Good afternoon. And welcome to the Flex First 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 and introductions, I would like to turn the call over to Mr. Kevin Kessel, Flex's Vice President of Investor Relations. Sir, you may begin.

Thank you. And thank you for joining Flex's first quarter fiscal 2020 conference call. Slides for today's discussion are available on the Investor Relations section of our Website. Joining me on today's call with some introductory remarks will be our Chief Executive Officer, Revathi Advaithi and our Chief Financial Officer, Chris Collier. Today's call has being webcast and recorded and contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties, and actual results could materially differ. Such information is subject to change and we undertake no obligation to update these forward-looking statements. For a discussion of the risks and uncertainties, see our most recent filings with the SEC, including our current annual and quarterly reports. If this call references non-GAAP financial measures for the current period, they can be found in our appendix slides. Otherwise they are located on the Investor Relations section of our Web site, along with the required reconciliations. Now, I would like to turn the call over to our CEO, Revathi?

Thanks, Kevin. Good afternoon. And thank you for joining us on the call today. I'm pleased to have the opportunity to update you on our progress. While the main purpose of the call is to review our financial result, I also want to provide you with some context about how we're managing our business. We have made a lot of progress in the past few months, making critical decisions in managing our portfolio. As a result of this today, we are sharing restructuring actions that will accelerate our decision to reduce exposure to higher volatility lower margin products within our business. Our strategy is simple and continues to be with to win more design lead business, which will improve our mix towards higher margin and less volatile business segments. I want to take this opportunity to thank our customers for their trust and our employee for their commitment to delivering results. We have great employees and attractive assets, and that gives me confidence in the path we're taking. I will talk in more detail regarding our progress in the quarter and our go forward plans. But first, let's review our first quarter financial results. Let's turn to Slide 3. I'm pleased with our financial performance this quarter as revenue, operating income and EPS, were all within their respective guidance ranges. We have solid results delivering $0.27 in adjusted EPS, adjusted operating margin of 3.4% and free cash flow of $114 million. Year-over-year revenue growth in both IEI and health solutions were lead by the successful ramp up of new programs secured through the prior year bookings. We saw slower than expected revenue in CEC and automotive. CEC was impacted by softness in a few telecom and networking customers, as well as the geopolitical issues in China. CTG was within the…

Thank you, Revathi. Please turn to Slide 9 for our Q1 income statement summary. Our first quarter revenue was $6.2 billion, down 3% versus a year ago and within our guidance range. Our Q1 adjusted operating income was $208 million, which was within our guidance range and up 11% year-over-year. Our adjusted net income was $138 million, resulting in adjusted earnings per share of $0.27, which was at the midpoint of our guidance range of $0.25 to $0.29. First quarter GAAP net income of $45 million was lower than our adjusted net income, primarily due to $15 million of stock based compensation, $15 million in net intangible amortization and $56 million in restructuring and asset impairment charges, as we undertook actions to reduce our exposure to high volatility, short cycle products and restructured targeted operations. Now please turn to Slide 10 for quarterly financial highlights. Our adjusted gross profit of $404 million was down slightly year-over-year, while our adjusted gross margin remained stable at 6.5%. Our first quarter adjusted SG&A expense declined 13% year-over-year to $196 million. This performance reinforces our intention to continue to operate with a strong cost discipline as we focus on driving productivity improvements and balancing investments into design and engineering capability with the objective of delivering sustainable operating earnings leverage. Our improved cost discipline and business mix are translating into greater profitability. Our quarterly adjusted operating income came in at $208 million, which is up 11% from the prior year. Our year-over-year operating margin expanded 50 basis points to 3.4%. Please turn to Slide 11 for our first quarter business group performance. I'll begin with our highest margin business, high reliability solutions, or HRS, which is comprised of automotive and health solutions. HRS revenue was $1.2 billion, down 3% year-over-year and just below our guided…

Thank you, Chris. We remain comfortable with the prior fiscal 2020 consensus adjusted EPS range that span from $1.20 to $1.30 as we communicated in April. Our teams are focused on meeting our commitments. They've taken thoughtful but swift action on our portfolio that will make us more focused and will put us on the pact to improving operating margins. We're committed to vastly improving our free cash flow conversion. As I have said, our stated goal is to drive sustainable disciplined execution that delivers a consistent track record you can have confidence in. I would now like to have the operator open the line for questions.

[Operator instructions] Your first question comes from Matt Sheerin with Stifel. Your line is now open.

Just the first question relative to the deselecting and walking away from the high velocity low-margin business, that $1 billion or so annual revenue run rate. As you get through this quarter, will that be it or as you go through the next few quarters. Will you still be looking at various segments? And will we see more of that or is the plan to get the portfolio in the shape that you want by the next quarter or so and then move on from there?

What I'd say is we have taken some big actions this quarter addressing parts of our portfolio that we think are obvious and need to be corrected, moving forward. With that, I would say that we're making decisions for long-term. So we may continue to prune a few things in CTG and CEC, as we have talked about before. But that pruning will continue and that should be part of running our business in a disciplined fashion. So I would say we're positioned well for long-term growth at this point. We are more focused and we're focused around the right areas that we want to grow in. And I see us leveraging this opportunity and building our business from here.

And then within the CEC business and the margins below target. Chris, you talked about getting all divisions into their targeted ranges for CEC given the headwinds that you are still seeing on the demand from. Are we talking a couple of quarters or so before you get there? Is any time frame you could put on that?

What I would highlight is if you were to exclude the impact in this past quarter of the unabsorbed manufacturing and the standard costs. CEC at its core would have been inside the target range. But as we think about as we move forward here, we would anticipate that these activities will be largely behind us as we get through this next quarter. And we're very confident and comfortable with the book of business we're operating within CEC that it does return into that target margin range.

And Matt, the only thing I'll add is, you can see with three of our businesses being in the operating margin ranges that we have talked about. We're really pushing hard to make our business more focused and more profitable. So our focus on CEC will be the same thing is to work through these customer restructuring actions that we're taking, and we've absorbed some big impact for it in Q1. And we expect that we'll start pushing into the target margin ranges, as we get through the rest of the year.

Your next question is from Steven Fox with Cross Research. Your line is open.

Two questions, please. First of all, when I look at the year-over-year sales decline, you still were able to increase your profit. So I was wondering if you could talk about maybe what the incremental margins of the business look like, whether those have improved? Or there're some other things that you called out in terms of how you were able to achieve such good operating leverage? And then secondly, I was wondering if you could provide some color on exactly what the charges you're looking at are for and how much will be in cash? Thank you.

Let me start with the first one. And I'd say definitely the mix of the business help driver overall margins. You can see that with IEI having such strong growth and HRS continuing to be strong for the overall portfolio, mix definitely helped. And the second is we really have good cost discipline across the business, which for a business like ours is important that as you have revenue volatility, you have to have cost discipline that goes with it. So this all goes to the theme that, I've been talking to you about last quarter and this quarter is that we have to be disciplined in all aspects of the business. And you're seeing that play to and us keeping our EPS commitment even with revenue changes. So I think that's really, really important that you're seeing in terms of overall mix and then cost discipline helping us deliver our Q1 commitments. And then on the restructuring, I'll have Chris give you some color on it.

So we're very thoughtful and very disciplined with these decisions here. Near-term actions are underway. As you saw, we had some of those charges inside of our Q1. And as I said in the prepared remarks, the bulk of these charges will be captured in our activities and execution inside of Q2. What we're doing is we're addressing the operating cost structures. And we're going to be working through managing the normal restructuring activities that'll be including people costs, some impairment charges associated with assets. And if you think about the cash aspect for that, I would say, it's a little less than half of the range that we have set up, both on the low and at the high. So those actions are underway, we'd anticipate be able to execute during this quarter. We've unfortunately done this before and we're focused here, and we're going to be very thoughtful and disciplined with these decisions and actions as we move forward.

And just one quick follow-up on all of that. How do you avoid keeping all of the product pruning into vacuum? In other words, I would imagine you're exiting certain programs where you're trying to stick with some more attractive programs at the same customer? How is that going to play out within the customer base a little more competitively, or is there any concerns we should think of there? Thank you.

No, I'd say, Steven, the way I think about it is at the end of the day, every customer relationship that we have has to be a win-win for both the customer and for us. I think customers understand that and our commercial teams are doing a great job of making sure that that story is clear within our organization and to our customers. I think long-term customer partnerships are built on that basis. So I don't have any concerns about that looking forward. I think this is just the way good businesses run. And we just have to do a better job of making sure we understand there our manufacturing and technology capabilities help us win, and that will be the best for the customers also and just focus on those areas. I think all our examples in Q1 are really good examples to show that we're well in our way in that direction.

Your next question is from Mark Delaney with Goldman Sachs. Your line is now open.

First question's on margins. And if my math's right, I believe implied EBIT margin guidance for next quarter is about 3.7%, or just over 3.7%, which would be I think one of the best percentages that have been put up in sometime just based on these macro challenges you talked about. So maybe just help bridge from the roughly 3.4% you did this quarter to 3.7%. What are some of the factors in particular helping the margin expansion for next quarter?

If you do integrate the guidance ranges that we set, you will see solid margin expansion on a year-over-year basis, both in terms of gross margin ultimately into operating margin. And I think you quantified it correctly. On the midpoint of it you were right around that 3.7%, which is a very strong performance for us. And that's largely on the efforts of the improving mix of business, some of the strength that you're seeing across the IEI portfolio and the contributions inside of HRS, as well as the consistent sustained cost discipline around SG&A that provides leverage. So the mix improvements, engaging more, design and engineering led programs that are now reflective inside of our revenue streams, a favorable mix shift and the discipline around our SG&A, all contributed to that favorable performance.

And Mark, that's been the thesis of our story. If you do a good job managing our mix, we minimize the variances in our factories, because we're disciplined, we manage cost. And all that should result in margin movement for this business. And in my view provide long-term customer affinity and growth and our Q2 guidance show us heading in that direction.

And my follow up question also on margins, but over the longer term. And I think I'm on Slide 6, there is a comment and Revathi spoke somewhat about this in your prepared remarks. But you talked about operating margins mid single digits are higher. Can you elaborate a little bit more on what you mean by that? Is that for the company overall? Or is that on a segment by segment basis and the timing to achieve that mid single digits or higher EBIT margins that are referred to on Slide 6? Thanks.

I think that is -- every good business, Mark, as you know, has to set good guidelines and criteria for our commercial teams and on operational teams on deciding what types of business to win. So this is not an aggregate or average. But our goal is for us to be focused on wining commercial programs and incentivizing our teams to look for mid single digit operating margins as being good business. And that eventually is going to lead to a mix shift and a margin improvement for this business. So this is not across the board. Obviously, all this will vary between segments, within customers. And there will be a lot of new answer within that. But this is -- and we have this type of guidance and criteria across every segment, across every type of business. And there is a span of ranges that makes this up.

Your next question comes from Ruplu Bhattacharya with Bank of America. Your line is now open.

Congrats on the strong margin performance despite the weak macro. My first question is on IEI. You're already at the high end of the guidance range. Within this portfolio there are different end markets. Do you think that there're certain end markets where Flex has a higher competitive advantage where you want to stress more? Can you give us your thoughts on semi cap and how should we look at -- think about margin progression in this business, going forward?

Ruplu, thanks and thanks for the comments on margin. Obviously, the works of our team is showing here. I would say on IEI, yes, there's different sub-segments that makeup this business, energy, semi cap, home and lifestyle. So many sub segments within this base core industrial business. Overall, our view is that, actually most parts of this business are fairly strong, both from a growth perspective and an operating margin and income improvement perspective. At this point, what we have baked into our thinking is that capital equipment continues to be a challenge. And we don't see a visibility yet or a side of recovery on that. So our forward looking view on it really builds that into it. So growth is obviously coming from all the other sub segments. In terms of operating margin ranges, obviously, too early to call anything on that right now. But our goal for the teams as they continue to move the mix, they continue to have good design lead wins, we should see that move higher and higher in the direction that we have set for them. So we think that it's heading in the right direction. And at some point, it'll be the right time to look at the margin ranges. But at this point, we're comfortable with where we are.

My second question on CEC. Maybe can you just give us an overall color of what you saw in the various ends markets routing, switching, optical? And is it just that one customer where you're trying to disengage from that is driving the margin performance? And should we see an uptick going in the next couple of quarters?

Let me start with it and Chris can jump in. We definitely saw the customers that we specifically mentioned and called out in our prepared remarks. And other than that, we saw declines in our telecom and networking businesses that we said and particularly side and a few large customers and customer pools that didn't happen at the end of the quarter. So that's where overall we saw our pluses and minuses, and it came across a various set of customers. And so I think that's the overall view on CEC. Chris, anymore color to add to that?

No, just like we highlighted in the prepared remarks, and I don't know your question. In this past quarter, we had to absorb significant manufacturing, unabsorbed manufacturing costs and stranded costs. And if you exclude that impact, we would have been at the low end of the range. In addition, I'd just say the loss contribution from lower total revenues pressures margins and profit. So that's kind of the reflection on CEC's margin profile.

Your next question is from Steve Milunovich with Wolfe Research. Your line is open.

Two questions. Number one, what are your intentions in your cloud business? [Jabil], I believe has about a billion dollars of cloud revenue growing double-digits, claiming that they're taking share from the ODMs selling to the hyperscalars and other cloud folks. Can you talk at all about your revenue and margin contribution, and is that an emphasis for you? And then the second question is have you made any -- or what management changes, if any, have you made since you've been there?

Let me start with the first part. I would say that we have a very strong cloud business across our portfolio. And our focus on the CEC segment in terms of wins is to be able to, not just focus on large customers and win large volume, but really to make sure that we move the mix. But I would say our cloud business is strong. We feel like we are -- have large market share in our cloud business. And there is constant innovation in that business. I talked to you about thinking like what we're doing around the power supply. So our focus on cloud is not just grow our contract manufacturing side of the business that really focus on design led engagement for that business. So I'm not going to comment on competitors. But I would say we are very confident in terms of that our cloud market share is strong and our growth in cloud is coming across a wide range of customers, and not just focused on a few big customers. And then in terms of new hires, we have done a really good job of hiring new people, just talking about cloud. We announced hiring [Regine] from Intel with a strong track record in running their cloud business. So we expect [Regine] will bring a lot of technology background to this, and really help in terms of growing this business with the right technology platforms, the right architecture. And we're already seeing the results of this. And then in addition to that, my big focus is always talent, because a good strong business is all about talent, and talent management and talent development. So in line with that thinking, we also brought in a new CHRO. So those are the two big changes we have made and several others across the business, but those are the ones, big ones to share.

Your next question is from Paul Coster with JPMorgan. Your line is now open.

This is Paul Chung on for Coster, thanks for taking my question. So in the past, Flex has been more of about volume, delivering margin in targeted ranges. But the focus on margins is driving nice products here despite some revenue headwind. So do you expect more of the firm to evolve into this more high mix lower volume firm over time and in turn bridge or overall margin targets? Or should we expect business as usual as long as it hits your margin ranges for your respective segments?

Paul, I'm definitely not going to help you raise our margin ranges at this point in time. I would say our actions have to speak for itself, right. But going in line with your question, I would say, this is my fundamentals and how you run any business. I think this doesn't apply just to Flex or to contract manufacturing, or this space in general that growth for the sake of growth is never great. So growth word really adds some capability, whether in terms of people, product, margins, is fundamentally important. So driving that discipline for me is the way any business runs, not just how Flex should run, it's a history of how all businesses should run. And that's the only way you have sustainable growth and sustainable margin conversion in the long-term. So bringing that discipline to Flex to me is a starting point of how this business runs and hopefully how this industry runs, which I think is long overdue. So I would say that either eventually, if we do this right and we continue to take these types of actions that we're taking, you should see a healthier business that is more sustainable with the right kind of growth and right kind of incremental margin on that growth that's what you should see from us going forward. So to me, this is just the fundamentals of how every business should run. And hopefully, we are putting ourselves on track to be achieving that.

And then just a follow up on IEI. Is there more design and engineering opportunity that is special to this segment relative to others that's driving that higher margin there? Or do you see other segments where you can apply more of the design and engineering higher margin services to those segments? Thank you.

Paul, I would say that I have tremendous opportunity, because if you look at the portfolio within IEI and how to diversify that customer base is. Most customers in that customer base want more from their suppliers. And they want more platform help in terms of technology and products. And our team is great at doing that. So I definitely see the potential to do more of that in IEI. But I also see the potential for collaborating across our businesses in terms of taking that technology and that capability across our business. For example, I talked in my prepared remarks about the integrated battery in the power supply, that's something that applies across all segments, right. We should be able to position that kind of capability across all segments. And today, we haven't done as good a job of that. And I see potential for that also moving forward. So if we can do well with increasing our design litigation but also cross collaborate across the segments, I think we build a more stronger portfolio, moving forward.

Your next question is from Adam Tindle with Raymond James. Your line is open.

Okay, thanks for taking the questions and good evening. Revathi, you came out on the March quarter call and talked about being comfortable with 120 to 130 EPS range for fiscal '20. I think you're obviously reiterating that due today. There has been a lot of changes to the outside environment, obviously, an internal restructuring program, I think it's incremental or wasn't contemplated since then. So the question is, EPS is obviously being reiterated or the same. But maybe could you just talk through what has changed in terms of the composition of EPS since the last call? Thanks.

I would say, Adam, if you look at composition of EPS for us, mix definitely plays a role, right. And so if you're growing in the right segments that helps significantly and that's an obvious one. So things like stronger growth in IEI does help our overall story, continued growth in health solutions. So mix plays a definite role in terms of composition of EPS. And I would say the other thing I said this in my last quarter call is this idea of being disciplined about how you execute, how you manage variances in the factory, how you manage programs brands, how do you prevent leakage, is also important. So the more we can do to take those things out of the equation that helps in terms of overall improvement of gross margin and enhance operating margin. So I'd say composition of how things change is basically mix and overall managing our variance much better and having fundamentally good cost management. As you know, we sometimes don't control our revenue. So we have a lot of pushes and pulls, and things are dynamic in a business like ours. So doing those things well, which is having the right mix, having a good management of variances, having strong cost management, are all fundamentals in how we need to manage this business. And I think that's what you're seeing in our guidance.

Maybe just as a follow-up on the restructuring program, I understand the themes to be in obviously lower margin areas that you're moving away from. But just hoping for, number one, more details into that decision? Just to play devil's advocate, I would think scale would be an important characteristic in those areas to still make a good return on capital. You have scale as a competitive advantage. So why exit or move away from them and focus on more lower volume areas where the competitive advantage of scale arguably less relevant? And secondly any contemplation on monetizing that versus simply restructuring it. Is there any possibility of divesting or selling or somehow monetizing that? Thank you.

What I would say is that, first, let me start with saying that these decisions are never easy. So there obviously a lot of thought has gone into these decisions that we have taken. Some of these discussion, particularly the one that we are talked about in Chine, somewhat beyond our control as governments make decisions and our customers make decisions in terms of what they want their supply base to look at. I would say for me, if I think about scale, scale is an advantage for sure. But the right type of scale is important. So having scale in high revenue but also high volatile short cycle business means that you are really moving the business up and down from a revenue prospective quarter-over-quarter significantly. And then you are working on laser thin margins, there's really not much to maneuver in terms of managing those businesses. And they are extremely short cycle. Product life cycle is not too long. So in those cases, scale has a very short cycle advantage really. It doesn't -- it's not sustainable long-term. And I think a lot of history in this business has proven that that is the case. So big ramps, big ups and down and that happens constantly at all the time. And I don't think we are above position to do that well. And other people may be that could be the case. But in the case of Flex, we don't think that's something that we should focus on. And I would say this doesn't mean that we're walking away from scale. We have very large customers across other parts of our business, which may not be highly volatile and short cycle. So that type of scale is okay and we're perfectly comfortable with that. And that's how we view this segment profile looking forward.

And just to extend a little bit. We looked at many different options. So you highlighted could you give us -- I mean, we looked at all those options and we assess those and we take a thoughtful disciplined approach in this to the best way to execute that for our shareholders. And so we went through that process, we've identified what we think we need to do. And we're going to be very selective as we move forward in terms of earmarking capacity and capital, and really tilting the portfolio towards those higher margin longer product life cycle businesses that enable us to operate in a much more stable and predictive fashion.

Our last question comes from Jim Suva with Citi. Your line is open.

This is Tim Young calling on behalf of Jim Suva. Thanks for taking my questions. Can you talk about your growth strategy in the near to mid-term. I think you have mentioned you're focused on execution and margin improvement, and the portfolio management and your performance has shown your progress on front. But your HRS and IEI have had couple of quarters performing below your 10% growth target. And it sounds like you are reducing CapEx as well. So I wonder if you can provide some color on how should we think about your growth opportunity, going forward.

Tim, great question. Let me tell you this. our growth is very important to us. So it's never a question that growth is not important to us, it's the right kind of growth. And if you refer to my slide where I talk about the progress today, I clearly mentioned about emphasis to grow on the industrial space, capturing new technology trends. I talk about design led wins across our businesses. In CEC, focusing on design led wins. And then I would just correct you a little bit and say that I had a very strong growth quarter. And HRS's aggregate was okay and was really muted by automotive right, but health solutions had a very strong growth quarter. So if you peel back the onion, I think there's a very strong focus on growth. And that is not the -- it's not the case at all that we're not looking for growth. I would say that we're looking for the right type of growth where we and the customers can win together. And we can provide long-term customer affinity and long term relationship that is sustainable and that's what we're looking for. And I'd say examples of IEI and health solutions having growth really shows that we're on the right trajectory in terms of managing our overall business from a growth perspective.

A quick follow-up, questions on the revenue mix. With your restructuring CTG and may be -- so you say a little bit. Can you help us understand the size of the segment as a percentage of total revenue in the next five years, or your target we go for the revenue mix? Thank you.

Tim, too early really to say what happens in the next five years. I would say that the changes that we're making really impact CEC and CTG today both. Our hope would be that what happens is that HRS and IEI become bigger parts of our portfolio. And our hope would also be that the right sub segments within CTG and CEC continue to grow, because there's not an overall segment issue this is fundamentally portions within a segment. And this is not unique to Flex, every business has that. There's portions of every business where the spread of growth and margin is significant and you have to move that spread in the right direction in terms of growth and margin. So I'd said too early to comment about what happens in five years. But I think our decisions and actions we have taken and the performance we're delivering in Q1 and committing to in Q2 really shows where we're heading. So hopefully that answers your question, Tim.

This concludes the Q&A period. And I'll now turn it back over to Flex for any closing remarks.

Thank you, everyone for joining us. I just want to close by saying, we had a really strong Q1 and we delivered solid adjusted EPS and free cash flow. We're taking thoughtful but swift actions in our portfolio and also driving discipline across all facets of our business. With these actions, we're confident that we're on the right path to deliver consistent and long-term shareholder the value. Thanks again for joining us.

This concludes today's conference call. You may now disconnect.