Good afternoon, and welcome to the Flex Fourth Quarter Fiscal Year 2020 Earnings Conference Call. Today’s call is being record 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’s 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 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 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're 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 and the great tenacity, 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 work stream approach and the playbook for each of the work stream 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 China, Mexico, Malaysia and Brazil. These protocols…

Thanks, Revathi. Please turn to slide 9 for fourth quarter income statement summary. Fourth quarter revenue total $5.5 billion million 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 quarterly financial highlights. Let me begin by highlighting the significant earnings impact we absorb this quarter associated with COVID-19, which amounted to roughly $52 million of costs. These cost 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 comply with government regulations. And 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%. So 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…

Thank you, Chris. Looking back at our Q4 in 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 an 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 two are 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 bought back on March 11.We are even more convinced that our…

[Operator Instructions] First question comes from the line of Mark Delaney with Goldman Sachs. Please go ahead. Your line is open.

Yes. Good afternoon. Thanks very much for taking the question. So want to better understand the bookings trends that Flex saw on the March quarter and also in the month of April and maybe help us better understand that bookings has continued to be pressured, more recently, including in April, 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 here in key segments like automotive and 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 the time like this as customers pause and focus more on executing then 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 says it comes back.

That's helpful. And my follow-up question is on margins. As a sterling metric the company's done very well on over the last several quarters and including this most recent quarter to the margin expansion on a year-over-year basis and 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 shutdown that we're seeing. But we are very confident Mark that we come back to the -- 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 that we'll have, in Q1, we see that returning back to the operating margin levels we want to execute in, is in 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.

Thank you.

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 depositing 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 and yeah for sure. The in the prepared remarks we tried to paint that picture so it was very clear. You know that 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, great discipline around networking capital, great discipline around our CapEx investments. One of the things that that this shock has done it's kind of elevated the levels of inventory in the system, in the prepared remarks we highlighted that we are working with partners right now. Re-assessing proper stock, safety stock requirements also, our finished goods inventory is at a very high level, so, after discussions, great, great engagement with our partners as we work through this hand-in-hand. And we would expect that to abate. And we measured it and taken a couple of quarters. But 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. And I'd say, some of the actions we've taken in terms of our inventory management in the in the rigor and discipline. All 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 instead of 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 net of, even those reductions in elective surgeries, in those areas. And then, we expect that, the areas that are a little muted today, because patients aren't going to hospital for non-COVID care is going to rebound back pretty quickly. Because you can't have that mission, stay at home and wait for those kinds of elective procedures. So 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. And just back at our Investor Day we'd highlighted the robustness of the continued bookings, you know, back to back two years in a row very, very healthy bookings across a broad array of product categories, diversified with new partners as well so we believe we have a healthy pipeline in a nice outlook for that business.

Great. Thanks a lot.

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 producing these days 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 with the auto OEM pressures you're seeing as well and -- 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 had -- we have seen impact in the last quarter in Malaysia and we continue to see that this month. So, you know, as you all know Malaysian government approved a lot of essential factories to be running at 50-plus percent, and have -- and we have quickly returning back to 100-plus percent based on the – 100% based on the approvals we have in Malaysia. India is slowly coming back. We’re expected to start production next week. And then ramp back to a full capacity to the quarter. Mexico, even though we have approval to operate in most of our Mexican facilities outside of automotive because they all classify as essential products, you know 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 Steven, we're being very proactive in making sure that we're keeping our employees safe. So we think that Mexico is a place to watch through next quarter more related to outbreaks than anything else in terms of our capability to operate fully. And then 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 that are occurring as a result of North American and European OEM partners of ours having their facility closures. You know, we operate a pretty significant global scale. We have over 20 automotive certified facilities in several of those are shut down and they'll be turned back on has returned. Production back on throughout May, and then ramped up production so that does put a heavier impact in terms of our, our costs undertaking in the next period.

Great. Thank you very much for that. It's very helpful.

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 our some of our customers also talk about 5G ramps and their earnings call over the last few weeks. You know, what we have said before about 5G Shannon 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 is just 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. And Europe and North America are somewhat on pause right now. What we're hearing from our customers is that that eventually this is going to start coming back up, but as you can tell from constraints of people and resources to deploy on this. This is not an -- 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. So I'd say China's strong, we'd 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 it 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 our areas which are underutilized, particularly to medical and they're doing that in factories in Juarez and Romania. In the US, 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. And we're receiving a lot of compliments from our medical customers as we do that. But our whole piece is on building the right operational model Shannon, for agility and reliability is really meant to sit that that we would be doing that even more efficiently as we move forward. As we make sure that our factories fit the right cycle of products into the right facility 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. And then 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. So Q4 shows that we're doing that, shifting of resources extremely well and taking cross fractions, but our long-term operation model that we're building with a lot of intelligence makes us even more robust for us to operate through the cycle.

Thank you.

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 March quarter, and then you said next quarter that cost will be double, so roughly 100 million. So for June quarter, you will have $60 million incremental costs, plus the headwinds from lower volume, is 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 is under absorption pressures as a result of these extended shelter-in-place rules, closures in the in the impacts of where we're having to run some of those or not run those some of those factories 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 closure and how much of that is from the demand witness? Thank you.

Yeah. So let me start with that, I'd seen 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 what we are trying to understand is what is the recovery that comes back, as the factory talk to operate in what becomes a demand reduction. So, if I think about it in terms of segment-by-segment. Yes, automotive will be coming back as a result of shutdown, but you all have seen is IHS projections 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 right? 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 in CEC and that would be demand related not related to any shutdowns. If you think about industrial, we have 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 industrial segments will be somewhat constrained. So what I would take away from this is that we are very proactively working with customers, using intelligence to understand and demand, and then adjusting our operational capability and capacity to meet with that pretty quickly is how we're dealing with it. So it's hard to really say that it's a one size fits all answer, And is it operational? Is it demand ? I would say, what you're seeing in Q1 is a combination of both and each segment is different.

Great. Appreciate the color. Thank you.

Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Please go ahead. Your line is open.

Hi. Thanks for taking my questions. Can you talk about the portfolio pruning that you've been doing in the CTG segment and CEC. And 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, Ruplu, because if you remember, most of our actions in terms of corrections of 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'll be a Q1 to Q1 comp as related to that. But I'd say most of our portfolio actions in any significant scale has been done, but that being said, I will constantly look for us improving mix at every aspect of our business. And that's going to be an ongoing task for our teams now that is, I would think any good business will continue to do that.

Yeah, that makes sense and thanks for that 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, I mean, would it make sense to maybe think of some M&A in organic growth in this time and maybe try and consolidate some of the competitors or smaller players in the EMS space. So just your thoughts on the inorganic growth in this environment? Thanks.

So Ruplu, what I'd say is you know, I said in the Investor Day conversation that when I think about M&A for this space, the places we'd be looking for is where we have technology advantages in areas that we want to target for growth, particularly in areas like automotive, health, parts of industrial where it clearly gives us a technology advantage. Now you are right, we have a strong liquidity position. And we're continuing to build on that. We feel very comfortable that for the -- that as the time shows up and if there are the right assets available for M&A we'll take a look at it. But maybe now is not the time for it, but we'll watch and see but we're well-positioned I would say. Our liquidity position is extremely strong and getting stronger, and if the right assets show up at the right time we'll think about it, but I'm not sure this is this quarter is the right time, but we'll keep our eyes open.

Okay. Thank you for the detail.

Your next question comes from the line of Adam Tindle with Raymond James. Please go ahead. Your line is open.

Good morning. This is Madison on for Adam and thanks for taking my questions. I want to first acknowledge the fact that you are growing profit dollars on double-digit revenue declines. So pretty impressive it's -- we're not accustomed to seeing EMS models like that. I know growth is driven by very solid performance and IEI, but it sounds like forward commentary was a little more cautious. So can you just touch on the sustainability with IEI from both revenue and margin standpoint and was there anything one time in the quarter that you would call out that benefited IEI performance?

Yes, so what I would say Adam is that, you know, our ability to continue to improve margins as a result of in declining revenues is not just related to the fact that we are focused on the right mix 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 industrial question, you know, I would say the only reason we're saying that will that there will be some slowness and industrialists just because you know, demand situation is unknown. We think that we're very well-positioned in industrial. We said that in prior quarters that the available market and industrials significant. There's lots of room to vertically integrate. We are hearing more from industrial customers in a time like this for -- 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 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, you know, 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 passion. 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 very disciplined as we move forward, continuously evaluating the cost structure and being a good solid partner

And Adam I'll be honest with you. Our biggest challenge is really predicting the mix right and 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 and calling it out exactly, because I think those are the things that'll 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, but 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.

Okay. Thanks again for taking the questions.

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 maybe 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 kind of pricing power evolves. Thanks guys.

Yeah. So let me start with where I think kind of the post-COVID world goes in terms of for us and where we think we want the wallet share from our customers. I would say definitely in areas like medical, we have demonstrated just 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 with us, either in terms of consolidation of 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 has very unique pockets that we are very focused on where we think that we add value with vertical integration in terms of our overall capability. So in the post-COVID world, we have already defined and talking to customers where we think we can play a unique role and customers are coming to us asking for where we can help out. 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 you know focusing on the right kind of growth I've said many times as important Paul and so that's what we will drive on. In terms of margin, I'd say it all depends on you know the mix of products and as you can see that 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, so we think that also helps us with margin improvement in the long term. So, overall in the post COVID world, they are really focusing now looking forward on where customers need our help, where we can jump in and really drive value. And then 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 of the mix of segments we want to grow in and we think there's enough and market available for us to focus on and grow there and that's all we're really focused on right now.

Okay. Great. Thank you so much.

Okay. Hey, thanks everyone for joining us today. And 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.