Good afternoon and thank you for standing by. Welcome to Flex’s Second Quarter Fiscal 2024 Earnings Conference Call. Presently, all participants are in listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded. I will now turn the call over to Mr. David Rubin. You may begin.

Thank you, John. Good afternoon, and welcome to Flex’s second quarter fiscal 2024 earnings conference call. With me today is our Chief Executive Officer, Revathi Advaithi; and our Chief Financial Officer, Paul Lundstrom. Both will give brief remarks followed by Q&A. Slides for today’s call as well as a copy of the earnings press release and summary financials are available on the Investor Relations section at flex.com. This call is being recorded and will be available for replay on our corporate Web site. As a reminder, today’s call contains forward-looking statements, which are based on our current expectations and assumptions. These statements involve risks and uncertainties that could cause actual results to differ materially. For a full discussion of these risks and uncertainties, please see the cautionary statements in our presentation, press release or the Risk Factors section in our recent filings with the SEC. Note this information is subject to change, and we undertake no obligation to update these forward-looking statements. Please note, unless otherwise stated, all results provided will be non-GAAP measures and all growth metrics will be on a year-over-year basis. The full non-GAAP to GAAP reconciliations can be found in the appendix slides of today’s presentation as well as the Investor Relations Web site. Earlier today, we were pleased to announce our plan to spin-off all of Flex’s remaining interest in Nextracker to Flex shareholders. As previously disclosed, Flex retained the option to effect the spin-off pursuant to a merger agreement entered into by Flex and Nextracker in connection with Nextracker’s initial public offering. We believe that the spin-off is the most advantageous form separation for Flex, Nextracker and our respective shareholders. Specifically, it provides the opportunity to distribute Flex’s interest in Nextracker to Flex shareholders in a tax free manner for U.S. federal income tax purposes and allows Flex to focus on our core strategies and long-term value creation for our shareholders. As earlier today, Nextracker filed a registration statement on Form S-4 that includes a preliminary proxy statement of Flex, which includes additional information regarding the spin-off. The spin-off is currently expected to be completed in Flex’s fourth quarter ending March 31, 2024 but does remain subject to a number of conditions and no assurance can be given that the spin-off will in fact occur. We understand that you may have questions on this process. At this point, there are no additional details to share other than what has been publicly made available. But we will provide any updates as appropriate. Now, I'd like to turn the call over to our CEO, Revathi.

Thank you, David. Good afternoon and thank you for joining us today. Before we start, I want to say how deeply saddened we are by the horrific attacks on Israel. Our hearts go out to our colleagues, our customers and our friends in that area. Turning to our quarterly results on Slide 5. Overall, fiscal Q2 was another strong quarter with great execution. Revenue came in at 7.5 billion which was down about 4%, adjusted operating margin came in at 5.9% and we delivered $0.68 of adjusted EPS. Since we have now announced the separation of Nextracker, we are able to provide core Flex’s results, which excludes Nextracker. For core Flex, we executed really well even with the market uncertainty. Revenue came in at 6.9 billion, down 5% against a great quarter last year, which grew 24%. Core Flex adjusted operating margin came in at 4.7%, up both sequentially and year-over-year, and we delivered $0.56 of adjusted EPS. I'm really pleased with how these results show their ability to execute and build a resilient company with strong performance through the cycles. Now turning to Slide 6. We'll take a look at market fundamentals and how we continue to navigate a highly dynamic environment. However, I want to point out a few important items that really puts into perspective the strength of our model and how we have truly evolved as a company. As you're well aware, we participate in six end markets. But within that, we've been focused on shifting our portfolio more towards next gen mobility, cloud and digital health. As highlighted in our March 2022 Investor Day, we believe these markets drive the right growth and margin expansion for us, so I'd like to give some specifics on how we're doing in these areas. Next gen mobility as…

Okay. Thank you, Revathi. I'll begin with our second quarter performance on Slide 8. It was another solid quarter. Second quarter revenue was 7.5 billion, in line with our expectations. Gross profit totaled 676 million and gross margin increased to 9%, up 130 basis points. Operating income was 439 million with operating margins at 5.9%, a substantial year-on-year improvement, up 110 basis points and earnings per share came in at $0.68 for the quarter increasing 8% which includes $0.08 of Nextracker non-controlling interest. Looking at core Flex results, which excludes Nextracker, in the quarter, core Flex revenue was 6.9 billion, down 5%. And as Revathi mentioned, this was against a great quarter last year, up 24%, which was our strongest quarter in fiscal year '23. Core Flex adjusted operating margins came in at 4.7%, up 20 basis points, and with another quarter of sequential margin expansion, up 40 basis points from Q1. The Flex core business delivered $0.56 of EPS, up 6%. Turning to our quarterly segment results on the next slide, Reliability revenue was flat at 3.3 billion. Auto and health solutions remained strong with some headwinds from residential solar and industrial. Operating income was 171 million and operating margin for the segment improved sequentially to 5.2% on solid execution. In Agility, revenue was down as expected to 3.6 billion as strong cloud growth was offset by the anticipated pressure in comms, enterprise IT and consumer. Operating income came in at 168 million with a solid 4.6% operating margin, up both sequentially and year-on-year and was reflective of strong operational management and improved mix. Finally, Nextracker delivered revenue of 573 million, up 21%. Operating income at Nextracker was 112 million more than double what it was last year, delivering a strong 20% operating margin. Moving to cash flow on…

Thank you, Paul. Overall, I'm really pleased with how we're executing our strategy on portfolio management, focused on the right kind of growth and driving margin expansion. This combined with executing the capital allocation strategy with a strong focus on buybacks is how we provide value to our shareholders. We expect an extraordinarily strong year for Flex with continued margin performance and EPS growth, even with the near-term challenges. This is also a good time for me to reiterate our Investor Day targets for fiscal '25 getting to core Flex adjusted EPS of $2.65. So we remain confident in the long-term opportunity for Flex. With that, I'll turn the call back to the operator, John, to begin Q&A.

Thank you. We will now begin the question-and-answer portion of today's call. [Operator Instructions]. Your first question comes from the line of Matt Sheerin from Stifel. Your line is now open.

Yes, thank you very much and good afternoon. Just a question relative to your guidance versus 90 days ago, it looks like you're taking down both expectations for both Reliability and Agility pretty significantly. We talked a little bit about some auto headwinds and some of the data comm markets still being weak. But could you tell us exactly what you've seen from customers in terms of their order patterns? And are we hitting the bottom in some of these markets? Or do you expect continued deterioration as we get into calendar '24?

Hi, Matt. So first of all, I appreciate the question. I think it's spot on. Let me just give you some specifics, and Revathi might have some comments as well. But what we had previously called out was weakness in more of our consumer-facing markets. And in particular, I'll just give you one example. Our consumer device business, which is within the Agility segment, we figured would be down for the year around mid teens. But based on what we're hearing from customers today, we're thinking it'll be down more like 25%, so mid teens to 25, a fairly significant change on those consumer-facing markets. We had called out a softening in comms infrastructure before. Our thought had been that should be probably flat for the year but with the ongoing inventory digestion and what we're seeing in some of those end markets right now, what you guys are all seeing too, we're expecting comms to be down more like 10% for the year for us. Auto has been strong. But now we're sitting in week six of this UAW strike and we're seeing some impact here in Q3, so we're taking a little bit more conservative approach. That said, we're still expecting growth overall for the automotive business. And then I guess, lastly, just a little on renewable. We were expecting robust double digit growth for the year. But given what you're seeing right now in some of the residential solar space, it will still be up but it will probably be up more like low single digit. So those are some of the bigger end markets we've seen some contraction, but I guess I would sort of book in that comment by saying, although things are choppy in some areas, things like next gen mobility looks great; cloud, great; digital health continues really nice to see some things there. So they just unfortunately just can't quite offset some of what we're seeing there in some of those other end markets.

Got it.

Matt, the only thing I'll add to what Paul said is that one of the things we've talked about consistently for Flex in the last few years is you have to have the right portfolio but you also have to have the right operational strategy to be agile and more operationally efficient. And you can see that playing out right now in our results with our margin expansion, EPS growth. So it's really well managed through the cycle, which is what you're seeing present out today. So market choppiness will be there. I think how we execute as a company is important, and we're pleased with that.

Okay. Thanks for all that, very helpful. And as my follow up, just regarding you reiterating that $2.65 EPS target for fiscal '25, obviously, it looks like significant growth off of what you're guiding the core business for '24. So how much of that is going to come from the core business growing, margins expanding versus the buyback making up for that deficit?

It's going to be a combination of the three, Matt. I don't want to get too far ahead of ourselves and guide too many of the specifics on that. We need to get through the next six months here, but I think it will be a combination of some top line growth, some margin expansion, which I think kind of makes sense, given our momentum here, and probably some buyback as well.

Okay, great. Thank you very much.

Your next question comes from the line of Steven Fox from Fox Advisors. Your line is now open.

Thanks. Good afternoon. Two questions, if I could. First of all, given the further progress in margins even though you're seeing weakness in some end markets, it seems to strike a chord that like some of the markets that are softening are even lower margin, below average than I would have thought. So I was curious, like, how many of these markets where maybe you're still not getting average margins, would you consider either exiting, repricing, reconsidering the strategy in some ways? I'm just curious how pliable you're going to be towards some of these other markets going forward? Thanks.

Sure. So I wouldn't say there's any major end markets we’re planning on exiting. But I would sort of caveat that statement, Steven, by saying portfolio management is a constant process, and we're always evaluating and maybe not “divesting” per se, but deemphasizing. I think your comment on mix is spot on. It's kind of nice that some of those end markets that I pointed out to happen to be sort of lower margin, if you look at the Flex aggregate. And so as I think about how we're moving with some market choppiness and kind of a guide down on the top line, mix definitely helps. Mix definitely helps. I don't know, is that helpful commentary?

Well, I'm just wondering --

Maybe, Steven, the one thing I'll add is just to say is managing mix and portfolio kind of has been our key theme in the last five years. If you look at what we have done overall in the Agility business and consumer devices, all of that within each of the end markets, we've really managed our mix pretty significantly in terms of moving up the value chain. That's why you see Agility’s margins being such a strong performance, even with the end markets it's in. So our belief is that within these end markets that our pockets that are extremely strong, that really helps us and then there are others that will keep shrinking in size. Nothing significant to talk about, but I think it's part of managing the portfolio even within all the six end markets. It doesn't matter whether they are under Reliability or Agility I see that normal course of action.

Okay, that's definitely helpful. And then I was wondering if you could dial in a little bit more on the auto market. You mentioned the UAW strike, but away from that, can you talk about just maturity of programs and whether they're contributing to margins, how sort of the program ramps look into next year, because you seem pretty bullish on new programs continuing to ramp even though there's been a lot of sort of negative headlines in the last couple of months on EVs and things like that?

Yes. I'd say -- I'll start with saying that a few years ago, we kind of stated our intention in automotive to really drive our focus on what we call next gen mobility. And our EV platform that I've talked about before, which is a combination of our own designs and designs that we work on with our customers, has been very successful in different geographies and also in North America in terms of winning platforms. We talked about large bookings expansion in automotive, which will take kind of two to five years to ramp up and get to maximum volume production. But that is our strategy on automotive. And we can see that in terms of our bookings and our core volume growth, both in automotive. I'd say that the noise that you see today in terms of EV is kind of part of I would say the growing pains that you're going to see in any end markets that is going through such a hyper growth cycle. And we see that that's a good thing. We believe that there's good growth to be had. We also think there is disruption in the overall supply chain in automotive, which provides a great opportunity for EMS companies like Flex. So you put all that together, I would say my overall view on EVs and in automotive is that it is a good place for Flex to be. And we continue to have really strong growth as a result of that. And we want to be diversified in our automotive EV end markets.

Great, that's helpful. Thank you.

Thanks, Steven.

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

Hi. Thank you for taking my questions. It looks like on the core business, your expectation for revenues has gone down about 2.6 billion, but the expectation for operating margins is 40 bps better. So I was wondering if you can delve a little bit deeper into both the revenue side and on the margins, specifically on renewables, like how much of your business is tied to residential versus utility scale? And how do you see that progressing over the year? And then on automotive, are you tied more to the North American OEMs or the Europeans? And how do you see that mix changing as the mix gets more towards EVs? And then just on the margins, that 40 bps of improvement, does that come more from Reliability or Agility? And Paul, in the past, you've talked about things like components, the lagging at semiconductors being an issue, is that now done? And what is driving that 40 bps, if you can just delve into that margin improvement on lower revenues?

Well, the good news, Ruplu, is that there will be no more sell-siders that ask questions, because I think you hit a homerun there. But I'm just teasing. So let me start with revenue. I called out a few of the end markets that we're seeing declines. By the way, by my math, the midpoint about $2.5 billion down. Consumer devices was a piece. We talked a little bit about renewable. We talked about being a little bit more conservative with auto. We talked about comms infrastructure. So I think those are going to be some of the bigger drivers partially offset by continued growth in the areas that Revathi and I have been talking about for a couple of years now. Next gen mobility and auto, cloud, digital health all look pretty good. So that's what drove the derate on revenue. You asked about utility versus resi for renewables. First, I'll just say, and I think we've disclosed this before, that the renewables business is now well over $1 billion for Flex. It's a big piece of the business. There's some confidentiality around customers. We have made some disclosures that would -- in partnership with our customers, so I think you know that. There's a couple names out there that tend to be more in the residential space. And that's where we've been pinched here a little bit in terms of some forecast changes and a little bit of choppiness, but our long-term view remains very bullish on that whole renewables space, and we do expect it to continue to grow. You asked about automotive, I would say we're fairly well geographically dispersed. We're not overly concentrated in North America. So although the UAW, we are expecting and seeing some impact here in Q3 that doesn't affect Europe, it…

Yes, thanks for all the details. I really appreciate you going into all of that. Just real quick on that quick follow up. Now that you've announced the remaining Nextracker transaction, does that change your philosophy around capital return and pace of buybacks? How should we think about that? Thank you. Thanks for all the details.

No problem. And so we've talked about our capital allocation priorities before and I would say, number one, we're never going to starve the core business. We’re quite bullish on a number of our end markets. And so we're never going to starve ourselves for things like CapEx or other internal investments. The number two priority, and this is a high, high priority, is share buyback. We continue to believe that there's a significant disconnect. Hopefully, with the Nextracker separation, people sort of realize the arbitrage there and things sort of rationalize a little bit. I would say probably the distant third at the moment would be M&A. As always, we reserve the right to change our minds. But stock buyback is clearly the expected use of free cash.

And the only thing I'd add is I'll remind you that our Board recently authorized $2 billion stock authorization, right, and so we expect to continue to just return cash back to our shareholders.

Okay. Thank you.

Thanks, Ruplu.

Your next question comes from the line of Samik Chatterjee from JPMorgan. Your line is now open.

Hi. Thanks for taking my question, and I have just two here. Just parsing through all the numbers that you've disclosed, when I look at 3Q guide versus 4Q implied in there, there's a modest uptick in revenue and a modest uptick in profit that I get to and I hope I'm doing the math right here. But just wondering how much of that is the cloud customer related projects you've talked about? Or is there something else embedded in there in terms of recovery going from 3Q to 4Q? And any sense you can give us on the timing of those [indiscernible] projects? Are they starting in 3Q and then ramping to 4Q? Or is it more of a 4Q event in the numbers? And then I have a quick follow up? Thank you.

Sure, Samik. So yes, there is some ramp tailwind as we move through Q4, as we continue to ramp cloud as a piece of it. There's a couple of others that we expect to benefit from as well. There's a number of these new platforms that we've been talking about that should give us some continued growth. It's the three areas that we've been talking about. It’s next gen mobility, it’s cloud as you pointed out, and health solutions should continue to do well in the smart tech device things. You mentioned margins. I do expect a little bit of a margin uptick as well as we move from Q3 to Q4. That's really just a full quarter of restructuring tailwind.

Got it. And on that point, the second question was, you did mention on the core, you're seeing about a 50 basis points margin expansion in fiscal '24 when you sort of adjust all the Nextracker numbers out. Just wondering if you can share your thoughts about sustainability of that pace of improvement going into next year, how much of the reliability improvement through the year is on account of price increases that you start to lap in fiscal '25? And how should we think about sustainability of that piece?

Yes. Samik, I would say first is margin -- steady margin expansion has been a core part of our story the last four to five years, right, and through the different cycles we've seen. We've been very consistent in our ability to drive margin expansion. So I view the 50 basis points margin expansion as sustainable and continue to track in the way of margin expansion. And it comes from the things we talked about. One is definitely continued change in our mix, right? Our focus is more on growing areas like cloud, next gen mobility, digital health care, all of those that are better margins, so mix plays a role in it for sure. We have done a lot around optimization of our factories and driving productivity through automation, through CapEx investments. So that is very sustainable. So if I look at how we're getting margin expansion, I would say that it's a very sustainable story. And I think it's good that we have been able to do that consistently. And reiterating FY '25 EPS also points in that direction.

Great. Thank you. Thanks for taking my questions.

Thanks, Samik.

Your next question comes from the line of George Wang from Barclays. Your line is now open.

Hi, guys. Thanks for taking my questions. I have two questions, if I can. Firstly, I just want to double click on the buyback. You mentioned that authorized 2 billion buyback. Just curious about cadence, especially kind of [indiscernible] around the spin-off timing, which is kind of in the last quarter 2024? And also I was looking at the share count kind of seems to be flat based on guide for 3Q versus 2Q, obviously, you may do some buybacks to offset dilution. Just curious, any sort of color you can provide in terms of the cadence and kind of linearity of the buybacks? And should we assume a similar sort of intermittent run rate for the next few quarters or it could be some technicality around the spin-off timing?

Well, the good news is now quiet periods are essentially over, because it's out in the public domain that we do intend to spin. And so that has sort of created some stops and starts over the last -- really over the last two years. So that helps a little bit. We give our last quarter share count as sort of -- as part of our guide. I think you've known us to continue to buy stock as we've moved through the quarters. And so that's probably a slightly conservative view, if you want to read into that a little bit. In terms of specific cadence, I'm not going to say exactly what we intend to buy here in our third quarter or our fourth other than to say stock buyback is clearly a capital allocation priority for us.

Got it. Thanks for that. Just to quickly follow up just in terms of the free cash flow kind of potentially could be a big driver for the share price appreciation. It's nice to see 2Q delivered much a strong FCF versus kind of 1Q being a cash use. Just curious, if you guys are reiterating 600 million or above in terms of full year FCF, and is there any potential upside just based on the better margin providing the backup?

Yes, it's a great question. And so I'll just say predicting cash flow is a little trickier than predicting the P&L. It can kind of bounce around a little bit. But what we're going to do is we're going to update everyone about the free cash flow expectation targets once the separation is complete. And here's the logic on that. There's lots of puts and takes from Nextracker specifically. And because the timing is not perfectly certain, other than we expect it sometime in Q4, it's just a little hard to predict. But what I want to make sure is clear. We're definitely headed in the right direction. We're particularly pleased with how we did in Q2. We generated -- like you said, we generated north of 200 million in free cash flow. That was up significantly both year-on-year and also sequentially. I'm quite pleased with our inventory performance as it came down again in the quarter. We inflected a couple quarters back, and I like to see the continued progress there. And that free cash generation was after 145 million in CapEx. So we're clearly not under investing in the business. So I would say nothing has fundamentally changed. And we still expect to grow free cash flow.

Great, thanks again. I'll go back to the queue.

Thanks, George, and welcome.

Your last question comes from the line of Mark Delaney from Goldman Sachs. Your line is now open.

Good afternoon. Thanks for taking my question. You mentioned mix as a key tailwind to core Flex margins going from fiscal 2Q to 3Q and as total revenue declines. But is there anything additional in terms of incremental pricing or large restructuring programs that may also be playing a key role in the sequential margin strength? And if so, could you dimensionalize how large those other drivers may be?

Sure. So just I’m clear on your question, are you talking Q2 to Q3, Mark?

Yes, from the four seven [ph] you just did, I think the midpoint of guidance is for a -- you mentioned mix is one of the key drivers as to how margins are actually even maybe expanding a little bit as revenue drops. But is there anything with restructuring programs you just did or incremental pricing that may also be playing a role to just try to think through some of the buckets and pieces that are helping margins in the upcoming quarter based on guidance?

Yes, got it. Okay. So I would say probably the biggest singular tailwind is our continued push on productivity programs. In our prepared remarks, you did flag that we pointed out some restructuring. We're going to have benefit from that both in Q3 and also in Q4. But mix is definitely a factor. You look at some of the end markets that are contracting right now, they tend to earn a little less than other parts of the core portfolio. And so we've sort of been a beneficiary of that mix. You asked about pricing, nothing significant to comment on there. I would say it's a combination of productivity programs and mix.

And we’re really, Mark, driving a lot of factory optimization. And that's, like Paul said, that is a big driver.

Okay, that's very helpful. Thanks for all the details on that. And then I know guidance on Nextracker, but just a level set on where you stand currently. Do you still need government approvals or tax rulings in order to do the spin, or do you have all those in place now with the announcement that you're making today?

Mark, this is David. Yes, it's all outlined in the S-4. I know you haven't had time to peruse it all 400 pages, but that will have the outlines of what approvals we've gotten. We still have the shareholder vote. That's on November 20. But otherwise, we're moving in process.

Okay. Thanks so much for taking the questions.

Early Q4 is what we're thinking, guys.

And I think that was our last question.

Great. Thank you all.

Okay. Thank you all for joining. I just want to thank the Flex team on behalf of the leadership team and of course to all our customers and our shareholders for your support. So thank you all. Thanks for joining.

This concludes today's conference call.