Flex Ltd. Q4 FY2020 Earnings Call

Good afternoon, and welcome to the Flex Fourth 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. After the speakers’ remarks, there will be a question-and-answer session. At this time, for opening remarks, I would like to turn the call over to Mr. David Rubin, Flex’s Vice President of Investor Relations. Sir, you may begin.

Thank you, Robert. And welcome to Flex’s fourth quarter fiscal 2020 conference call. Joining me today is our Chief Executive Officer, Revathi Advaithi, and our Chief Financial Officer, Chris Collier. Today’s call is being webcast and recorded and slides for today's presentation are available on the investor relations section of our flex.com website. Please note, today's call contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties, including the impact of the COVID-19 pandemic, and actual results could materially differ. Such information is subject to change; we undertake no obligation to update these forward-looking statements. For all discussion of the risks and uncertainties, please see our most recent filings with the SEC. Lastly, this call references non-GAAP financial measures for the current period; GAAP reconciliations can be found in the appendix slide in today's presentation, as well as the Investor Relations section of our website. With that, I’d like to turn the call over to our CEO. Revathi?

Thank you, David. Good afternoon and thank you for joining us today. It has been an unprecedented 90 days for all of us. Before I start, I want to express my sincere thanks and send best wishes to the tens of thousands of Flex employees around the world, who have worked tirelessly to achieve the results we are very proud to share with you. Today I’ll describe some of the incredible work that's been going on in Flex and the decisions we've been making to overcome near-term challenges while still focusing on the long-term financial health of the company. We are addressing all of our challenges thoughtfully, enabled by an incredible can-do and caring culture, deep-rooted inside the company. We will not be giving formal guidance today because of the unpredictability in the current environment. However, I want to provide as much color as I can on what we're seeing, and the assumptions we're making. First, I'd like to start with giving you an update on the COVID-19 situation. Our leadership teams had our first conversation about the coronavirus in early January. And as we shared in our Investor Day presentation in March, we developed a five-workstream approach and the playbook for each of the workstreams with a priority to protect the safety and well-being of our employees. This approach really helped us to be ahead of the curve. We deployed masks, gloves, sanitation measures, temperature checks, and social distancing in our factories well before government and health organizations mandated them. We have enabled thousands of office workers to work from home without compromising productivity. Our protocols to protect employees and safely run operations have been recognized as best-in-class by several governments, including those in China, Mexico, Malaysia, and Brazil. These protocols have not only helped us protect our colleagues but also enabled us to effectively operate our factories in support of our customers with mandated essential products. As COVID-19 is primarily a global health crisis, there was a clear need to help raise the health care system capacity, and this is something we could do in partnership with our customers. Overnight many of our critical care products we make for health care customers were in short supply. We immediately ramped our efforts to expand production of products such as oxygen concentrators, which help patients breathe more efficiently, along with other items like patient monitors, infusion pumps, and ICU beds. We are also significantly increasing our testing equipment production for both point-of-care and laboratory systems. We're now ramping tests for both identifying the presence of the COVID-19 virus as well as new and highly accurate antibody tests. In addition, we were approached by many medical and non-traditional customers, as well as governments, to help manufacture ventilators. The global shortage of ventilators has been highly publicized. Current producers, along with the supply chain, are severely constrained and unable to meet the global demand. As many people have discovered, ventilators are not simple devices to make. Not only do you have to make the device, but you also need the required testing equipment. We have been engaged with a number of partners to bring proven designs to market at a scale and speed never seen before. Our engagement with Philips has been talked about publicly, and we're also working with other ventilator OEMs behind the scenes. Most medical device ramps typically take around 12 to 18 months; however, as of seven weeks ago we had never made a ventilator before. Now we're proud to say that we're producing ventilators at six sites around the globe, and by the end of this month, we'll be producing thousands to continue to grow. To give you a sense of scale, before this health crisis, the entire global production of ventilators was around 25,000 units per year. So we are uniquely positioned to take on challenges such as these. We have decades of experience in making medical-grade devices. We're experts at ramping and building highly complex products and systems, often helping our customers redesign products to make production more efficient. We’re also exceptional at simplifying and managing complex supply chains, including organizing them regionally, which as you know is increasingly important for the markets we serve. There are many stories to share, but let me talk about a product we're producing for Roche. One of the products that Roche makes is a state-of-the-art testing system that is now in high demand. We make components for this system, but nowhere near the quantities that are needed right now. In response to this formidable challenge, Flex created a special global Task Force, leveraging the expertise from our Swiss-based manufacturing site to ramp up other sites in record time. As a result of our strong strategic partnership with Roche, Flex has been given the opportunity to make a difference in this pandemic. I want to point out that this response was truly global. In addition to our Health Solutions and operations teams, countless others across organizations contributed. Our non-medical segments supported with repurposed capacity needed in regions, our global procurement and IT teams provided crucial support, and HR staff helped shift Flex workers to the medical efforts. Not to mention, our crisis operations teams were keeping people safe and protected so they could produce these life-saving products. At the heart of this extraordinary effort are the tens of thousands of Flex workers in our factories who deliver every day, and I cannot overstate how proud I am that despite the difficult times, the Flex family came together, quickly found new ways to work, and in many cases were running 24/7 to solve complex problems. Ultimately, we truly lived up to our purpose, which is to make great products for our customers that create value and improve people's lives. Now let's go into our operations. During our March investor call, we outlined that component shortages reached a peak on February 22. Since then, our suppliers have made great progress, and we're seeing fewer component shortages. Today, we see component shortages in only a handful of situations, and we are managing them closely. Now with regard to our operations, we're pleased that our China sites are now fully up and running. In our other regions, we have a few sites that are shut down due to acute outbreaks. In these geographies, we remain in contact with the local and national governments and have received, or are in the process of receiving waivers to return factories safely to full capacity. We’ve also shut down our automotive facilities in line with our North American and European customer facility closures. We expect that some of the automotive shutdowns that started in March will continue through May. To ensure we're prepared for the uncertain demand situation, we have aggressively cut costs and are preserving cash. Our goal is to maintain as many jobs as we can and to invest where we need to enable our future business. To accomplish this, we deploy a combination of graduated salary cuts, furloughs, and other programs. Taking actions such as pay cuts and furloughs can be challenging, but they are absolutely necessary during this unprecedented time. I want to thank our employees again for their dedication to Flex and willingness to sacrifice to protect jobs. We also decided to suspend our share buyback through fiscal Q1 as part of our efforts to preserve cash, and Chris will walk you through our strong liquidity position and our financial conditions during his remarks. Now please turn to slide 5. Considering how quickly the COVID-19 situation escalated in the quarter, we executed with great discipline, which resulted in a strong quarter for us. Let me highlight several of the key financial metrics for our fourth quarter. Revenue was $5.5 billion, down 12% year-over-year due to COVID-19, along with previously planned changes in our portfolio to reduce exposure to high volatility and short-cycle businesses. We achieved an adjusted operating margin of 3.8%, despite absorbing an impact of $52 million in COVID-19 costs. Our adjusted EPS was $0.28. We had a very strong quarter for adjusted free cash flow of $134 million. These strong results reflect our focus on driving disciplined execution and a fast reaction to the pandemic. Turning to slide 6, I'll talk about our fiscal 2020 results. Revenue was $24.2 billion, down 7.6% year-over-year. We achieved a full-year adjusted operating margin of 3.7%, which is the highest since 2001. Our adjusted EPS for the year was $1.23, which was within our original fiscal year guidance of $1.20 to $1.30. And through this year, we generated adjusted free cash flow of $672 million. Turning to slide 7, I have to say that with the number of challenges we saw this year, including the global trade impacts, our planned changes to our portfolio, and the COVID-19 crisis, the fact that we had one of our strongest financial years should give you confidence in the fundamentals of our company. The actions we took, and are taking, position us well as we continue implementing our new strategy. Now I'd like to turn the call over to Chris, who will walk you through our quarterly financial results in more detail. I will then come back at the end to share some closing remarks. Chris?

Thanks, Revathi. Please turn to slide 9 for our fourth quarter income statement summary. Fourth quarter revenue totaled $5.5 billion, which was down 12% year-over-year, reflecting the distinct actions we undertook earlier this year to reduce our exposure to high volatility short-cycle business, and the result of COVID-19 negatively impacting demand and production during the quarter. Our Q4 adjusted operating income of $207 million reflected the impact of incremental expenses associated with COVID-19. Despite a $742 million decline in quarter revenues year-over-year, our Q4 operating income was up $3 million year-over-year. Our adjusted net income was $143 million, resulting in adjusted earnings per share of $0.28, which was up 5% year-over-year. Fourth quarter GAAP net income of $48 million was lower than our adjusted net income primarily due to $18 million of stock-based compensation, $13 million in net intangible amortization, and $64 million in net restructuring and other charges. Now please turn to slide 10 for our quarterly financial highlights. Let me begin by highlighting the significant earnings impact we absorbed this quarter associated with COVID-19, which amounted to roughly $52 million of costs. These costs included enhanced health and safety measures, labor incentives, incremental supply chain costs, and forced under-absorption of labor and overhead costs. These additional costs were incurred as we implemented appropriate health guidelines for global sites and complied with government regulations. In certain countries, there are limitations in our ability to adjust our cost structure during factory shutdowns. Our fourth quarter adjusted gross profit was down 4% year-over-year. Our adjusted gross margin improved 50 basis points year-over-year to 7.1%. Despite these shocks that were not foreseen when we started the quarter, our better mix of business coupled with improved execution from our operation teams led to our fourth consecutive quarter of year-over-year gross margin expansion. Our SG&A expense decreased 9% year-over-year to $185 million this quarter, which in absolute dollar terms is the lowest quarterly level we have operated at in over seven years. This was the result of strong cost discipline embedded in our organization which enabled us to respond quickly to current market conditions, by taking targeted actions on our discretionary spend while maintaining our cost focus, while enacting further cost measures to reduce our operating expenses as we go forward. Lastly, our year-over-year adjusted operating margin expanded 50 basis points to 3.8%, which marks our seventh consecutive quarter of year-over-year margin expansion. Now turn to slide 11 for our fourth quarter business segment performance. HRS revenue was $1.1 billion, down 6% year-over-year, driven by an 8% decline in automotive and a 2% decline in health solutions. Our automotive business was hampered due to multiple factory shutdowns from several of our large OEM customers late in the quarter in response to the COVID-19 outbreak. Health solutions was modestly weaker as certain customers also saw minor COVID-19 related disruptions. Revenue for the II business grew a strong 23% year-over-year to $1.9 billion. II benefited from significant growth within energy, in particular our renewable energy solutions, which exhibited strong revenue growth throughout the quarter. This more than offset underlying supply chain disruptions that impacted product ramps for various industrial customers, as well as home and lifestyle customers. CEC revenue declined 23% year-over-year to $1.5 billion, which was reflective of across-the-board reductions in data center, edge compute, telecom, and networking due to production disruptions. Lastly, CTG revenue declined 37% from the prior year to $1 billion, due to significant supply chain constraints that impacted our ability to ship product, as well as reflecting the impacts of our targeted portfolio reductions in high volatility businesses earlier this year. Turning to profitability, we were pleased to expand our adjusted operating margin year-over-year to 3.8%. HRS generated $63 million of adjusted operating profit, and a 5.6% adjusted operating margin. I’d like to point out that the reduced profitability and margin performance were primarily reflective of the under-absorption impacts associated with the temporary closure of several of our automotive sites. This automotive weakness masks the success of our ongoing ramp of a large continuous glucose monitoring device program, which is a foundational element of our Health Solutions offering. IEI generated $134 million of adjusted operating profit, and a 7.2% adjusted operating margin. This strong performance reflects the continued benefit from a richer mix of business that we've been winning over the past several years, as well as increased contribution from strong renewable energy growth. CEC delivered $31 million of adjusted operating profit, and a 2.1% adjusted operating margin. As we continue to adjust CEC’s cost structure to align with this lower top line. Finally, CTG posted a 0.6% adjusted operating margin, as it was pressured from manufacturing inefficiencies, while simultaneously undergoing repositioning of its cost structure. Turning to slide 12. Let us review our cash flow generation highlights. Our fourth quarter performance displayed solid cash flow execution. Adjusted free cash flow was $134 million, as we continue to operate with discipline over both CapEx and working capital. This marked the sixth consecutive quarter that we have generated positive adjusted free cash flow. We generated $166 million in cash flow from operations, despite experiencing higher inventory levels, which remained elevated due to a constrained supply environment during the quarter. We've mitigated most of the initial supplier constraints and component shortages that we had encountered back in February. We continue to operate in an unusual and dynamic environment with respect to virus-related production limitations and fluctuating demand. As a result, we expect it will take a few quarters to adequately drive down our inventory levels to align with the current demand environment. To that regard, we are actively working with our partners to rebalance safety and buffer stock requirements. We have an established enterprise-wide cross-functional initiative resetting our remote planning. We are confident we will be able to achieve our targeted reductions, given the numerous inventory management actions already underway. A key element of cash flow generation has been the discipline with which we have managed our CapEx investments this past year. This quarter, our net capital expenditures totaled $83 million, significantly lower than depreciation, thanks to prior year’s investments that are now supporting new technologies, products, and programs. We continue to have confidence in our ability to manage CapEx to be at or below our depreciation levels, while adequately investing into the core areas of growth for the company. As we managed through alleviating supply constraints, production restarts and clearing finished goods, as well as some shifting in payables, our cash flow will fluctuate in the near term. However, we believe it is important to reiterate that Flex’s free cash flow generation will continue to be largely counter-cyclical, resulting from working capital reductions expected in a down cycle, coupled with our ability to sustain disciplined CapEx investment. Deploying free cash flow in a prudent fashion is a key feature of our capital allocation strategy. During the quarter, we remained focused on delivering shareholder returns, as we repurchased over 7 million shares for $87 million. However, as market conditions changed, we suspended share repurchases in mid-March in order to prioritize our liquidity and cash position during the ongoing health crisis. We actively monitor our capital allocation and will resume share repurchases at an appropriate future date. Please turn to slide 13 for liquidity and cash update. We continue to operate with a balanced and flexible capital structure that has staggered debt maturities, no meaningful near-term maturities, and strong cash flow. During the quarter, we took a number of steps to enhance our liquidity position, such as suspending share repurchases in mid-March, further tightening CapEx to only fund critical investments in our highest margin opportunities, and aggressively reducing discretionary corporate spending, and enacting targeted pay reductions. As we close out this fiscal year, we have ample access to liquidity, including our one and three-quarters billion undrawn revolver, supported by a strong banking syndicate. In summary, we have worked very diligently to maintain a sound and flexible capital structure that gives us confidence in our ability to meet our current and future business needs and remain committed to maintaining our investment grade rating. Please turn to slide 14 for our first quarter of fiscal 2021 business update. From where we stand today, we continue to operate in a very dynamic and highly fluid production environment. Our ability to safely run our factories is subject to local conditions and government actions, both of which can change quickly as further outbreaks or disruptions occur. Given the uncertainty in this current environment, we will likely suspend quarterly guidance for the June quarter, so we want to provide some qualitative insight into how we view our end markets and how we're driving disciplined operational execution and sound financial governance. Let me start with our Flex Agility Solution segment and its business groups. In lifestyle, our demand is negatively impacted by reduced consumer spending, particularly on non-essential products. However, we are seeing certain bright spots within durable goods that support remote working and schooling, and in areas like cleaning and home beverage. The CEC business is experiencing increased cloud infrastructure demand due to increased telework, streaming, gaming, and other online usage. We are also seeing increased demand to support remote work in our networking, edge computing, and VPN solutions. However, we're seeing broader commentary indicating that overall enterprise IT spending looks to be flat to down, driven by broader CapEx restraints. Telecom infrastructure is also challenged as all spending levels may be a comment on demand for these products. It's also about the impact from supply chain disruptions and inadequate field labor, which may further postpone some aspects of 5G rollouts. With regards to our consumer devices, we have seen a moderate uptick in PC and notebook demand due to the shift to telework practices, but this has been more than offset by weaker consumer demand for our customers' mobility products. Turning to our Flex Reliability Solution segment, let me start with our automotive business group. This is an area where visibility remains very low. All indications are that trends around increasing vehicle features and content, electrification, and ADAS will continue, as well as many of our longer-term projects and opportunities. However, the full impact of plant closures by North American and European OEMs is not fully known and the series impediments in the near term. While production is expected to resume to some degree in mid-May, we still do not have a clear view of that demand. So while we remain very confident in our differentiated solutions offering in the long-term fundamentals within automotive, our financial performance in this very rich piece of our business will be extremely pressured in the near term. In Health Solutions, as Revathi had highlighted earlier, COVID-19 is driving significant demand increases in critical care products, such as oxygenators, ventilators, patient monitors, testing equipment, and ICU-related necessities, all of which we produce. This new business demand is nicely balanced across our portfolio, and we continue to have a very healthy pipeline. However, demand related to elective procedures has been impacted by the shelter-in-place orders which have essentially shut down non-emergency medical services. We expect elective procedures and routine health care services to return; the timing and that pace in which they return is unclear at this point. In the interim, that creates a modest headwind to our overall Health Solutions demand. But again, we expect growth in our June quarter, given the significant ramping business. Lastly, our industrial business is likely to remain challenged, while renewable energy has been largely stable. We've seen near-term signs of reductions in this market. We also anticipate near-term challenges ahead related to CapEx reductions across all major industrial segments. Given the sum of the outlook I just shared, we would expect our quarterly enterprise revenue to decline sequentially in the range of high single to low double-digit percentages as we continue to operate through regional production disruptions, as well as acute volume pressure within our automotive business. When considering our first quarter adjusted operating margins, we also anticipate impacts from a sequential doubling or more of the COVID-19 costs we incurred in our fourth quarter. This increase comes primarily from greater levels of operational shutdowns or capacity constraints, which create elevated levels of under-absorption as well as sustaining cost pressures due to some jurisdictional constraints on our ability to take distinct cost actions, as well as sustained costs associated with protecting our employees. The last thing we want to mention is that we've taken numerous actions to align our cost structure with today's lower sales levels, and we continue to drive those efforts in a thoughtful and disciplined way. These effects will mitigate some of our incremental COVID-19-related costs, as well as result in SG&A expense levels that are modestly lower sequentially in the first quarter. With that, let me turn it back over to Revathi.

Thank you, Chris. Looking back at our Q4 and our fiscal year 2020 results, it is quite clear that the Flex team is executing with the new cadence and rhythm. Even in Q4 when the challenges with production and supply chain were unexpected, we stayed agile and executed with discipline. Now let me tell you what we're doing differently this time from prior downturns. I believe that we have a unique opportunity to anticipate and balance our supply and demand needs and adjust our investments and working capital accordingly. I call this our operational radar, which enables us to look out beyond our immediate time horizon. Using this radar, we have early insight into an incredibly broad base of customers with very diverse products. We operate directly or indirectly in almost every country in the world. So we see early data at the grassroots level through our contracts with thousands of purchasing managers and local leaders, and we combine that with the connectivity we have with a broad array of CEOs, banks, and government officials. We're using all that intelligence to help shape our customer, and our supplier behaviors in terms of demand, so we can holistically operate as a more efficient supply chain. We're also using that to actively scenario plan for different demand scenarios, enabling us to respond to decreases or increases very quickly. Now there's lots to be done here, but the goal for this industry should be to come out of this crisis more efficient and agile. We want to drive the leadership thinking around this. Turning to slide 15. Through all of this, I want to stress that we remain committed to our long-term strategy we outlined to you at our Investor Day back on March 11. We are even more convinced that our strategic approach is right. We will continue our shift to a more diversified portfolio. We'll focus on targeted growth applications, expanding our technology differentiation, as well as design operating models that are tailored specifically to our agility and reliability segments. And you can see that this is working. Turning to slide 16, you'll see that our strategy has allowed us to react to change faster and has positioned us for the new demands of adaptive supply chains and regional and regionalized production. Our differentiation through focus, domain expertise, and technologies enabling us to solve our customers' most difficult manufacturing challenges is deepening our customer and supplier relationships. I am even more confident we will come out of the other side of this global crisis stronger and better positioned for the future. Finally, I'd like to return once more to thank our employees for their tireless work throughout this period. We should all be very proud that we're making many essential products that save lives and play a part in enabling the world's economies to keep working. I continue to be inspired by the creativity and the generosity of the Flex employees around the globe. Seeing our teams come together to contribute in so many ways, from ramping ventilators in weeks not months, to making and donating hundreds of thousands of masks in our communities, creatively working in their homes to make sure we meet our commitments while also caring for their loved ones, has shown how resilient and resourceful the Flex family is. I want to thank you for your support, and we remain committed to delivering consistent sustainable long-term value for our shareholders.

First question comes from Mark Delaney with Goldman Sachs. Please go ahead. Your line is open.

Yes. Good afternoon. Thanks very much for taking the question. So I want to better understand the booking trends that Flex saw in the March quarter and also in the month of April and maybe help us better understand that bookings have continued to be pressured more recently, including in April, and if there's any signs of stabilization that the company is now seeing?

Yeah, Mark, thank you for the question. I would say that bookings were lower in our last quarter compared to our prior quarters. But as you recall, we came into the year with a very strong bookings year in key segments like automotive, health solutions, and industrial. I would say in critical segments like health, it was very strong as you would expect, but we definitely saw some slowness in our other segments, which is also expected in times like this as customers pause and focus more on executing than releasing new POs. But I feel quite confident that our pipeline that we sit on for health solutions and automotive and industrial is pretty strong. And our recovery and agility will be trending back with the market as it comes back.

That's helpful. And my follow-up question is on margins. As a sterling metric, the company's done very well over the last several quarters and including this most recent quarter to the margin expansion on a year-over-year basis. As we think long-term about the margin potentials for the fellow companies and the targets that Flex has discussed, do you think investors should expect any change in what the margin levels in the different business segments can be in the long-term, as we think about factoring in potential costs for physical distancing and COVID prevention? Thanks.

No, I would say that obviously, like we said, next quarter will be challenged because we'll be increasing the COVID-related costs that we see as a result of supply constraints and operational disruptions and shutdowns that we're seeing. But we are very confident, Mark, that we will come back to not only the expected ranges that we have in terms of operating margins, but also to the commitment I made in Investor Day in terms of our long-term focus on improving margins, which comes as a result of having the right mix with the right sort of bookings and growth in the areas we think are the right fit for Flex, but also with driving operational efficiency where we think we have more room to drive operational efficiency across our business. So other than the pause that we think we will have in Q1, we see that returning back to the operating margin levels we want to execute in on our horizon, and actually our Q4 results should be a great indication of that, that we have executed so well in Q4 despite the challenges in revenue.

Your next question comes from the line of Matt Sheerin with Stifel. Please go ahead. Your line is open.

Yes. Thank you. Chris, I wanted to talk about the commentary regarding cash flow expectations. I understand the inventory situation. And I also understand it could take longer than normal just because some customers may want you to keep some inventory. There's continued to be supply chain disruptions. But are you working with customers in terms of them making cash deposits or supporting you in that regard? And once you get past this quarter or two, which we expect to see kind of a normal free cash flow relative to the revenue decline that we're expecting?

Hey, Matt, thanks for the question. Yeah, for sure. In the prepared remarks, we tried to paint that picture so it was very clear. If you just look back, we've gotten now six straight quarters of greater than $100 million of free cash flow generation. We've been operating very well with great discipline around networking capital and our CapEx investments. One of the things that this shock has done is elevated the levels of inventory in the system. In the prepared remarks, we highlighted that we are working with partners right now, reassessing proper stock and safety stock requirements. Also, our finished goods inventory is at a very high level. After discussions and great engagement with our partners as we work through this hand-in-hand, we would expect that to abate, and we measured it and taken a couple of quarters to stabilize. You put it all together, we operate in a very counter-cyclical way. You should anticipate seeing the company continue to generate solid free cash flow generation this coming year. We've been able to demonstrate that historically through these cycles as well. Some of the actions we've taken in terms of our inventory management rigors as well will prove beneficial to us as we move through these couple quarters.

Okay, thanks for that. It's a question regarding the strength and some weakness you're seeing in medical relative to COVID-related needs in elective surgery. On the first part, are you expecting that to wind down in terms of the surgery we're seeing now? The expectations that see the opportunities in the elective part of the business might offset?

You know, Matt, we absolutely think that our growth in Health Solutions next quarter is going to be strong, even net of those reductions in elective surgeries in those areas. We expect that the areas that are a little muted today, because patients aren't going to hospitals for non-COVID care, are going to rebound back pretty quickly, because you can't have that miss and stay at home and wait for those kinds of elective procedures. Next quarter, we're going to see strong growth in health solutions, and we expect that that'll be net of any reductions in non-critical procedures, which we then think will come back pretty quickly.

Matt, we will be very, very pleased with the performance of that group. Just back at our Investor Day, we highlighted the robustness of the continued bookings, back-to-back two years in a row, very healthy bookings across a broad array of product categories, diversified with new partners as well. So we believe we have a healthy pipeline and a nice outlook for that business.

Your next question comes from the line of Steven Fox with Fox Advisors. Please go ahead. Your line is open.

Thanks. Good afternoon. Could you maybe give us a little more detail on your experience with production in Mexico, Malaysia, and India, and how much those regions sort of account for some of the challenges you have going ahead? And then secondly, Chris, with regard to the COVID cost pressures you highlighted for this quarter. Is there any overlap with sort of the auto OEM pressures you're seeing as well in the sense that you might have an inability to shut down some plants fully where you would like to? Thanks.

Yeah, Steven. Thanks for the question. I'd say that, you know, with relation to Malaysia, we have seen an impact in the last quarter in Malaysia and we continue to see that this month. So, you know, as you all know, the Malaysian government approved a lot of essential factories to be running at 50-plus percent, and we have quickly returning back to 100% based on the approvals we have in Malaysia. India is slowly coming back. We’re expected to start production next week and ramp back to full capacity by the end of the quarter. In Mexico, even though we have approval to operate in most of our Mexican facilities outside of automotive because they all classify as essential products, what we are doing is being proactive in watching where there are COVID outbreaks in Mexican cities and trying to shut down our facilities just to keep our employees safe. So even if governments are allowing us to keep it running, we're being very proactive in making sure that we're keeping our employees safe. Mexico is a place to watch through next quarter more related to outbreaks rather than anything else in terms of our capability to operate fully. Automotive is definitely shut down for now starting in May, but I'll hand it over to Chris to talk about automotive more.

Yeah, for sure. The impacts that we're seeing that we highlighted in terms of the COVID costs you know more than doubled for us this coming period. And that also has a large reflection on the extended shutdowns occurring as a result of North American and European OEM partners having their facility closures. You know, we operate on a pretty significant global scale. We have over 20 automotive certified facilities, and several of those are shut down. They'll be turned back on as returned production ramps up throughout May.

Your next question comes from the line of Shannon Cross with Cross Research. Please go ahead. Your line is open.

Thank you very much for taking my question. I was wondering if you could talk a bit about how any thoughts have changed on the 5G ramp. What you're hearing from your partners and how you're thinking about it as we look forward given some of the pressures from COVID at this point. And then I have a follow-up. Thank you.

Thank you, Shannon. Here let me just talk about 5G here for a second. You've also heard from some of our customers about 5G ramps in their earnings call over the last few weeks. What we have said before about 5G is that if you look at our relative wins in 5G, we're strong in Asia and Europe, not as strong in North America. Right now, what we're seeing is that the 5G investments in China are ramping up significantly, and that's the result of the government making infrastructure investments in China to help the economy, and we are definitely seeing a big benefit from that. Europe and North America are somewhat on pause right now. What we're hearing from our customers is that eventually this is going to start coming back, but as you can tell from constraints of people and resources to deploy this, it's not about if it comes back—it's a question of when it comes back, and that's the main thing we'd all be looking for. My assessment is that China's strong; we'll have to see for Europe and North America to start coming back, but it's just a question of timing.

Okay, great. And then I just want to follow up from the standpoint of the cost side of things. I'm just curious, as you're seeing some of the pressures in various segments. How much can you shift some of the manufacturing capacity and reallocate it for areas of growth? I know you talked a bit about auto, but I was wondering about some of the other areas within your business in terms of opportunities to leverage underutilized assets. Thank you.

Shannon, let me talk about what we are doing now and what we are kind of changing in terms of our operational model even moving forward. Today we're absolutely shifting resources from areas which are underutilized, particularly to medical, and we’re doing that in factories in Juarez and Romania. In the U.S., wherever we're doing medical ramps, we're shifting our employees both from factory employees and non-factory employees to help with many medical ramps across the board, and that's happening quite effectively and efficiently. We are receiving a lot of compliments from our medical customers as we do that. Our whole piece is on building the right operational model, Shannon, for agility and reliability, which is meant to reflect that we would be doing that even more efficiently as we move forward. We’ll ensure that our factories fit the right cycle of products into the right facilities, and that way we'll be able to flex up and down, a variable enough fixed cost structure, even better than what we're doing now, because you can see from our Q4 results, we're doing quite well. On top of that, of course, we can take a lot of actions like we're doing already in terms of variable costs to offset in the near-term pressure, and you can see that we've already implemented that and executed all of those. Our Q4 shows that we're shifting resources extremely well and taking cross-fractures, but our long-term operational model that we’re building with a lot of intelligence makes us even more robust for us to operate through the cycle.

Your next question comes from the line of Jim Suva with Citi. Please go ahead. Your line is open.

Hi. This is Tim Yang calling on behalf of Jim Suva. Thanks for taking the question, a clarification question. You had $52 million costs associated with COVID in the March quarter, and then you said next quarter that cost will be double, so roughly 100 million. So for the June quarter, you will have $60 million incremental costs, plus the headwinds from lower volume; is that the right way to think about the margin performance for next quarter?

And so just for a bit of clarification, as well, and it was touched on earlier. There's a bit of overlap with regards to that, as there are under-absorption pressures as a result of these extended shelter-in-place rules and closures impacting our operations. So part of that is in the equation of doubling that cost that we absorbed in our Q4.

Got you. That's very helpful. Given your global manufacturing footprint, can you talk about how much of the June quarter sales decline is driven by factory closures, and how much of that is from the demand weakness? Thank you.

Yeah. So let me start with that. In some sectors, it's obviously very clear, right, like automotive, as a result of factory closures. But I think this is not a simple answer, right? Because every segment, we are trying to understand what the recovery becomes as the factory starts to operate and what becomes a demand reduction. If I think about it in terms of segment-by-segment, yes, automotive will be coming back as a result of shutdowns. However, as you have seen, IHS projections are that automotive overall is probably going to decline north of 20% in the year. So what you're going to see in the quarter is a little bit of a mix. The same I would say in terms of other segments. If you think about CEC, if I peel that onion, I would say, yes, we'd see strong growth in terms of our cloud infrastructure investments, but if you think of enterprise spending, we would expect that the demand would be down in enterprise spend and CEC, and that would be demand-related, not related to any shutdowns. If you think about industrial, we had strong growth in industrial across all segments in Q4. We're still expecting a pretty solid Q1 for industrial, but we do expect that CapEx spending in the industrial segments will be somewhat constrained. What I would take away from this is that we are very proactively working with customers, using intelligence to understand demand, and then adjusting our operational capability and capacity to meet this pretty quickly. It's hard to really say that it's a one-size-fits-all answer either operational or demand-driven. I would say what you're seeing in Q1 is a combination of both, and each segment is different.

Hi. Thanks for taking my questions. Can you talk about the portfolio pruning that you've been doing in the CTG and CEC segments? Where does that stand given demand is currently weak in the June quarter? Are you still doing more pruning, and how would you think that impacts your revenues and margins in the June quarter?

Yeah. So I think we've addressed most of our portfolio corrections, I would say in the last year. There will be some year-over-year impacts, Ruplu, because if you remember, most of our actions in terms of corrections of the portfolio started in Q2 of last year. We gave you a range of $300-plus million impact in a quarter for that. We would see some overhang of that because there will be a Q1 to Q1 comp related to that. But I'd say most of our portfolio actions on any significant scale have been done. That being said, I will constantly look for us to improve the mix at every aspect of our business, and that's going to be an ongoing task for our teams now, and I would think any good business will continue to do that.

Yeah, that makes sense, and thanks for the details, Revathi. The second for my follow-up, if you can address, maybe uses of cash. I realize you need to maintain liquidity, but it looks like you have good liquidity, you don't have a lot of debt coming up soon. You're suspended buybacks. So given that, would it make sense to maybe think of some M&A in organic growth at this time and maybe try and consolidate some of the competitors or smaller players in the EMS space? Just your thoughts on the inorganic growth in this environment? Thanks.

So Ruplu, what I would say is that during the Investor Day conversation, I mentioned that when considering M&A in this area, we would focus on opportunities where we have technological advantages in sectors we aim to grow, specifically in automotive, health, and certain parts of industrial where we clearly excel. You're right that we maintain a strong liquidity position, and we are building on that. We feel confident that when the right assets for M&A become available, we will evaluate them. However, it might not be the right time for that currently. We'll keep an eye on the situation, and we are well-positioned. Our liquidity is very strong and improving, and if the right assets arise at the right moment, we will consider it, but I am not certain this quarter is the right moment. We'll remain vigilant.

Good morning. This is Madison on for Adam, and I appreciate the opportunity to ask my questions. I want to begin by recognizing that you are increasing profit dollars despite experiencing double-digit revenue declines, which is quite impressive and not something we typically see in EMS models. I understand that growth is mainly due to solid performance in IEI, but it seems that your forward outlook was a bit more cautious. Can you discuss the sustainability of IEI from both a revenue and margin perspective? Additionally, was there anything unusual in the quarter that might have positively impacted IEI's performance?

Yes, so what I would say, Adam, is that, you know, our ability to continue to improve margins as a result of declining revenues is not just related to the fact that we are focused on the right mix of growth, but we also are taking a lot of efficiency actions across our portfolio which is helping that. I expect that to continue. In the case of the industrial question, you know, I would say the only reason we're saying that there will be some slowness in industrial is just because, you know, the demand situation is unknown. We think that we're very well-positioned in industrial. We said that in prior quarters; that the available market in industrial is significant. There's lots of room to vertically integrate. We are hearing more from industrial customers in a time like this for the opportunity to actually move business over to us. There's good meaningful design and engineering content, and our industrial business is now fairly sizable with how we have positioned it. So other than the fact that you know demand is slightly unknown right now from an overall customer base perspective, we think Q1 will take a little bit of pause. But we have no concerns that industrial will continue to grow to the foreseeable future as the world returns to normalcy.

Okay. That's good color. Thank you. And just a quick follow-up, you know, on the slides you mentioned that operating margin is going to be down sequentially, but do you also think that operating margin is going to be down from a year-over-year basis as well? Thanks.

Yeah. We defined the qualitative insight there on a sequential basis. There's a lot of puts and takes inside of that. If you look back to the same quarter over a year ago, we did roughly a 3.4% operating margin. We're just not going to get into guiding, but we are operating a business to continue to have strong margin performance. We're very thoughtful with regards to the cost structures we're operating. We've installed several austerity measures, and I think we're managing through this crisis in a very strong fashion. In fact, we've not cut to the bone in the actions we've taken to date. So we're going to be very thoughtful and disciplined as we move forward, continuously evaluating the cost structure and being good solid partners.

And Adam, I'll be honest with you. Our biggest challenge is really predicting the mix right, because it's going to depend on how soon automotive opens back and how quickly it ramps back up or things like that. So mix really plays a role in that, and that's why we're being a little bit more cautious in calling it out exactly, because I think those are the things that will impact how this quarter looks. But I'm sure all of you are well used to the fact that this is going to be an unusual quarter for the whole world, for every company across the world. Hopefully what Q4 shows you is that even in times like this, we're executing well, and that's what we'll continue to do.

Your last question comes from the line of Paul Coster with JPMorgan; please go ahead. Your line is open.

Hey guys. It's Paul Chung on for Coster. Thanks for squeezing me in. So just a quick one, just your quick thoughts on the EMS industry, as we think about kind of post-COVID. Do you expect to see maybe some increase in wallet share from some of your existing customers as they look to offload some fixed costs? And then also, do you expect to see maybe some more consolidation, maybe some smaller EMS players? Just curious on your thoughts there and how you think margins and pricing power evolve. Thanks, guys.

Yeah. So let me start with where I think kind of the post-COVID world goes in terms of us and where we think we want the wallet share from our customers. I would say definitely in areas like medical, we have demonstrated a unique capability in terms of not only being able to do complex program prompts, but also help our customers rethink designs in terms of how we bring it to market. So I'd say we expect wallet share to continue to grow in places like health. We see the same around sectors like industrial and automotive where we think that we have unique capability, and customers are approaching us either to consolidate a weaker supply base or where they think that we can do a better job of operationally managing their supply chain in their factories. So I expect that those are the areas that we'll really focus on in terms of wallet share improvement. I'd say our lifestyle business and our CEC business have very unique pockets that we are very focused on where we think that we add value through vertical integration in our overall capability. In the post-COVID world, we have already defined and are talking to customers where we think we can play a unique role, and customers are coming to us asking for help. We also think that the whole regionalization conversation is one that is working out really well for us, and we're helping a lot of customers think through that. So focusing on the right kind of growth, I've said many times, is crucial, Paul, and so that's what we will drive on. In terms of margin, I'd say it all depends on the mix of products. As you can see, we continue to drive the right mix. We've already said in our Investor Day that we see that our operational model has tremendous room for efficiency. We're continuing to focus on that, and we'll continue to drive that. I'm really focused on our overall fixed and variable cost structure, so we can operate well within all the various cycles of our short practice and mid-cycle businesses. Overall, in the post-COVID world, we're really focusing now on looking forward to where customers need our help and how we can jump in and really drive value. I’d say overall in terms of other EMS partners, I would hate to comment on anything like that. I think we have a very clear plan for the mix of segments we want to grow in, and we think there's enough market available for us to focus on and grow there, and that's all we're really focused on right now. Okay. Hey, thanks everyone for joining us today. Even with these unprecedented times, I'm really confident about the future for Flex. You could see that from our great performance in Q4 and in our fiscal year 2020 results. I wish that all of you will remain safe and in good health, and we look forward to talking to you again next quarter. Thank you for joining us.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.