Flex Ltd (FLEX) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the Flex First Quarter Fiscal 2018 Earnings Conference Call.

Today's call is being recorded.

(Operator Instructions)

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Kessel, Flex's Vice President of Investor Relations.

Sir, you may begin.

Thank you, and welcome to Flex's conference call to discuss the results of our first quarter fiscal 2018 ended June 30, 2017.

We have published slides for today's discussion that can be found on the Investor Relations section of our website at flex.com.

The executive management on the call with me today includes our Chief Executive Officer, Mike McNamara; and our Chief Financial Officer, Chris Collier.

Today's call is being webcast and recorded and contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties, and actual results could materially differ.

Such information is subject to change and we undertake no obligation to update these forward-looking statements.

For a discussion of the risks and uncertainties, see our most recent filings with the Securities and Exchange Commission, including our current annual and quarterly reports.

If this call references non-GAAP financial measures for the current period, they can be found in our Appendix slide.

Otherwise, they are located in the Investor Relations section of our website, along with the required reconciliation.

In addition, all commonly referred to acronyms for each of our 4 business groups, along with their definitions, are mentioned at the bottom of our disclosure slide.

With that, let me turn the call over to our CFO, Chris Collier.

Chris?

Good afternoon, and thank you for joining us today.

We'll start on Slide 2 with our first quarter fiscal 2018 income statement summary.

Our first quarter results reflect performance that was within our guidance on all key financial metrics we provided in April.

The first quarter performance was aligned with both our long-term strategic vision of continued portfolio evolution and our commitment to engaging in more Sketch-to-Scale business.

Our net sales totaled $6 billion for the quarter, up 2% versus the prior year, with all of our business segments meeting or exceeding their quarterly sales guidance ranges.

Mike will provide additional insight into our business group revenue and the demand environment shortly.

Our first quarter adjusted operating income was $178 million, which was within our guidance range, and a 6% decrease from a year ago.

Adjusted net income was $128 million.

Adjusted earnings per diluted share for the first quarter was $0.24, and certain onetime gains resulted in our GAAP EPS hitting $0.23.

Now I'll turn to Slide 3 for our quarterly financial highlights.

Our first quarter adjusted gross profit totaled $410 million, and our adjusted gross margin was 6.8%.

As communicated back in April, we expected a temporary decline in our gross profit and gross margin in fiscal 2018 as a result of increased investments in costs.

During the period, we saw elevated levels of cost to support our strategic partnership with Nike.

These costs were mostly associated with developing new automation and process technologies and transitioning into a state-of-the-art, purpose-built factory we are constructing.

This was higher than anticipated and has an effect of pressuring our profitability to the low end of our guidance ranges.

As we have highlighted last quarter, we are consciously and purposely elevating the levels of spend to support our new business initiatives, investing in our innovation system and in expanding our design and engineering capabilities.

We anticipate that we will continue to direct more of our operating expenses to investing in our Sketch-to-Scale portfolio shift and this will contribute to the reemergence of top line growth in the second half of this fiscal year and beyond, will also aid in profit and margin expansion as we gain leverage from the greater revenue levels.

In our first quarter, our SG&A expense amounted to $232 million, which was up both sequentially and year-over-year.

As a reminder, R&D is a component of our SG&A.

The expansion of SG&A is reflective of incremental design and engineering costs as we expand our innovation and design centers as well as absorbing incremental costs associated with our acquisitions, which carried higher SG&A and R&D levels than our legacy businesses.

We believe this will drive operational efficiencies and productivity in SG&A going forward, which will enable us to operate with a slightly lower quarterly SG&A investment level of approximately $230 million.

Our quarterly adjusted operating income came in at $178 million and our adjusted operating margin was 3%, which was a modest margin decrease year-over-year, and almost entirely attributed to the increase in investments and cost I just discussed.

Return on invested capital, or ROIC, was 19% and continues to be well above our cost of capital.

Turning to Slide 4. We display our operating performance by business group.

Our CEC business generated $49 million in adjusted operating profit and posted 2.5% adjusted operating margin, which was at the low end of our targeted range of 2.5% to 3.5% and declined by $13 million over the prior year period.

The decline in profitability is driven by 10% lower revenue levels versus a year ago, resulting in lower overhead absorption, combined with CEC's modest increase cost to expand its cloud data center capabilities.

Our CTG business produced $18 million in adjusted operating, resulting in an adjusted operating margin of 1.2%, which fell below our targeted range of 2% to 4% for this business.

The adjusted operating profit deterioration was directly the result of the elevated level of operating losses from our strategic partnership with Nike discussed earlier.

Our IEI business generated $55 million in adjusted operating profit, which set a new quarterly high and achieved a 4% adjusted operating margin.

This solid performance was consistent with our expectations as strong revenue growth reflects IEI's ability to capitalize on its strong bookings and technology investments and to deliver profit expansion.

Our improved earnings are resulting from the absorption benefits from greater volumes as a result of ramping multiple new customer programs in industrial, home and lifestyle and our energy businesses.

Lastly, our HRS business delivered $90 million in adjusted operating profit, equating to an 8% adjusted operating margin and also posting a record quarterly profit level.

HRS consistently demonstrates strong revenue growth and a solid operational management while it continues to ramp multiple new customers and programs.

We are pleased with our HRS's ability to operate effectively within its target margin range of 6% to 9% while actively investing to expand its engineering and technical competencies to provide innovative solutions.

Please turn to Slide 5 for other income statement comments.

Net interest and other expense for the quarter was $27 million, which was modestly below our guidance as a result of realizing favorable foreign currency gains.

We continue to believe guiding to a range of $30 million to $35 million for this line item is appropriate as it reflects the impact of a higher interest rate environment.

Our adjusted income tax expense for the quarter was roughly $23 million, reflecting an adjusted income tax rate of approximately 15%.

This was higher than expected due to unanticipated negative foreign exchange impact on our deferred tax assets and liabilities.

Without this negative impact, our effective rate would have been in line with our guided range.

We expect our Q2 rate to be back towards the lower end of our long-term rate range of 10% to 15%, and we anticipate executing to the lower end of that range in fiscal 2018 as previously discussed.

There are several different elements that have an impact when reconciling between our quarterly GAAP and adjusted EPS.

There's a $0.04 impact from the $22 million of stock-based compensation expense and another $0.03 impact from the $18 million of net intangible amortization expense.

This quarter, offsetting the impact of stock-based compensation and intangible amortization was a net onetime gain of $36 million or $0.07.

During the past quarter, we entered into a strategic transaction with i.am+ for the sale of our Wink business.

This gain is reflected in our GAAP results but we've excluded it from our adjusted numbers.

We're excited about this new partnership, where we are the exclusive Sketch-to-Scale partner for i.am+, which should become a larger and more important CTG customer over time.

This transaction also gives Flex a minority ownership in a well-positioned company with a presence in audio, connected living, AI and the fashion industry, all of which are long-term beneficial to CTG.

Turning to Slide 6, let us review our cash flows and net working capital.

We continue to generate strong operating cash flows, which enables us to operate, invest and grow our business.

We generated $138 million in cash flow from operations in Q1, which marked 12 straight quarters of quarterly generation being greater than $100 million.

Net working capital expanded to $1.7 billion and amounted to 7% of our net sales, which remains well within our targeted range of 6% to 8% and illustrates our disciplined working capital management.

We continue to add multiple actions to improve our inventory management, and we are pleased with the inventory turns continuing to improve during Q1 to 6.4 turns.

We believe that our current and prospective business mix will result in our net working capital as a percentage of sales remaining within our targeted range of 6% to 8%.

We continue to identify and invest in the areas of capability and capacity to continue to support our portfolio evolution and to strengthen our platform as we drive automation and innovation investments and fulfill our expansion requirements.

This quarter, we saw our capital expenditures totaling $119 million, which was $11 million above our quarterly depreciation, consistent with our plans for managing our CapEx modestly above our depreciation levels.

Our resulting free cash flow was $19 million for the quarter.

We have a commitment to consistently return value to our shareholders, and that is reflected in the repurchasing of our shares.

This quarter, we repurchased roughly 4.5 million shares or 1% of our float for approximately $74 million, which was significantly more than our free cash flow generation for the period.

Please turn to Slide 7 to review our balanced capital structure.

During the quarter, we took advantage of favorable credit conditions and successfully refinanced our credit facility that had been due in 2019 with a [$2.3 billion] facility now due in 2022, and while doing so, we increased our revolving credit facility by $250 million.

We continue to operate with a strong financial condition, maintaining over $3.3 billion in liquidity, no near-term debt maturities; and approximately $1.6 billion in cash.

Our credit metrics remain healthy with a debt-to-adjusted EBITDA ratio at 2.4x.

Before I turn the call over to Mike, I’d like to highlight that our strategic focus remains firm and that we are driving meaningful traction in new industries and markets from providing differentiated Sketch-to-Scale supply chain solutions.

Our efforts and our investments are all centered towards delivering substantial long-term earnings power and delivering on our long-term financial commitments.

Now I'll turn the call over to Mike.

Thank you, Chris.

Please turn to Slide 8 for Q1 fiscal 2018 business highlights.

Our first quarter results were within our guidance ranges and reflected the increased level of investment needed to move our company into differentiating capabilities and expanding total available market.

As discussed over the last few quarters, we are in an investment year and focused on managing our business for the long term.

We strongly believe that in order to truly drive competitive advantage, we must prioritize investing over a long-term view while still balancing short-term demands and requirements appropriately.

We have taken the right steps in this path and are seeing real achievement in accomplishing our objectives.

Our strong cash flow generation remains the hallmark of Flex and enables us to make strategic investments necessary to successfully expand our platform beyond just electronics (inaudible).

As Chris just said, this is our 12th straight quarter of generating over $100 million in cash flow from operations, affording us the ability to aggressively invest in our future.

During the quarter, we continued to fulfill our commitments to return value to shareholders by repurchasing approximately 4.5 million shares for $74 million.

It is our objective to enhance our platform with a balanced [slate] of investments to position us for the future while simultaneously returning value to shareholders.

This ensures we position Flex for long-term margin expansion and accelerated growth as substantial new TAM becomes available to us.

Our portfolio evolution continues to make progress.

Our HRS and IEI businesses are growing extremely well.

And that growth is now beginning to accelerate.

We expect greater-than-10% revenue growth in fiscal 2018 for both business groups.

This improved growth is correlated to our success in new customer bookings, while at the same time, expanding Sketch-to-Scale relationships.

Our focus on these 2 business groups will continue to deliver impressive results and help lead the way towards our fiscal 2020 targets.

In addition to our methodical portfolio management, we have also deliberately increased our investments in new transformational business opportunities, including Nike.

This strategic partnership, which is measured in decades, remains a very important long-term margin, revenue and TAM expansion opportunity for us.

We are making steady progress in completely reinventing shoe manufacturing by developing new automation technologies and integrating it into our partner's design processes.

This demands high-level engineering and problem-solving and requires real invention and innovation.

On a cumulative basis, we've manufactured over 1 million pairs of footwear across multiple styles and our learnings have been significant.

Fiscal 2018 continues to be the investment increase phase in this business, with significant losses as we discussed back in May.

These losses will likely persist throughout the year as we operationalize our processes and expand capacity to position ourselves to scale up revenue over the coming quarters and move into profitability in fiscal 2019.

I firmly believe that this is a truly great opportunity which will be an extraordinarily sticky business and provide our customers real competitive advantage in their marketplace, while also creating an important competitive differentiator and TAM expansion opportunity for Flex.

For these reasons, we both remain laser-focused on driving our partnership to success.

Please turn to Slide 9 as we review revenue by business group in detail.

Our overall diversification remains strong and is also a very unique and important aspect of our business.

We had no 10% or greater customers for the 6th consecutive quarters.

Our top 10 customers accounted for 43% of sales and we expect this will continue to trend lower.

CEC was in line with the midpoint of our expectations for our year-over-year revenue decline of 5% to 15% as it was 10% lower than the prior year at $2 billion as most of CEC outside of cloud data center declined.

For the September quarter, we expect CEC revenue to be down 10% to 15% on a year-over-year basis, driven mostly by a decline in traditional businesses, which more than offsets the growth in cloud data center.

We anticipate Q2 will mark a trough for CEC and will improve in the second half.

Nevertheless, our long-term CEC target of flat to down minus 5% will be pressured this year given CEC's anticipated decline in the first half.

As a result, we expect CEC's fiscal 2018 revenue to be slightly below the targeted range.

CTG's revenue came in at the high end of the guidance range of up 5% to 15% year-over-year.

Revenue of $1.5 billion rose 15% year-over-year as the result of growth in connected living, audio and mobile products versus the prior year that more than offset weakness from certain legacy programs in [gaming tablets] and wrist wearables going into [life].

For the September quarter, we are guiding CTG revenue to be flat to up 5% year-over-year, driven by the same CTG trends we saw in the June quarter.

We will continue to actively shape this business to be more Sketch-to-Scale with higher technology contents and less seasonality than in the past.

IEI had another very strong quarter with revenue coming in at $1.4 billion, up 8% year-over-year, above the forecast of flat to up 5%.

IEI's sales hit another record -- quarterly record revenues level, led by energy and industrial home and lifestyle, which grew year-over-year due to new program launches and in-market growth.

For the September quarter, we are forecasting IEI revenue growth to accelerate further, up 5% to 15% year-over-year, as growth in energy, lighting, industrial, home and lifestyle more than offset expected year-over-year decline in [technical] equipment.

As I've mentioned previously, our bookings in the segment last year were exceptional.

They remain very healthy, which will lead to accelerated growth in the second half of the year and greater than 10% growth in fiscal 2018.

HRS revenue grew for the 30th straight quarter on a year-over-year basis.

This quarter, revenue was up $1.1 billion or 5.5% year-over-year, compared to expectation of up 5% to 10%.

In our September quarter, we expect HRS's growth will step up even further, making it 31 straight quarters of HRS growth as revenue grows 10% to 20% year-over-year.

This year-over-year expected growth represents both new programs and the expansion of existing programs for both medical and automotive.

We also expect HRS to exceed our 10% growth target for the year so its strong performance should continue.

Let's turn to our September quarter guidance on Slide 10.

While our strategic investments pressure our near-term results, we are thrilled to move our business into a continuously better portfolio mix and significantly expand our total available market.

As the year unfolds, we are positioned to see strong revenue growth in the second half, reflecting much less seasonality and a continuation of the revenue growth is expected to provide momentum going into fiscal 2019.

For the September quarter of Q2 FY '18, we expect revenue to increase to the range of $5.9 billion to $6.3 billion.

Adjusted operating income is expected to be in the range of $170 million to $200 million, and continues to reflect heightened investment level for our businesses.

This leads to adjusted EPS guidance range of $0.24 to $0.28 per share based on the weighted average shares of outstanding of $538 million.

The adjusted EPS guidance range is expected to be approximately 8% per share higher than fully GAAP EPS.

With that, I would like to open up the call for questions.

Operator, we're ready for questions.

(Operator Instructions) And your first question comes from the line of Amit Daryanani with RBC Capital Markets.

I guess to start off, could you just touch on the investment that you guys have -- you made this quarter?

It sounds like it (inaudible) somewhat.

What are they focused on beyond the strategic partnership with Nike?

And then what comfort should we get that OpEx will remain flat from these levels?

And I guess, margin expansion in the back half, do we think about as more as OpEx is flat and revenues grow in the back half and that drives margin expansion?

So just help on where are these investments are going and the back half margin expansion?

Okay, so let me start with some investments.

In the prepared remarks, we're pretty descriptive that we've been continuing to make incremental investments in our whole strategic relationship with Nike.

That's going to continue over the course of this year, and I think we've been pretty forthcoming in terms of this is going to be a pretty significant investment year at the back of Nike.

We continue to make other investments.

We've talked about things like buildings and we've talked about investments in some of our software system and certainly, increased investments in our Sketch-to-Scale businesses.

All of those continue in a metered way but all of which are positioning us for the future, whether it's Sketch-to-Scale or new business opportunities or existing opportunity with Nike, each one of them individually are pretty -- are significant and additive to where we are.

Well, alternatively, it's something that we believe that's required in order to hit the 2020 vision that we've outlined.

So one of the things that we had done at our Investor Day was I called out specifically the level of accelerated investments we've been making to build out our innovation system to expand into new markets.

Mike mentioned the construction of our YTWO Formative initiative, we have digital health.

We've been making in incremental investments in growing our -- the Elementum business.

And specifically though, we've been making investments to expand the design and engineering, competency and capability across our global system, building out the centers of excellence, expanding the innovation hubs.

And so what you've seen is an elevated level of that separate from the strict Nike discussion that we provided in the prepared remarks.

So you see those elements stepping in, and if you look at the June performance, it's very similar to the performance last year, we had some variability in the start of the year, some other investments and timing of certain aspects.

And so as we move forward throughout the rest of the year, we want to make certain that there is a view as to bringing that back down a bit, and that's why I centered it around $230 million per quarter as we go.

And by doing that, plus as we see continuous improvement and revenue acceleration throughout the year, you're going to get the benefit of that leverage in the system.

Got it.

And I guess, just as a follow-up, does this change the scope in terms of your revenue expectations with Nike, maybe in fiscal '18 and fiscal '19 at all, is it getting pulled in somewhat?

Could you just maybe help on the revenue trajectory as you go from here with that customer.

I don't think the revenue trajectory vision has changed all that much.

I think we're seeing some accelerated cost as we bring this ramp up.

Mostly the reason for that, it's a pretty complicated ramp, we're vertically integrating technologies, we're rethinking all of the whole supply process, we're applying automation technologies.

We have to integrate it with the customer designs and qualification process, ramp it 1 million square feet with thousands of people is going to take time.

And it has a natural learning associated with it.

But put them all together, and it creates a pretty complicated event.

So we're -- we continue to chase the same revenue vision as where we've been, it's just how we take the costs are a little bit more difficult or difficult to see in the near term.

Your next question comes from the line of Steven Milunovich with UBS.

Just to dive down a bit more on Nike, a couple of questions: Number one, I believe you had said previously that you expected to be in your breakeven by the end of the calendar year, it sounds like that might not be the case.

And if so, when do you expect to be at breakeven?

Second, can you size at all the investments you're making with Nike?

Or at least give us a sense maybe when the peak investment occurs?

And third, your ability to predict the cost, I guess, that's 2 quarters now that's been higher than you expected.

How much confidence do you have that this isn't going to continue for the next couple of quarters with, "Oh, we had to spend more than we thought?"

Okay, so let me start with breakeven.

So our expectation is always, the fiscal year, we would cross over into breakeven.

We still believe that's the right target and objective and where we see the business heading.

So -- we're not on a calendar year forecast, and I think we've been pretty consistent with that if I think about all the things that were said over the past quarters.

As far as citing the losses, I think the way -- we can't give out any kind of specific margin and loss by customer.

I think the way to think about it is CTG has a certain margin range that ran in last year.

The core CTG continues to run in about that range, around just slightly below the midpoint of the range.

And as you know, we posted our CTG results with Nike included, which is 1.2% this quarter, so it kind of gives you an idea of the amount of money we're spending.

I don't want to go into specifics of what that's going to look like, but we expect heavy investment over the next 2 quarters, and the biggest driver of that whole investment is we're moving into a brand new facility and the transition in that facility will be complete by October.

So absolutely, the last major implementation is difficult right now to be able to run the factory with high efficiencies and high ramps and many different process technologies and all the automation and all the vertical integration, everything that we're doing to make this just run.

But as we get into the new facility, it's custom-designed for these processes.

So that's what -- those are the key things that we're thinking about.

As I'd probably -- and as we implement these things, we have a whole roadmap of process changes that will yield results, going into the new facility, the natural learning curve of the people coming along, between all those things, we do expect it to move into a breakeven situation by the end of our fiscal year.

And I would just add to that, obviously, we're -- we set a framework of guidance that we anticipate on achieving.

We are now -- we are reinventing how shoes are made, this is a new endeavor.

We do our best to kind of frame out what that looks like.

Mike highlighted some of the things as to what's accelerated and what some of those losses are and why it went beyond our expectations, whether it's the supply process, whether it's applying automation techniques, certain commissioning or qualification to the design process, there's several areas that we have been very focused on and we continue to have line of sight to, that we anticipate moving throughout the year and improving on those.

What you're seeing now is a reset, if you will, that we acknowledged at the June quarter's elevated levels, we anticipate that sustaining itself, but with the vision of many of these activities crystallizing enough being able to get back to our objective of being breakeven by the end of the year.

And Chris, what does this mean for your free cash flow now this year?

Well, if you think about free cash flow for us, 3 main drivers obviously is the earnings contribution and then the working capital and CapEx.

Working capital and CapEx are probably bigger drivers for the delta.

So this is a bit of a drag, it will put some pressure on.

I also think that as we move through the year, and we start having some accelerated revenue, you're going to have some incremental working capital to be deployed there.

I think you're seeing us manage very well within a good discipline.

We haven't been outside of our targeted 6% to 8% range in well over 20-plus quarters.

So that's intact.

And now we're going to continue to have discipline around the CapEx investment to be modestly higher than depreciation.

So putting it all together, we are not moving off of at all where we had said at the Investor Day of our vision over the next 3 years of $3.5 billion of operating cash flow and $2 billion of free cash flow.

There will be variability in that, we'll probably not be on our linear path in those points that you've highlighted, the pressure from the operational earnings and maybe an elevated level of net working capital will put that pressure on this year, but it will be recaptured the following year.

To clarify, that breakeven, we expect to hit it by the end of the year.

We don't expect Q4 to be breakeven.

We actually expect to cross over to breakeven during the Q4 timeframe.

So we're expecting to exit the year in a breakeven standpoint.

Your next question comes from the line of Adam Tindle with Raymond James.

I guess, I'll stick on Nike.

When you talk about the Nike cost, you mentioned learnings, and these are not accelerating the revenue ramp.

So I just wanted to understand, is there an aspect here of some cost due to missteps in the ramp?

And how do we think about the visibility into the path of the 3.5% to 5% margin in the business in fiscal '19 and '20 that you laid out at the Analyst Day?

Yes.

I don't know really how to answer that except by the time you add in new ways of loading the factory, multiple supply -- multiple product and shoe -- different processes.

We add in some of the vertical integration we're doing, we add in some of the automation techniques we have to integrate in with the customer and their timeframes to be able to get the automation accepted and qualified, we have to ramp 1 million people -- 1 million square feet with like 8,000 people.

I mean, all I can see is when you put all that into 1 system over the course of the year, it's going to take time to move out.

And I would just say it's complicated, and our ability to precisely forecast exactly those costs is hard.

And forecasting a learning curve is difficult.

So it's just going to take us time to go ramp this factory.

It's why we've said from the very, very beginning that this is a very, very long-term relationship and a long-term path.

You can't go and reinvent shoes and reimagine how they're built and reinvent processes and necessarily put it on to a precise schedule.

So while it's off a little bit over the next couple of quarters, we're going to stay focused on the long-term vision of having this thing when it's all done.

We think it's never going to be done, we'll always keep improving and changing it, but I mean, we still believe that this has absolute long-term value to our customer in terms of its responsiveness and competitiveness in the marketplace, which means we expect continuous revenue expansion, literally every year for the next -- foreseeable future.

And over time, we'll (inaudible) this up.

So that's just what a reinvention process kind of looks like.

It kind of takes time, it's not going to be precise.

And we're committed to the long-term target margins.

And I would add, Adam, Mike's given us several examples.

I mean, if you think about what improves going forward, you're going to have automation gains, the -- we're going to have better building space and operational flow benefits, greater labor efficiencies, all of which are going to help us move back into that target range.

And what you're hearing from us is the long-term vision of expanded TAM and margins is intact.

It's just been harder for us at the front end here.

Understood.

And maybe just as a follow-up.

Just wanted to confirm that the targets from the Analyst Day still apply?

And if so, what gives you confidence?

It doesn't look like operating profit dollars are going to grow much in fiscal '18, so that would imply that they grow kind of mid-teens plus in '19 and '20 to achieve that.

Maybe just any level of confidence around that?

Yes, so obviously, from the posting we just had for Q1 and the commentary and guidance we have set for Q2, and how we're thinking about the level of effort being put forth to absorb the losses that have been bringing on the strategic initiative, and that's going to put pressure on that ability to grow that operating profit dollars this year.

Take away the losses associated with this initiative and we're well on our way to growing profit dollars this year on the rest of the core business.

And your math is right, you take -- in the next -- '19 and '20, you're going to see significant growth in terms of operating profit dollars on the back of resurgence to profitability on Nike and a continued accelerated growth and sustainability in terms of IEI and HRS earning contributions.

If you look at how we framed out the model to deliver the substantial earnings leverage, we've identified HRS to be the biggest contributor to that forward vision off of '17 with giving $0.26-plus of contribution.

Just to give you a framework, you've seen the very strong performance from it, HRS, continuing.

We anticipate that long-term structural growth to be intact.

And if you look back just the past 3 years, HRS contributed roughly $0.21.

I'd say we're in a better position both capability-wise, expertise- and penetration-wise to easily achieve that $0.26 from that segment.

So looking at the long-term model, we're telling you that we believe it's intact.

78 days ago, we gave you that vision, what we're doing now is recalibrating with a new different type of business, this new, big, exciting initiative that we have with Nike that has some challenges in the interim that we're defining.

And just to reiterate what Chris said, you take away those Nike costs, which we think will go away by end of the year, and we have very nice expansion on the back of our Sketch-to-Scale Initiatives, at the back of our portfolio transition and on the back of CTG core move into a different kind of system.

And we're going to end up with a lot less seasonality at the same time this year, which is going to be way improved.

So the quarter underneath the Nike investments is very healthy moving forward at a nice clip, very consistent with our expectation.

The only thing that we're having this year is we have the big investment here at the back of Nike and as long as we get it mitigated, then by end of the year, we're in great shape, because that will all be added to the next year.

Kind of got a double impact next year, you have the reversal of the Nike losses.

Do they just go into 0, which is a huge increase to earnings per share, and at the same time, we've got continued expansion of HRS and IEI, which will actually accelerate.

Your next question comes from the line of Paul Coster with JPMorgan.

I'm going to dwell a little bit longer on Nike, I do apologize.

And so the way I understand it at the moment is you've got a quasi-operational facility now, which just got a low absorption rate plus you've got some onetime expenses associated with the transition that go away in 2 quarters from now.

Is that the correct way of thinking about it, first of all?

I think any time you ramp 1 million square feet with thousands of people, we're going to have a cost to the learning curve and it -- those people that we hire into that are only going to learn so fast, even if it was processes, we exactly know and precisely know the outcomes.

So that's kind of with us all year, no matter what.

That should go away for sure.

I mean, the learning curve associated with the factory is less -- is not more than a year.

We move into the new facility, which should provide us a step up in function improvement in terms of output and productivity because it's custom-designed.

Right now, we're running all the Nike stuff jammed into an EMS facility that doesn't have the proper outflow and those kind of things, all this is costing us some lack of productivity.

The minute we move in there -- so between moving into a purpose-built facility that actually has the room and right layouts and the right warehousing and the right flows, between actually having 1 year under our belt in terms of the people, in terms of the learning curve of getting the whole system working well together, those are kind of givens that are very predictable.

I would call those onetime in nature and something we can get through.

Then there's actually the additional limitations from the process improvements and automation, all those kind of things.

And those are things that we should see drive improvements over the course of the next 2 years.

So while they're kind of onetime, a lot of the design and development and research is kind of onetime, alternatively, it's somewhat like a continuous process to continually refine, improve those processes and implementing those technologies to further improve the manufacturing of the shoes and the quality and the responsiveness.

So it's -- All I can tell you is that it's like a really big project.

It involves a lot of different technologies, it involves a lot of scale and you put it all together, it's just going to take time to work through.

And our timeframe to work through that and into a breakeven is this year.

And Paul, remember at Investor Day, we assigned fiscal '18 to be that investment and create phase.

It's just that we're significantly -- we're suffering significantly greater losses and we see those persisting for a bit as we continue to operationalize the processes, as Mike said, and we position to scale over the next several quarters and achieve that next phases that we laid out in that long-term vision.

And we understand this is a (inaudible) spring, with which in mind, it sounds like you have a great deal of confidence about breakeven point for this.

Can you -- is there anything you can share with us regarding the contracted revenues with Nike -- is?

What term?

Is there a min-max to it?

Is there a -- are there sort of break points?

Anything that kind of sort of provides us with color around your level of confidence?

We don't necessarily have contracts around revenue.

We have an exclusive deal to actually be their manufacturing revolution partner.

But they'd give us as much revenue as we can produce productively.

Last question.

I thought Bose might get a mention but it didn't -- what's the status there?

Bose, we continue to make process in the integration.

The integration process of taking over a facility takes about probably 1.5 years before you get to full profitability, and the reason I say that is because the way we get productivity when we take over another factory is we put in our own computer system, we put in our own processes, our own shop work control system, our own manufacturing and all those.

So we continue to put that in.

We took over the facility in September, so we had a pause as they went through their Christmas season or as we went through the holiday season.

So we didn't make any changes to process and improvements in the September quarter.

So we started on those at the beginning of this year.

It takes about 1 year to really implement it, and at that point, we can be at what we call full productivity.

But revenue seems to be good, it's top 10 this year, it's contributing to the underlying core CTG and super happy with the whole relationship with the deal and there's more upside to come because once fully implemented, we'll see the effects of productivity using our system and process.

A good part of that is those are systems and processes that we have in like 100 different factories.

So there's less variability and uncertainty associated with the implementation of those processes.

Your next question comes from the line of Mark Delaney, Goldman Sachs.

I guess, just to move on to Nike, since there had been a lot of questions there already.

I wanted to talk about IEI and that's obviously been doing very well, and not only for the quarter, but the good bookings the company disclosed during the Analyst Day.

Can you just elaborate the long-cycle nature of some of those -- in some of those programs, how much visibility you have in the sustainability of the IEI revenue growth?

And then given that the margins in IEI are still towards the lower end of your targeted range, you sustained these types of IEI sales growth, what does that mean for the margin potential within IEI?

Yes.

I think you should see a very nice linear increase of property margins in IEI over the course of the year.

It will be consistent with the continuous increase in revenue expansion over the year.

The visibility we get is not quite as good as in HRS, but the products' life cycles typically are typically 5-year kind of product life cycles.

They're not a regulated factory, so there's still some flexibility with the customer to do different strategies over time.

But on average, much longer product life cycles and much more visibility than we get with a CEC or a CTG, quite frankly.

If you actually look at the margin profile in the last couple of years, FY' 15 was 3 and FY '16 was 3.4, FY '17 was 3.6.

We started this year at 4.0, so we're in the bottom of the range, and we would expect that progression just to continue on a nice linear basis.

So that's why we really like this segment.

A little bit more visibility, a little bit longer product life cycles.

We have visibility in the strong expansion of revenue.

As that revenue expands, we see strong expansion or a linear expansion in the margin profile.

And we probably have couple more years to run at this kind of run rate and level of improvement.

A follow-up question on automotive.

There's been concern in the broader market about the slowdown in car production levels, in particular in the North America market.

Is Flex seeing any impacts there?

And maybe you can update us about some of the goals that have been driving good growth for Flex previously, like getting on to more models and I think you had a goal to get your content per car to about $134 next year from, I think, [$118] last year?

Yes.

So when we think about our automotive strategy, part of it is driven by the expansion total on automobiles space that's ours.

But keep in mind, we're not doing tires, which is directly correlated to how many cars were on the road, we're actually building technology content in cars and focused on the connectivity aspects, the automation aspects.

So much more of the technology pieces.

So even as the [SAARS] goes down, our revenue can expand.

And you said it well, so I appreciate the comments.

We expect the average vehicle -- we're in about, I think, 41% of the total vehicles for the marketplace, something like that.

We have -- we're in about 500 different models, and the average content per model, as you said, is going to be up about 20% this year.

So we actually expect revenue expansion even in a market where the SAARS may be going flat.

Your next question comes from the line of Jim Suva with Citi.

A lot of the questions had been focused on Nike, which I think is fair given the year-over-year revenue increase yet.

It looks like net income year-over-year is actually declining.

So Chris, maybe if you could confirm, is that the case, and if it's solely attributed to Nike?

And then my follow-up question is: if revenues minus cost equals profits, then you say that profits are still going to be as you exit this year.

Is it the second half of your fiscal year where revenues accelerate with Nike or know your efficiencies with Nike, and the losses get better?

Jim, I'll take that first front-end of the question, and a previous question had been asked as well.

If you isolate the impact from Nike, you will see a Flex earnings growth year-on-year, with the incremental loss that we're observing, we're anticipating on having a operating profit pressure this year.

Also, coupled with increased interest expense and, in fact, is that we're below the line, that adds some other pressure into the overall net income that you'd be anticipating being down.

So it'd be down modestly, and the big driver is the investment cycle as we're absorbing the significant losses as you ramp the Nike initiative.

I think, Jim, we think this year, we'll actually see a revenue increase in the back half of the year, not necessarily from Nike, but from all our different programs.

So we're actually expecting Q3 to be up even a high single-digit kind of number and even -- and have almost no seasonality this year.

So this is something that we haven't seen before.

It's on the back of really, really strong bookings.

Nike is just a part of that, but we're seeing this broad expansion.

And as I mentioned in my prepared remarks, both HRS and IEI are actually accelerating in terms of revenue growth.

And as I mentioned, both, we expect to be over 10% for the year.

So this is something that we probably have more visibility into than we've had in the past.

We are going to start seeing that revenue growth occur just across the board on Flex.

And that's why in the back of Sketch-to-Scale revenues and a lot of the different -- the breadth of bookings that we've been able to achieve.

So Jim, it kind of ties back into the portfolio evolution aspects when you have a greater concentration of those longer product life cycle, more stable businesses.

You're going to have a better line of sight into where those sit.

We're also ramping up multiple new customers, multiple new programs across several of these product categories and industries, which gives us more comfort into this fiscal '18 being the first year in many that we've seen a top line growth reemerge for Flex.

Your next question comes from the line of Matt Sheerin with Stifel.

I just wanted to ask questions on CTG beyond Nike.

I know you're guiding to less seasonality in that business, partly because you've been deselecting some legacy hardware programs.

As you go forward and you focus on more Sketch-to-Scale and more value-add in that business, what should we be thinking about in terms of your relationships on the commodity side with some of your traditionally big customers in that space?

So Matt, maybe you can clarify what you mean by the relationship with the big customers in the space?

Well, no, some of the -- you've done some very high volume, high velocity, businesses and things like with Fitbit for instance and Xbox and smartphones.

And it looks like where there's more seasonality, it looks like you have made the shift there in terms of where you're focusing you're efforts going forward.

Yes.

Some of these -- as we've -- the kind of products that we're not trying to do in the company are those that have very low margin -- very low margin -- we have very low margin expectations, even below CTG levels, which many of these very high-volume products run at.

And they're not only like very, very low margin targets, but in fact, they don't run linear throughout the year, so your ability to plan capital and manage capital on a consistent basis across the year is really, really limited.

So some of these programs are just like massive ramps over Christmas, and they just go to 20% of the volume, come March.

And you've seen some of that seasonality in our CTG business.

And those are the kind of programs that we're really trying to stay away from.

I mean, those kind of programs that are single-focused programs, they're built in China, they've just -- it's all a cost based, competitive position and it only runs at your margin target for like 1 quarter and then it goes away.

So when we think about those things we don't just think about the margin targets like we're talking about here, but we also think about the implications of the balance sheet and the implications of the seasonality of the equipment.

So we're trying to balance all 3 of those things on the ones that were reflected in the margin targets that we'll give you guys.

But those kind of programs and maybe they're with bigger customers, it's probably not the right business mix for us.

We're trying to find programs where we have more value, we have better revenue, we have customers that actually are looking for more of a value-added relationship.

And it also does a lot of other things for us because very often, these other kind of customers provide technologies that are very interesting for us to apply across into the other business segments.

So we're kind of looking for them.

But no -- but the -- but who can build the cheapest in China, but only for 1 quarter is not an attractive customer for us.

Okay.

That's helpful.

And in the -- on the CEC business, your commentary about revenue crossing here in the next quarter or so and beginning to grow again.

It sounds like part of that is due to the cloud infrastructure initiatives.

But beyond that, are you seeing any signs of market coming back particularly in telecom or new programs, that will also help you grow?

Well, we're seeing some new programs, a lot of them are based in the (inaudible) infrastructure, on the back of some of the line technology that we've seen.

But in terms of, do we -- we're seeing -- we expect to see a reasonably -- a reasonable pickup in Q3 in terms of revenue.

But as we mentioned, a drop in Q2.

But overall, do you see this structurally really coming back around?

The answer is probably not yet, where we have a heavy telecom business, and that telecom business is still going to be challenged for another couple of years until 5G comes out.

And so we have to invent or create our own demand.

And we're also trying to create and invent demand, that actually has a large target that's reasonable, that just by the amount of capital -- the amount of working capital that we have to put into it.

So it's -- I don't see anything structurally improving in terms of the overall volume of the business, and we're very, very focused on trying to once again provide value-added technology capabilities that will be good for customers that are thinking about how do we move into the data center and position ourselves as it moves into the cloud.

Your next question comes from the line of Steven Fox with Cross Research.

Just wanted to understand a little bit better the acceleration you're talking about in HRS and IEI.

So on HRS, can you give us a little more color on how much of it is due to auto versus medical and what the drivers are there?

And then on IEI, can you just sort of -- you said -- you mentioned earlier in the call, healthy bookings.

Is that a recent phenomena?

Or is that bookings that you realized, say, a couple of quarters ago that are now ramping?

And is it all energy driven or is there other things in there?

Yes.

So let me take IEI first.

So we kind of view this as a very, very balanced increase in bookings, whether they be lifestyles we mentioned or lighting or energy, all of which are going up pretty nicely.

The only thing that we expect to see a little bit of a downturn this year in that entire group is capital equipment.

So we see semi-conductor equipment run hot for a couple of quarters and really all of last year, and we expect on a year-on-year comp basis -- it will actually still be pretty good.

On a year-over-year comp basis, it will probably be down somewhat.

So -- and a lot of these bookings were actually -- actually occurred towards the end of last fiscal year.

I think about Q4 is when we had a really record bookings, Q4 of FY '17, but they've continued to improve over the course of FY '18.

So mostly, the bookings are over the last 8 months, if you will, is when we really ramped things up, and as result, you'll see a lot of these things starting to hit Q3, Q4, even into Q1.

So we should go into FY '19 with some pretty good strength and continued revenue increase.

But it's very, very broad-based.

As far as automotive, we just have steady strength.

Remember, it's down a little bit, but last year was a record.

I think that's still a pretty healthy number expectation for this year.

But we continue to have global expansion, we continue to have a variety of different technologies, whether it's lighting or connectivity or consoles or infotainment.

We've had very consistent solid bookings across a wide variety of driving the -- we're driving the content average, content per car.

We're in more and more vehicles every year at the same time.

And just good, solid progress across the board.

And in medical, it's a little bit slow this quarter and last quarter in terms of increases, but we have some -- all throughout, some nice bookings that we did mostly like 2 full years ago, quite frankly, that start moving a little bit more positively in Q3 and Q4.

Mostly, the medical bookings is actually at least 2 years out.

So it's easy to make.

Operator, I think, we've run a little bit over here.

And I know it's a super busy earnings day, so I think we're going to end up -- needing to wrap it up now.

I think, Mike, you want to (inaudible)?

Yes, I'll just -- thanks, Kevin.

I'll just add a few comments before I move on -- before we go.

I'm very confident that Flex's Sketch-to-Scale strategy is advancing as planned.

It's interesting when we did the Analyst Day last year, we were at roughly 35% to 40% for FY '20, we now we now expect to be -- we talked about this at Analyst Day, at 40%, and actually seeing even more strength as we go into this year.

So the ability to enter and create new markets is very exciting, and we're very, very focused in expanding our total available market and we continue to invest.

These require some investment and require some hard work and it's going to take time.

I mentioned earlier, we expect to see some revenue growth over the course of this year.

We're seeing a little bit in Q1 and Q2, but it will accelerate in Q3 and Q4.

Our cash flow continues to be very strong, it enables us to successfully position for the future, definitely reinforce our strategic vision.

And we're still very, very focused on the 2020 vision we outlined at Analyst Day.

The fact that we have a few incremental costs associated with some of the Nike ramps that are occurring is -- we wish we didn't have them.

Alternatively, all those come back at the end of the year as we move towards breakeven.

But the underlying core transitions we're making around better a CTG business, around the growth in HRS and IEI and the continuous margin expansion, particularly in IEI, is -- continues to be intact.

So we're still very, very bullish about where we're going for the 2020 target, and we'll look forward to sharing that with you as we move forward.

Thanks, Mike.

And again, I wanted to thank everyone for dialing in.

We know how many other companies are reporting today.

We'll see many of you in conferences and meetings, and this concludes our conference call.

This concludes today's conference call.

You may now disconnect.