Flex (NASDAQ:FLEX) Q1 2021 Earnings Call

0:00 Good afternoon and welcome to the FLEX first quarter fiscal year 2021 earnings conference call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's 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, Simon. and welcome to Flex's first quarter fiscal 2021 conference call. Joining me today will be our chief executive officer, Revathi Advaithi, and our chief financial officer, Chris Collier. This call is being webcast and recorded and slides for today's presentation are available on the investor relations section of our flex.com website. Please note today's call contains forward-looking statements which are based on current expectations and assumptions that are subject to risks and uncertainties, including the impact of the COVID-19 pandemic The actual events or results could differ materially.

1:00 Also, such information is subject to change, and we undertake no obligation to update these forward-looking statements. For full discussion of the risks and uncertainties, please see our most recent filings with the SEC, including our most recent 10-K. Lastly, this call references non-GAAP financial measures for the current period. GAAP reconciliations can be found in the appendix slides of today's presentation, as well as on the investor relations section of our website. With that, I'd like to turn the call over to our CEO, Revathi. Thank you, David. Good afternoon, everybody, and thank you for joining us today. And as we continue through these unprecedented times, I hope you and your families are safe and healthy. It has been an eventful few months for the whole world, and our Flex colleagues have worked tirelessly, of course, to support our customers and our communities.

1:48 And I can't thank them enough for their continued support and dedication. So because of these efforts, we've made real progress through a very difficult quarter and delivered better than expected results. I'll start first by providing an update on how we are operating in the COVID-19 environment, and then we'll talk about our fiscal Q1 results. So navigating the COVID-19 pandemic remains top of mind for all of us. The safety and well-being of our employees is our highest priority, and to provide that protection, We have deployed very extensive safety measures such as enhanced sanitation, temperature checks, and of course a lot of safe distancing in production environments. The associated costs of these measures will continue to have an impact on our business.

2:34 However, we're getting more efficient at operating under the safest possible condition and will continue to improve our productivity. Personal protective equipment remains a keystone to our safety efforts. Our mass production project that we talked about last quarter continues to be on track with over 20 million masks that we have produced to date at seven locations across the globe. And while most of the production is used to keep our colleagues and their families safe, we're also supporting our communities by continuing to donate masks to hospitals and first responders. The working from home remains effective for many employees and will continue to have non-manufacturing employees work remotely as long as it is prudent. But I do believe that human interaction is an important part of building and maintaining a healthy culture. So we are planning for an eventual return to work in some form, of course, but it'll be a minute approach and only at the appropriate time.

3:32 So from an operational standpoint, all of our production sites around the globe are up and running. We've also seen dramatic improvements in the supply chain since the early days of the crisis. However, a few component constraints and elevated lead time still exist, causing increased inventories in some areas. So let me talk about managing costs. Last quarter, when uncertainty was at its greatest, we instituted austerity measures, including temporary pay cuts and bonus cuts to mitigate elevated levels of manufacturing costs. We have used this to plan how we will operate with the most optimal manufacturing efficiency and overhead cost structure in a sustainable fashion in the current environment, and we still remain on track to reach our long-term financial goals.

4:21 As a result, we're now implementing a systematic and disciplined restructuring effort that will be executed in fiscal Q2. This effort will enable us to further solidify our focus on improving margins and driving the right kind of growth. Lastly, of course, we continue to have a strong liquidity position and we will be prudent in our use and deployment of cash throughout this time period. So let me now talk about fiscal Q1 results. Let's turn to slide four. We have executed very well despite the difficult environment. Let me highlight several of the financial metrics for our first quarter and then Chris will take you through the numbers in a great detail. The revenue of 5.15 billion was down 6% sequentially and 17% year-over-year.

5:08 Please note that this sequential drop was due mostly to the impact of the automotive shutdowns and a slow ramp in the quarter. And as all of you are aware, we'll have year-over-year comparisons from last year's portfolio shifts we made. Our adjusted operating margin was 3.2% despite absorbing significant COVID related costs as well as negative mixed impact from the automotive shutdowns. Our adjusted EPS is 23 cents down from 27 cents in Q1 of last year. Our adjusted free cash flow came in at negative 74 million as we had talked about earlier. In the last quarter, we expected fluctuations in operating free cash flow due to managing through net working capital requirements in this unusual period, as well as timing of payments in the quarter. However, we expect to quickly return to achieving our adjusted free cash flow targets starting in the September quarter.

6:04 So moving on to slide five. As we described last quarter, we knew that Q1 would be challenging as the impact from the COVID-19 outbreak continued to affect production and demand. However, we did see strength in several of our end markets, which is a testament to our diversification strategy and our ability to execute and deliver. Let me start with our reliability segment. Health Solutions was extremely strong. The team executed very well on projects supporting the fight against COVID-19, such as our recent fast ramps and ventilators and testing equipment, as well as expansions in critical care products such as oxygen concentrators and fusion pumps patient monitors and ICU beds. We also saw continued strength in industrial areas such as power products.

6:52 However, we did face a major challenge in our automotive segment. Most of our North American and European auto production sites remain essentially shut down in line with our OEM customers. We knew production would restart after the quarantine period, so it greatly limited our option and our ability to cut costs in line with anticipated demand levels in the quarter. In May, we're excited to have Mike Thoeny join Flex to lead the automotive group. Mike has a long history in the industry and brings extensive experience and deep domain expertise to the team. Mike hit the ground running and the whole group has worked very hard to ramp production, get the wheels turning again, and I'm very pleased to announce that all of our automotive production sites are now up and running.

7:40 In our agility solutions business, CEC experienced a very strong rebound this quarter as they ramped aggressively to meet customer demands for networking and compute equipment to support the increased workload from work and learn from home. This upside was offset by lower demand in our lifestyle and consumer device segments. Initially, lifestyle was impacted by both retail shutdowns as well as initial e-commerce shifts to essential purchase only. However, we have started to see strong demand in areas like floor care, coffee machines, and audio products. So as I discussed with you in March during our analyst presentation, we have reorganized our market-facing segments to be agile and to have end-to-end ownership to drive the right growth strategy. And despite the current situation, we have not wavered from our growth mindset. Across the company, our teams have been very productive, finding new ways to operate and continuing to win new businesses.

8:36 When COVID-19 made it impossible for customers to tour prospective manufacturing sites, we launched our new virtual customer platform to provide them with high-quality video tours of our global factories. Now, this has been a huge hit with our customers. When it comes to growth, we are focused on targeting and winning new businesses that are aligned with our strategic priorities. And our customer engagements continue to reinforce our belief that we are perfectly positioned with the right combination of technology and domain expertise. We continue to see strong new program wins in our targeted market, whether it's the next generation medical monitoring device, autonomous auto compute modules, auto electrification systems, or things like advanced industrial grade robotics or new beverage appliances.

9:26 So executing our growth strategy is going well. We're also moving forward and deploying our operational model Custom to our two groups and combining that with being world-class in manufacturing technologies. Along with that, we continue to focus on driving disciplined execution, taking rapid tactical actions as challenges arise. I do believe we have a good balance of moving on our strategic agenda while executing really well in the near term. Now I'd like to turn the call over to Chris, who will walk you through our Cori financial results in more detail, and then I'll come back at the end to share some closing remarks. Chris? Thank you, Revathi. Please turn to slide seven for our first quarter income statement summary.

10:13 Our first quarter revenue totals $5.2 billion, which was down 6% quarter over quarter and 17% year over year. Our results reflect COVID-19 related demand and production pressures, as well as the effect of an unfavorable year over year comparison given our targeted disengagement of high volatility, short cycle businesses we launched in our second quarter last year. Our Q1 adjusted operating income of $163 million includes the impact of pandemic related expenses. As a result, our adjusted net income was $116 million and our adjusted earnings per share was $0.23, which was down 13% year over year.

11:01 First quarter gap net income of $52 million was lower than our adjusted net income, primarily due to $13 million of stock-based compensation, $13 million in net intangible annualization, and $38 million in net restructuring and other charges, which consisted of $10 million of restructuring costs and $28 million of legal and other costs, which were not related to ongoing or core businesses, and which includes various loss contingencies for certain historical legal matters. I'd like to expand briefly on our reorganization and optimization activities. We have deliberately and thoughtfully evaluated each part of our business to determine where there are opportunities to better align with our long-term strategy and more recently with the current economic environment.

11:54 Accordingly, we will be taking actions to phase out certain non-core functions Streamline our organizational structure and sharpen our focus on key end markets where we have competitive advantages and deep domain expertise. We expect to recognize associated restructuring charges of approximately $100 million for the remainder of fiscal 2021, the majority being severance and benefits related costs. We anticipate a cost savings in fiscal 2022 of approximately $60 million related to these activities. Now please turn to slide 8 for quarterly financial highlights. As we anticipated, our production and productivity continued to be impacted by the ongoing pandemic.

12:42 In the first quarter, our COVID-19 related costs roughly doubled sequentially from the March quarter, which was in line with our expectations. Note that the majority of our COVID costs impact our cost of goods sold and gross margin. and they include our enhanced health and safety infrastructure costs, incremental supply chain costs, labor incentives, and the largest component being the forced underabsorption of labor and overhead from lost production and lower productivity. While these costs will persist, they will be significantly lower in the second quarter as we expect improvements in our absorption of overhead and labor costs as our production levels rise and our productivity improves.

13:32 Our first quarter adjusted gross profit was $318 million, down 21% year-over-year, and our adjusted gross margin declined 30 basis points year-over-year to 6.2%, primarily as a consequence of COVID-19 pressures in the related closure of our automotive sites for nearly half of the June quarter. As Revathi highlighted earlier, All of our sites are now operational as our teams have done a stellar job of rolling out our new delivery models while navigating a dynamic demand and production environment. Looking ahead, we are optimistic that we will return to consistent gross margin expansion as our operating sites remain open and disruptions lessen.

14:18 Our adjusted SG&A expense decreased 21% year over year to $155 million this quarter. which in dollar terms is the lowest quarterly level we've operated at in over 10 years. We benefited from aggressively attacking discretionary spend levels as well as from temporary reductions in compensation levels. We will maintain our cost discipline as we realign the company to not only weather the pandemic but also to execute on our strategic strategy more efficiently in the long term. We have confidence in sustaining SG&A as a percentage of revenue in our targeted range of 3 to 3.2%, which creates meaningful earnings leverage.

15:05 Lastly, our year-over-year adjusted operating margin contracted by 20 basis points to 3.2%, which we believe was a strong performance when viewed in the context of the COVID-19 challenges. Now turn to slide nine for our first quarter business segment performance. As we communicated at Investor Day in March and on our last earnings call in May, we are operating with two reporting segments, Flex Reliability Solutions and Flex Agility Solutions. Flex Reliability Revenue was $2.2 billion, down 12% quarter-over-quarter and down 1% year-over-year. Health Solutions was a standout performer during the first quarter and was up high double-digit sequentially.

15:56 Our core business is performing very well and demand for critical procedures products like ventilators, oxygenators, and hospital beds more than offset demand softness for elective medical procedure products. Industrial was down high single digits quarter over quarter with strength from our power products offset by anticipated declines for renewable energy and core industrial products. We remain well positioned in this key business group and believe that its fundamentals are intact given its broad diversified portfolio and numerous ramping programs. Lastly, our automotive business fell to just over half its pre-COVID quarterly run rate in the first quarter.

16:44 Our factories are now online and we have moved past the large-scale OEM plant shutdowns that were in place for the substantial portion of our June quarter. We expect that automotive revenue will continue recovering from the trough levels experienced in the first quarter, but expect that our revenue run rate will trail historical performance in the near term. Flex Agility revenue of $2.9 billion was down 1% quarter over quarter and 25% year over year. As a reminder, this segment includes products from our communications and consumer and markets, which underwent targeted reductions of over a billion dollars in revenues starting from the second quarter of fiscal 2020. We will begin to lap the unfavorable year-over-year comparisons for these products beginning next quarter.

17:38 Within agility, CEC was up low double digits quarter-over-quarter as it benefited from critical infrastructure demand from our networking and cloud customers, and we managed through production capacity challenges as we moved throughout the quarter. Lifestyle was down high single digits quarter over quarter as it experienced soft overall demand due to depressed consumer spending and lower retail sales. Lastly, consumer devices were down 21% quarter over quarter as a result of prolonged production constraints in certain geographies and depressed demand due to COVID-19. Turning to profitability, Flex Reliability Solutions generated $115 million of adjusted operating profit and a 5.1% adjusted operating margin.

18:33 Our industrial and health solutions groups performed very well, while simultaneously ramping multiple programs in key end markets, such as semiconductor capital equipment and diabetes care. But the protracted automotive site closures and resulting underabsorption and efficiency impacts were a headwind in the quarter. Flex Agility Solutions generated $72 million of adjusted operating profit and a 2.5% adjusted operating margin. Both CEC and Lifestyle performed in line with expectations, but major geographic disruptions for consumer devices resulted in elevated under-absorption challenges. We continue to actively manage the cost structure in this group to align with volume fluctuations.

19:26 Turning to slide 10, let us review our cash flow generation highlights. As anticipated, our cash flow generation was pressured in the quarter as production restarts, clearing finished goods, and timing shifts in payables all affected the quarterly cadence of our cash flows. For the quarter, Our adjusted operating cash flow was modestly positive, and we generated negative adjusted free cash flow of $74 million, which had been anticipated due to timing of working capital management. We closed the quarter with inventory of $3.5 billion, which was down 8% sequentially and resulted in inventory turns of 5.3 times.

20:15 We've mitigated most of our supplier constraints, and we will continue driving further inventory improvements while operating in this dynamic environment. A noteworthy action undertaken this quarter was to proactively and strategically utilize the proceeds of our May debt issuance to reduce the outstanding balance of our ABS program. We reduced the balance on the short-term financing product by $655 million sequentially, which had the accounting effect of reducing our cash flow from operations. Our net capital expenditures for the quarter totaled $102 million, which remains lower than our depreciation. We are confident in our ability to manage CapEx to be at or below depreciation levels in the near term, while simultaneously funding core areas of our growth.

21:09 In summary, while our adjusted free cash flow was negative for the quarter, we remain fundamentally structured to return to our objective of 80% or greater We continue to operate with a balanced and flexible capital structure that has staggered debt maturities, no meaningful near term maturities and no maturities that exceed our expected annual adjusted free cash flow. Many of the steps we previously implemented to enhance our liquidity position remain in place as we continue to prudently manage cash and ensure that we have ample liquidity, which includes access to our $1.75 billion undrawn revolver.

22:04 During the quarter, we took advantage of favorable market conditions to issue roughly $750 million of long-term debt in May, which extended our weighted average maturity to over five years, In summary, we've worked diligently to maintain a sound and flexible capital structure that gives us confidence in our ability to meet our current and future business needs, and we remain committed to maintaining our investment grade rating. Please turn to slide 12 for our second quarter fiscal 2021 update. Over the last six months, We have gained a tremendous amount of experience and knowledge that is now guiding us through a very dynamic and highly fluid production environment.

22:55 Our ability to safely run our factories remains subject to local conditions and government actions, but we have improved our near-term visibility and execution in response to our learnings. As such, we have elected to provide quarterly guidance for the September quarter and we'll continue to give qualitative insight into how we view each of our own markets in order to provide investors with as much transparency as possible during this period. Let me start with our Flex Agility Solution segment, which will be up five to 10% quarter over quarter. Our lifestyle group should see quarter over quarter growth as improving demand for durable goods that support working from home and schooling partially offsets reduced consumer spending on non-essential products.

23:46 Our CEC business will further benefit from increased critical infrastructure demand due to increased telework, streaming, gaming, and other online usage. Coupled with a slight pickup in our telecom infrastructure business, CEC should grow modestly quarter over quarter. As for consumer devices, we are also anticipating a rebound quarter over quarter as mobile demand and production begins to recover. Turning to our Flex reliability solution segment, we expect its revenues to be up 5% to 10% quarter over quarter. Second quarter automotive revenue will improve sequentially, but will remain below pre-COVID-19 levels.

24:34 China auto demand appears strong. and we see EMEA showing signs of the recovery coming out of the June quarter. The outlook for North America is also improving, though uncertainty related to potential future lockdowns remains an overhang. In health solutions, positive growth on quarter-over-quarter basis should continue with strong demand for critical care and chronic illness products, offsetting weak demand related to elective procedures. Lastly, our industrial business will be modestly up quarter over quarter, driven by renewable energy and power. As for core industrial, we continue to anticipate moderate near-term capex reductions.

25:23 Given the sum of those outlooks, we would expect our quarterly enterprise revenue to be in the range of $5.4 to $5.7 billion. Our adjusted operating income is expected to be in the range of $180 million to $220 million, displaying adjusted operating margin expansion while remaining burdened by COVID-19 costs associated with operational production and productivity constraints. Our interest in other expense is estimated to be between $35 to $40 million. We expect our tax rate in the quarter to remain at the higher end of our targeted range of 10 to 15%. Adjusted EPS guidance is in a range of 25 cents to 31 cents per share, based on weighted average shares outstanding of 502 million.

26:13 Our adjusted EPS guidance excludes the impact of stock-based compensation expense, net intangible amortization, and the impacts from our restructuring and other charges. As a result, we expect a gap earnings per share in the range of 5 cents to 11 cents. With that, Let me turn it back over to Revathi. Thank you, Chris. So as all of you can see from Chris's comments, we had really solid execution in Q1. And because of that, we have confidence in giving you more detailed quarterly guidance. Though I would reiterate, as all of you already know, that there's continued uncertainty with the COVID-19 pandemic. And because of that, we will hold off on giving any full year guidance. What we can assure you is that we'll continue to operate with discipline.

27:01 while serving our customers well and focusing on key growth areas for our business groups as we are well positioned to the new demands of adaptive supply chains and regionalized production. I remain confident that we'll emerge from this global crisis stronger and even better positioned for the future. Again, I want to say a thank you to all our employees for their continued commitment to our customers, for their trust and partnerships during the challenging time. and to our shareholders for their continued support. At this time, ladies and gentlemen, if you would like to ask a question, please press star then the number one on your telephone keypad.

27:47 If you would like to withdraw your question, please press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Stephen Fox with Fox Advisors. Your line is open. Thanks. Good afternoon. I have two questions, if I could. First, on the restructuring announcement, you've obviously pared down some emphasis on things that were lesser value. Can you talk about maybe more specifics about what you're doing now? And it also sounds like what markets you're targeting to sort of de-emphasize and where you may be doubling down a little bit more with some added skill sets? And then as a follow up, from a big picture standpoint, a lot of companies, including yourselves, have seen a surge in certain areas, healthcare, bandwidth related, work from home. How would you describe the opportunity going forward since it's been such a big pickup?

28:43 Do you expect sort of a normalization or is this a new normal? Any color there would be great. Thank you. Okay, I'll get started. And I'd say, you know, from our restructuring standpoint, If you recall, when I had talked to all of you in the investor day in March, we had talked about streamlining our organizational structure and also rethinking our delivery models for our two major business groups. And as a result of that, we had found many avenues for efficiency and optimization of our overall headcount. But we had decided to pause on implementation of any of that as we were trying to understand the COVID-19 pandemic impact in Q1. So let's say what we're looking at here is a combination of things.

29:30 One is, of course, any effect that we see from COVID-19, but also the fact that we have taken a lot of effort to streamline our organizational structure. Giving our market and markets end-to-end control has given us a lot of room for efficiency from kind of the corporate overhead structure and segment overhead structure, which is really helping with overall restructuring. The markets that I see tremendous opportunities for, of course, is our health solutions business. As you know, even before the pandemic had great bookings trajectory and continues to now solidify that position moving forward. Even at a time like this when automotive and markets seem to be really challenged, I would say for us the combination of autonomy, connectivity, and electrification which really drives bigger electronic content and vehicle.

30:26 So the growth is much greater than the overall markets. It's also a very interesting opportunity for us, and we're continuing to win many platforms there. Our industrial business, of course, remains extremely solid, you know, through the last few years, and we continue to have many avenues for growth. As you know, the term there is pretty significant. On the agility side, outside of our base CEC business, I would say I'm quite excited about our lifestyle business as we have redefined it. If you recall the available market as we defined for that was $150 billion plus in our investor day. And so what we're finding is many avenues of growth within that business that's highly profitable. And while we're not externally sharing all our bookings number, if you look at our bookings trajectory in that business, We're finding solid opportunities for growth with almost double the operating margin trajectory that we have had in the past.

31:24 So that is another area that we're really excited about. And then as we have talked about, our CEC business has always been solid in terms of our technology portfolio. So overall, I feel really good about the areas that we have picked. Our available markets are big. What we're doing is doubling down within sub-segments in that where we feel like we can really show our capability to win. I think that covers the question, right? Was there anything else, Chris? Yeah, I think the only other point was whether or not we're going to see a normalization to this elevated level of demand for the work from home, the gaming, and what we've seen at the early stages here of the The COVID response.

32:10 I think our initial view on this, I think like most people, is that the near-term view on that business is that there's going to be continued growth because the demand is really far outstripping the capacity available today. And you're seeing that from all end data center and cloud customers who are projecting that today. And I would say our view is similar and in line with that. Great, thank you so much. Thank you. Your next question comes from the line of Tim Yang with Citi. Your line is open. Hi, this is Tim Yang calling on behalf of Jim Suva. Thanks for taking the question. Your agility group seems to generate better margins in the June quarter despite lower revenue on a sequential basis. Can you maybe just talk about what's driving that and how sustainable it is? And then I have a follow-up.

33:07 Yeah, so I'll start and then maybe Chris, you can jump in here too. I'd say, you know, a couple of important things that are driving. One is, of course, you know, CEC has seen good incremental growth. I think that helps our overall margin portfolio. I'd say, you know, we're really focused on driving the right kind of bookings and improving our overall margin portfolio profile in our bookings in the last six months. We're also seeing the effect of it. Our operational delivery model where we're really focused on making sure that our variable fixed cost model for agility moves in line with volume has also, you know, paying the right benefits to make sure that how we incur costs are done in the right way.

33:53 And then I'd say in the lifestyle segment, the pickup of floor care and things like coffee machines, which we like that from an end segment perspective are also incremental to our overall margin mix portfolio. So those are all the reasons why I'd say agility is doing very well. But our continued focus would be if our bookings are in the right categories with the right And Tim, I think you also were picking up on a comparison to the reliability. And again, as we've said in our prepared remarks, you know, reliability position is very strong across the health solutions doing very well there.

34:44 Industrials have been very stable for us in growing, but it's been the automotive Thank you. Just on your reliability segment guidance, I think you mentioned you had significant halving in automotive due to factory shutdown during the quarter and then now all your factories are running. So my question is why your reliability group growth for September quarter would not be higher sequentially given auto production is expected to rebound roughly 40% in September quarter?

35:37 Yeah, I would say two things. One is, you know, we do have automotive rebounding very significantly. We have health solutions with a pretty solid sequential growth, you know, Q1 to Q2. I'd say we have taken a more muted approach on industrial in terms of sequential growth, and that's just because we think that CapEx will be constrained in industrial and the jury is out on that. Maybe, you know, we could be conservative on that, I'd say, but that's the view we have taken. But automotive and health solutions sequentially are showing pretty strong growth for us and we're being more conservative and prudent in our industrial forecasts. Great. Thanks for calling.

36:27 Your next question comes from the line of Paul Koster with JP Morgan. Your line is open. Yeah, thanks for taking my question, Revathi. I wonder if you'd be kind enough to sort of maybe give us a multi-quarter or multi-year kind of scenario for how the auto business sort of develops. Obviously, initially, it's just filling up spare capacity again. But is it initially then, you know, the traditional ICE products, Thank you very much. Thank you. It's a big question, Paul, and I'll give you kind of my perspective here.

37:28 First is overall from a macro level, from a full-year perspective, we're in line with where IHS is, which is we think Ottawa will be down 20% year-over-year. But set that aside, I think your question is more kind of a multi-year business category. First is if you think about the areas we participate in, which is autonomy connectivity and electrification like I had said you know the growth in those areas are driven mainly by electronic content and vehicles and so you know we expect that those areas that we have picked will have a greater growth than than the overall market and the way we see if you think about a multi-year approach we obviously see that You know, the growth in terms of connectivity is going to be across the board in all regions, whether it is North America or Europe or Asia.

38:27 We see that there's consistent growth across the regions and we're winning in all areas of the world in terms of connectivity. I'd say that electrification, you know, we do think that the biggest growth comes from the overall China markets. but we do expect strong growth then following in North America and Europe. You know, I'd say that is a position that we're gaining quickly in areas like converters and that we have talked to you about in battery management solutions and things like that where we're really gaining ground quickly. And if I think about a multiyear approach in that, we do believe that Asia has, particularly China, has the strongest growth followed by North America.

39:14 and then by Europe. And then lastly, in terms of autonomous, you know, that's a longer term trend. The real question on autonomous becomes, do you have solid design capability in autonomous, you know, which becomes a very significant revenue stream. And I would say they're extremely well positioned in terms of autonomous. Not only in terms of, you know, the OEMs, but now also in terms of tier ones who are doing more development on the autonomous work. And to me, that's going to be a many year process. But where we want to invest in autonomous is basically on the technology investment side. So I'd say challenge this year overall, you know, particularly in terms of COVID-19.

40:03 But we strongly believe that the autonomy, connectivity, electrification segments of growth that we have picked will be greater than the overall market. And we see kind of a multi-year rebound on that. And so our goal is to double down and invest in areas like electrification more than we have done before. because we strongly believe that we have capabilities and that that can really accelerate our overall growth. Yeah, that was good. Thank you. I appreciate that. And maybe a quick question for Chris. You talked of improved visibility. Chris, is it something that you've done that's improved the visibility or is it just that your customers are feeling more confident in expressing that to you?

40:54 I think when you think about visibility, you've got to think back to what the period we just came out of in terms of where we had many different factories around the globe either shut down or starting and stopping. Our consistent operations now gives us better clarity to better work balancing, load planning. We're getting just improved visibility in terms of our own ability to execute with the demand that's in front of us. And we've been very... Very aggressive in terms of our rigor and cadence in which we operate our system and really driving the visibility in our supply chain and our operations. It's enabling us to get more confident in terms of what's in front of us and how to adequately manage in what is really still a very challenging environment.

41:43 And so, Paul, last quarter we had talked about our overall operational radar, which is really peeling the onion on understanding end market demands. Using all the intelligence we have and reaching intelligent conclusions for ourselves and also our customers. So I'd say we're just kind of becoming better at that. And last quarter was just a tough quarter to predict anything, and we didn't want to get ahead of ourselves. I think we're feeling more comfortable now in terms of how we're predicting demand. Awesome. Thanks very much. Thank you. Thank you. Your next question comes from the line of Rublu Bhattacharya with Bank of America.

42:28 Your line is open. Hi, thank you for taking my questions and congrats on the strong execution. My question relates to your capex spend in fiscal 21. Given the economic environment, how should we think about your capex spend and the split between how much would be towards the reliability solution segment versus agility solutions? And maybe just looking at a broader picture, when you look at your footprint, are you seeing your customers asking for any product line moves from one region to another, maybe to have redundancy or to move out of China? And do you have the capacity to support that? So any details on that would be appreciated. Thank you. Yeah, so maybe let me start with CapEx. One is, I would say, you know, we've said this before, Rupal, is that we made the commitment last year that we'll invest in CapEx in line with our depreciation levels.

43:24 And we want to continue to focus on it that way. But they're very focused on making sure that our CapEx is invested in critical growth areas. It does lean a lot towards our reliability business. More now just because of large investments in areas like the medical segment and you know those are fairly significant capex investments but we believe are the right ones for us long term. So we really feel like we brought capex in line last year and we want to keep it at that level of investment and we'll be focused on making sure it's in line with depreciation and very much in line with our growth strategy.

44:09 And then in terms of China itself, I'd say, you know, you've seen in our, you know, in our filings, you know, how our PPE has moved over time, you know, between the regions, right? So our overall PPE has reduced, you know, in China and has become more focused on US and Mexico. China is now at 17% and Mexico is more at 25%. So we do feel like customers have been driving a regionalization strategy, whether it's driven by trade or tax or all those reasons. And of course, with COVID, that conversation of regionalization continues to intensify.

44:58 and we follow our customers. I think Ruflu and I have talked about this in the past. We're very well positioned in terms of our capability everywhere in the world including China to take advantage of that trend as it continues. Okay, thanks for the detail on that Revathi. Maybe for my follow up, if I can just ask a question on margins on the reliability solution segment. They came in at 5.1% this quarter. If you can just, I know you can't give guidance, but in terms of just the puts and takes, if you can give us some guideposts, because on one hand, automotive is weak, but then you have the healthcare solution segment, which is doing well. You have a large diabetes meter-related program that you're ramping this year.

45:47 And then industrial should also be ramping with some programs like SEMICAP that have good margins. So just in terms of puts and take, do you think that margins can improve over the next couple of quarters? Just balancing out all of these things. Yeah, I would say this is an easy answer, Rupal. Yes, absolutely, it'll improve. We are very pleased with our margin performance for industrial and health solutions in the quarter. Industrial continued its track record of margins that you've seen in the past. Health solutions had a fantastic margin performance. We were very challenged with 50% cut in overall automotive revenues, which is quite significant. Taking that kind of shutdown for half the quarter really impacted us significantly. So reliability had a pretty significant impact as a result of it. We'll absolutely see meaningful improvement in the following quarters.

46:47 Okay, great. Thanks for all the details. Appreciate it. Your next question comes from the line of Shannon Cross with Cross Research. Your line is open. Thank you very much. I was just curious. Clearly, PPE and all the medical devices, or maybe not PPE is the right description, but all the medical devices are going to be important for quite a while given the pandemic. But is there a way to sort of quantify how long, you know, ventilators will still need to be manufactured or maybe the size of the opportunity from the standpoint of the testing equipment? Just trying to understand within healthcare, you know, how some of this can bridge the gap until theoretically, I guess, we're all able to go back into elective surgery.

47:34 I don't know if you have any numbers behind it or ways to think about it, but that would be helpful. And then I have another question. Thank you. Yeah, so Shannon, I'd start by saying the way we have discussed this in the past is that we were expecting that the next few quarters which is Q2 and Q3 would see meaningful kind of production for ventilators. And then we said that in Q3 and Q4, we would start seeing some return in elective procedures. So they will offset each other somewhat. That's our guess, Shannon. And I think we have a very good interaction with our customers in these spaces to have that view of it. Though I'd say the The changes that we could see is obviously you are seeing that COVID-19 doesn't seem to be going away. So some of the ventilator production that we thought would go down now is continuing to ramp more than we expected.

48:36 So it may push out an extra quarter than what we had said before, but at a high level, from very deep analysis that we've done with our customers, we feel like the next couple of quarters Q2 and Q3 will continue with ventilators. It may push out another quarter, and then electives we think is going to come back in the next couple of, in Q3 and Q4, and that's how we are projecting our revenues for the year. Okay, thank you. That was helpful. Chris, working capital is a use of $180 million this quarter. I know there's some seasonality, but obviously there are many other puts and takes going on with cash management at So how do we think about working capital through the remainder of the year?

49:25 And, you know, what are the key metrics or key levers that you have to pull that might drive incremental? Thank you. Yeah, in my prepared remarks, I tried to highlight this past quarter the various moving parts. You know, I would probably point you in the direction of, for us, you know, this past period, We had our payables come down over a half a billion dollars in the period. You know, and that was due to timing. And again, due to, you know, we were shut down for many of our factories during the period, so we didn't get the production flow that we had anticipated. And thus, the inventory still was at an elevated level than where we anticipated. So that coupled with when production flows out of the back end of the quarter, you have timing in terms of the linearity in your receivables.

50:18 So there's a lot of different moving parts in terms of the timing of working capital management. But we have very clear line of sight to lessening the capital intensity of the business. We're making very good progress working through our inventory management. You know, we see many different ways to continue to drive what is today at 69 days of inventory much lower. Those aspects are going to be very fruitful in terms of driving greater cash generation as we move forward. Thank you. Your last question comes from the line of Adam Tyndall with Raymond James. Your line is open. Okay, thanks. Good afternoon, Revathi. I just wanted to start, you know, as you thought about the restructuring playbook, I'm wondering, how did you think about the tradeoff on cultural sentiment and future growth for the company, which I know has been a challenge for a number of quarters? Just the flip side, you know, you're starting to see a sequential improvement in demand. Your costs are attenuating.

51:20 And when you look at the operational metrics, they're actually quite healthy relative to competitors and even relative to your own historical. So I guess why throw this on top? And what would you say to investors that may worry it could impair future growth? Yeah, I would say, Adam, absolutely no concerns at all. And this is why. Because I think I was very clear to all of you when I talked in March. and we said that we had redesigned our organizational structure end-to-end and we are realigning our operational model to drive more manufacturing efficiencies that there would be a need to realign our overall cost base in line with that. And so I think we had put that on pause just as we were trying to evaluate The effect of the COVID-19 impact, and that's what we were trying to do.

52:11 I would say we are more well-positioned for growth than we've ever been before, Adam, because growth is not a result of just how many resources you throw at it. It's more a result of are you organizationally aligned end-to-end? Do you have a great go-to-market that's focused? Is your technology lined up with that? And today, our six segments, the way we're organized, are laser-focused. on pipeline and growth, and we are seeing significant results as a result of that. Our pipeline is stronger than it's ever been on the kinds of projects we want to win, and we're very pleased with how our bookings are growing even in a time like this. So I would say that investors should feel very comfortable that finding the right kind of growth is about organizational alignment, and that's what we're hoping to achieve. And then the second part of the restructuring also really significantly addresses manufacturing efficiency for us, which is very important in terms of how we're aligning our operational model to deliver to our two-group structure.

53:21 And we're finding tremendous room for manufacturing efficiency, and that playbook is also having the effect. So I would say investors should be very pleased that we're continuing to drive the right kind of growth. and at the same time, we're delivering margin improvement along with that. Good. Okay. Thank you. And just as a follow-up, you know, one a little bit more near term, maybe Chris would answer. If you could touch on seasonality with the new segments. And I'm really specifically thinking ahead to December. I know you're not providing guidance, but just don't want to get ahead of ourselves. And we typically get a solid lift sequentially from September. I'm just wondering if that has changed versus the normal build of, you know, hey, add a nickel, you know, sequentially on UPS from September to December.

54:09 Is there something different about the way that the business is today? And if you could touch on seasonality, that'd be helpful. Thank you. Sure, Adam. You know, one of the things we'll be very hesitant in getting too far out in front here. I mean, the world in which we're operating is very uncertain. That has not changed that much. That's why we're focused on providing a near-term guidance. I would say if you look back to the portfolio shifts that have been undertaken and where we're really trying to drive to optimize and the actions that really were launched last year, we've dramatically lessened the size of our portfolio associated with consumer related products. And so, you know, when we looked at that in the past, that has been something that would probably dampen that level of seasonality that we historically would see throughout the year.

54:55 but that's as much as we really want to get into in terms of looking out beyond this next quarter at this time. Okay, is that restructuring tailwind done in September or is there incremental that goes into December as well? The restructuring that we talked about today is going to be enacted during this period, the majority of which we would hope to accomplish in our second quarter here and that is for the entire year. Okay, that's helpful. Thank you very much. You're welcome. Great. Hey, thank you all for joining us today. And even with these unprecedented times, I'm as confident as ever in the future of FLEX. I wish that all of you remain safe and have good health.

55:40 And I look forward to talking to all of you next quarter. Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.