Q&A.