Flex Ltd (FLEX) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to the Flex Second Quarter Fiscal Year 2021 Earnings Conference Call. Today's call is being recorded. (Operator Instructions)

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, Rob, and welcome to Flex's Second Quarter Fiscal 2021 Conference Call. Joining me today is our Chief Executive Officer, Revathi Advaithi, and our Chief Financial Officer, Paul Lundstrom. This call is being webcast and recorded, and if you have not already received them, slides for today's presentation are available on the Investor Relations section of our flex.com website.

As a reminder, today's call contains forward-looking statements, which are based on our current expectations and assumptions that are subject to risks and uncertainties, including the impact of the COVID-19 pandemic and actual events or results could differ materially. Also, such information is subject to change and we undertake no obligation to update these forward-looking statements. For a full discussion of the risks and uncertainties, please see our most recent filings with the SEC.

Lastly, this call references non-GAAP financial measures for the current period. The GAAP reconciliations can be found in the appendix slides of today's presentation as well as 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, and thank you for joining us today. I hope you and your families remain well through these challenging times. I want to start off by thanking all of my Flex colleagues for their commitment and perseverance through these unprecedented times. I believe it is often in these toughest situations that we find what we have truly made off. And these past months are an example of that. On behalf of the entire leadership team, our sincere thanks to the global Flex family for all of that -- for all that you have accomplished. Our strong fiscal Q2 results are a testament to your efforts.

Now let's turn to Slide 3. Let me start off with a few highlights on our financial metrics for the quarter. Our revenue was over $5.9 billion, up 16% sequentially and down 1.7% year-over-year. Our adjusted operating margin was strong at 4.1%. This includes continued COVID-19-related costs as well as some lingering demand weakness, partially offset by austerity measures that ended with Q2.

Our adjusted EPS was $0.36, up from $0.31 in Q2 of last year. Our adjusted free cash flow came in at $326 million. I will point out that this is the strongest quarterly adjusted free cash flow in 15 quarters and maintains our objective of 80% adjusted free cash flow conversion.

So moving on to the next slide. We executed really well in fiscal Q2. Taking advantage of improved market dynamics that resulted in sequential improvements in all our end markets. Our Reliability segment grew both sequentially and year-over-year. These results were driven by a continuation of the strength we have seen in Health Solutions as well as stronger-than-anticipated rebound in Automotive after a very difficult Q1.

Despite continued macro challenges in Automotive, we are winning new businesses and expanding our presence in key long-term markets such as autonomous and electrification. For example, this quarter, we launched a collaborative partnership with LeddarTech to combine their sensing platform and our automotive sensor design and manufacturing expertise to deliver an optimized solution to customers working on all levels of autonomy.

Additionally, within our renewables group, our NEXTracker team had some strong wins with this market-leading solution in Australia's largest solar farm in Queensland, and also with Dubai's Mohammed bin Rashid's Solar Park, which happens to be the largest solar park in the Middle East.

In fact, our Reliability segment revenue and profit dollars were both up on a year-over-year basis for the first half of fiscal '21, even with the fiscal Q1 shutdowns and slower recovery in Automotive. These results come from consistent, disciplined execution as well as longer-term purposeful diversification.

Our Agility segment improved revenue sequentially from work and learn from home trends as well as general improvement in consumer spending that remains down year-over-year due to a much slower recovery in emerging markets. We continue to stay disciplined and manage cost and mix, which helped the Agility segment improve profit margin year-over-year and sequentially. In the Agility segment, we remain focused on the right business aligned to our strategy regardless of growth takes a little longer in this environment.

Looking at these results from a higher level, I would say our strategy is working. As we outlined at our Investor Day back in March, our strategy is to migrate towards higher value opportunities. We have reengineered the structural foundation and delivery platforms for the company. We approach our targeted markets with 6 diversified businesses, each with unique vertical offerings and supported by a resilient global supply chain and unified technology backbone. This -- the market strategy enables us to provide domain-specific, sustainable value and drive profitable growth across each of the markets we serve.

We are underway in our multiyear transformation journey. COVID-19 has presented real challenges as well as opportunities. But by remaining steadfast in our strategic approach, I'm confident that we'll continue to overcome these challenges as well as find new creative opportunities that play to our strength.

Our strategy is about changing the way we operate, the value we create and internally building the right growth mindset. This approach is how we move away from the historical fits and starts of the legacy EMS business. Following the strategy, I believe you'll find in the years to come that our company will look much more like diversified manufacturing businesses than traditional EMS. This will happen by changing our mix within segments and by making the right technology and portfolio investments.

Along with our 4 strategic pillars of markets, technology, operations and systems, is our focus on people and culture. Our new values and purpose have been invaluable guides as we have navigated the pandemic and are foundation of the culture we are building.

We are fostering a contemporary and high-performing, inclusive and diverse workplace, and we're ensuring we have the right talent to implement and carry out our strategy. As you have seen over the last few years, we have made it a priority to increase our domain expertise across the company.

As you all know, most recently, Chris Collier stepped down as our CFO. Chris is staying as a senior adviser to work with me on some critical projects we have going on as part of our transformation. Chris has been a fantastic partner for me in the last 1.5 years, both educating me and supporting me in this transformation plan. I want to take this opportunity to thank Chris for his incredible service to this company and his hard work helping with a planned and disciplined CFO transition.

With that, I'm excited to introduce our new CFO, Paul Lundstrom. Paul brings very strong financial experience in manufacturing and industrial sectors as well as international markets to help execute on our strategy. He joined us just about 2 months ago and hit the ground running. And I'm sure you all think he should be an expert on Flex by now. So I'll actually have him handle all of today's Q&A.

Now I'll turn the call over to Paul, who will walk you through our results in more detail. I'll then come back at the end to share some closing remarks. Paul?

All right. I don't remember that part being in the script, but thank you, Revathi. So if you could please turn to Slide 6. Flex revenue was just under $6 billion in the quarter, and that was up 16% quarter-over-quarter and down 2% year-over-year. Although we are pleased that both the Agility and Reliability segments experienced sequential growth, COVID-19-related demand pressures still remain in certain end markets. We'll spend more time detailing those factors later in the call.

Despite a roughly $100 million revenue headwind, adjusted operating income of $247 million was up $20 million compared to last year. Better mix, productivity and austerity measures were tailwinds in the quarter and more than offset COVID-19-related costs. As a result, our adjusted net income was $180 million and our adjusted earnings per share was $0.36, up 16% year-over-year.

Second quarter GAAP net income of $113 million was lower than our adjusted net income due in part to $24 million of stock-based compensation and $14 million in net intangible amortization. In addition, net restructuring and other charges were roughly $30 million. As we move through the balance of fiscal '21, we will proceed with remaining restructuring activities in a measured and prudent way to minimize impacts to our operations. We still expect approximately $100 million of costs between Q2 and Q4.

If you could please turn to Slide 7. Our second quarter adjusted gross profit was -- excuse me, $423 million. And despite more than $100 million of top line pressure, was up year-over-year, with margin rates up 30 basis points to 7.1%.

Since March, our teams have navigated the dynamic demand and production environment exceptionally well. And we are pleased that our global sites operated with minimal production disruptions in the quarter. We did, however, have cost headwinds related to the ongoing pandemic, continued spending on enhanced health and safety, incremental supply chain costs and the underabsorption of labor and overhead were present in the quarter, but declined meaningfully from what we experienced in Q1.

Maybe a comment or two here on G&A. Adjusted SG&A expense decreased 5% year-over-year to $177 million, which was down 10 basis points to 3% of sales. Over the last year, the company has worked diligently to cut expenses and fundamentally reposition the cost structure. Those actions should provide meaningful earnings leverage as we execute on our long-term growth strategy and as volumes return.

So if you add all up, adjusted operating income of $247 million was up 9% in the quarter with a year-on-year margin rate improvement of 40 basis points to a new high of 4.1%.

On Slide 8, Flex Reliability revenue was $2.7 billion in the quarter and snapped back from a soft Q1. Overall, Reliability was up 19% compared to the first quarter and up 6% year-over-year. The main driver of sequential growth for the Reliability segment came from the recovery in our Automotive business, following the prolonged OEM plant closures earlier this year. Although the Q2 rebound was strong compared to Q1, Automotive revenue was still down high single digits year-on-year. So much better than what we saw in Q1, but at least in the near term, we expect Automotive revenue to run below pre-COVID levels.

Health Solutions remain strong with sales up more than 30% year-over-year, driven by continued demand for critical care products and strength in existing diagnostics and patient monitoring programs. Lastly, Industrial was up low single digits compared to the prior year, with strong growth in renewables and power solutions, partially offset by continued pressure in capital equipment.

Turning to profitability. Flex Reliability Solutions generated $179 million of adjusted operating profit and a 6.7% adjusted operating margin. We had some pressure in Automotive, given the softer volumes, but it was a marked improvement from Q1, resulting in nice growth in both profit dollars and margin rate for overall Reliability.

Flex Agility revenue of $3.3 billion was up 14% quarter-over-quarter and down 7% year-over-year. Within Agility, particularly against the backdrop, CEC and Lifestyle were solid, both with revenue up low single digits year-over-year. CEC benefited from critical infrastructure demand from our networking and cloud customers, though enterprise IT spending has not recovered in the current environment.

As I mentioned, Lifestyle revenue was up year-on-year and saw a meaningful recovery compared to Q1 as consumer spending picked up in areas like floor care, small appliances, and high-end audio solutions.

Lastly, Consumer Devices was up sequentially, but on a year-on-year basis, down roughly 30%, primarily driven by continued soft demand in various emerging markets.

Turning to profitability. Flex Agility Solutions generated $88 million of adjusted operating profit and a 2.7% adjusted operating margin. Both CEC and Lifestyle performed well from better sequential volumes. But as I mentioned, we did have some headwinds in Consumer Devices.

Turning to Slide 9 on cash flow. For the quarter, stronger earnings and favorable working capital drove sequential growth in both operating cash flow -- excuse me, sequential growth in operating cash flow. Adjusted free cash flow of $326 million benefited from disciplined CapEx. We remain fundamentally structured to achieve 80% or greater adjusted free cash flow conversion in the coming quarters.

We closed Q2 with inventory of $3.6 billion, which was up 4% sequentially, but down 3% year-over-year and resulted in inventory turns of 6.3x. That's up a full turn from a quarter ago. At this point, many of our supplier constraints and component shortages have abated, but we continue to monitor this landscape closely.

Our net capital expenditures for the quarter totaled $69 million. Our prior year's investments are enabling us to support our current technologies, products and programs, but we certainly won't hesitate to invest in compelling areas of growth as those opportunities arise. We will continue to manage CapEx to be at or below depreciation in the near term while simultaneously funding those core areas of growth.

Now turning to our share repurchase program. I want to give you an update on our thinking in terms of returning capital to shareholders. Our repurchase program has been on pause since March, as we focus instead on preserving our strong cash and liquidity positions during the most volatile periods of the ongoing pandemic. Though we are still faced with an elevated degree of uncertainty in some parts of our business, we believe that visibility has improved enough to resume closer to normal operations, such as rolling back austerity measures and also reinstating share buybacks. Discipline and prudent buybacks are a key feature of our capital allocation strategy, and we will proceed in a measured, thoughtful way as we get back into the market here in Q3 and in Q4.

On Slide 10, we continue to operate with a balanced and flexible capital structure that has staggered debt maturities. With nothing meaningful due in the near term and no maturities that exceed our expected annual adjusted free cash flow. During the quarter, we took advantage of favorable market conditions and issued $575 million of long-term debt in August, which extended our weighted average maturity to almost 6 years, while being leverage-neutral. We used some of these proceeds to further work down the outstanding balance of our ABS program, which at the end of Q2 was negligible. The proceeds were also used to pay off $433 million of term loans due in '22, which had the effect of extending maturity, as I mentioned before.

Our cash and liquidity position remains strong and is further supported by our $1.75 billion undrawn revolver. In short, our flexible capital structure gives us confidence in our ability to meet our current and future business needs while simultaneously, and importantly, remaining investment-grade rated.

On Slide 11, maybe a couple of thoughts on the upcoming quarter. But before we get into the guidance, just a reminder that although we've gained a tremendous amount of experience and knowledge since the beginning of this pandemic, we're still operating in a very dynamic and highly fluid environment. Our first priority, of course, is the safety of our workforce, and we're keeping a close eye on our sites around the world as local conditions change in real time. Our guidance is, therefore, based on our current visibility and information that is available today on expected COVID-19-related impacts to our business.

So let me start with our Flex Agility Solutions segment. I would love to say Agility will be up mid-single digits. But frankly, given the environment, we're going to range it a little winder than that and call it somewhere between low and high single-digit growth quarter-over-quarter.

Both our Lifestyle and CEC businesses should be roughly flat sequentially in Q3. We expect to see sustained demand for products that support remote work and school and critical infrastructure demand should persist along with positioning ahead of 5G ramps.

Lastly, Consumer Devices will continue to rebound quarter-over-quarter as mobile demand and production recovers.

Turning to our Flex Reliability Solutions segment, we expect revenue to be up low to mid-single digits quarter-over-quarter. Third quarter Automotive revenue will be up low to mid-single digits sequentially, but as I mentioned before, remain below pre-COVID levels. All major geographies are recovering, though our assumption remains that overall global Automotive production will be down high teens for the year.

Although we continue to see robust year-on-year growth in Health Solutions, compared to Q2, Health Solutions will be down low to mid-single digits sequentially as we move into Q3. In the back half of the year, we expect to see a roll-off of demand for certain critical care products such as ventilators. Our expectation is that elective procedure demand will recover to offset the slowdown in COVID-related products, though it appears this recovery is still in its very early stages.

Lastly, our Industrial business will be up low to mid-single digits quarter-over-quarter, driven by renewable energy and core industrial, both of which are offset by a customer-specific headwind within power solutions.

Now on Slide 12. Given the sum of all those outlooks, we would expect our quarterly enterprise revenue to be in the range of $6 billion to $6.4 billion. Our adjusted operating income is expected to be in the range of $235 million to $275 million, with operating margin expansion.

COVID-19 costs continue to remain a headwind. And as a reminder, benefits from austerity measures will also be rolling off in the third quarter as we restore full compensation and reinstate our incentive plan for affected employees, among other actions.

Interest and other is estimated to be between $40 million and $45 million. We expect the tax rate in the quarter of between 10% and 15%. And overall, adjusted EPS guidance should be in a range of $0.34 to $0.40 per share based on weighted average shares outstanding of 504 million. Our adjusted EPS guidance excludes the impact of stock-based compensation, net intangible amortization and the impacts from our restructuring and other charges. As a result, we expect a GAAP earnings per share in the range of $0.21 to $0.27.

With that, I'll turn it back over to Revathi.

Thanks, Paul. So as you can see, our fiscal Q2 execution was really strong, and you can also see from Paul's comments that we expect that improvement to continue into fiscal Q3.

So as I think about the second half of the fiscal year, there are a few elements I would like to highlight. Firstly, in Health Solutions, COVID-related episodic and acute care product demand may likely roll off in late Q3. We fully expect elective-related medical products to return with concerns about increasing COVID levels in multiple geographies appear to be slowing that recovery. So we don't expect to see the elective medical market rebound until early in our next fiscal year.

In the other end markets, I also anticipate some catch-up demand could begin to normalize. As I think about Q4, I would anticipate trends roughly in line with typical seasonal declines. While I would certainly like to provide as much visibility as we can, given the continued uncertainty from the pandemic and the geopolitical concerns, we will refrain from providing complete Q4 or full year fiscal '21 guidance at this time.

Now I want to talk about our solar space. There's been a lot of excitement lately around this space. I will say that it's been great to see the opportunity in the solar market being recognized, which is validating our investments and building out our NEXTracker business.

I've also said many times that it is our job to continuously evaluate our portfolio positioning, improving the mix, finding and investing in great opportunities and taking a disciplined approach in finding the right way to monetize each of these businesses to maximize long-term shareholder value.

I'll finish by saying I remain extremely confident that we have the right strategy to reach our longer-term goals and that we will emerge from this global crisis stronger and better positioned for the future. Again, I wanted to say thank you to all our employees for their ongoing commitment, to our customers for their trust and partnership and to our shareholders for your continued support.

(Operator Instructions) Your first question comes from the line of Michael Murray from RBC Capital Markets.

This is Michael Murray on for Robert Muller. So you touched on this in your comments briefly. So a competitor of NEXTracker recently went public and is being valued very highly right now. So with the overall run-up with solar companies, it's pretty apparent that the value isn't being properly reflected in Flex's share price. So first, could you give us a sense of the size and margin profile of NEXTracker? And then just a quick follow-up. Are you considering steps to unlock value of this either with further financial disclosure or a potential spin-off?

Thank you, Michael. We were going -- having bets on whether this would be the first question or not. So let me start by just giving you a little bit of a view on the NEXTracker business itself. I'll start by saying that I have known the -- I've been part of the solar business for a long time from my prior role leading Eaton's electrical business and having played a lot of -- having had a lot of experience with the solar market for more than a decade.

So our NEXTracker business itself is #1 in global market share on solar tracker businesses. And it's been that way for the last 5 years and continues to be that way. Till date, we have installed around 40-plus gigawatt of smart solar trackers for projects across 5 continents. So we're really global in our business here. And not only do we have the tracker product itself, but we have a really fantastic software called TrueCapture, which really focuses on smart monitoring and as a control software platform across the kind of solar field.

And so over the last few years, the NEXTracker business has grown from being a few hundred million in revenue to being north of $1 billion today. And in terms of operating margin, really is in line with industry peers and operates in the double-digit operating margin range. So you can see it's a very strong business, a market share leader, has had a healthy growth profile and really has had fantastic operating margin performance and continues to be so.

I would say that, that we believe strongly in NEXTracker's market-leading technology and have been investing heavily in that business to grow and support that business. But what we don't want to do is to just allow the external noise distract us from continuing to build that business. So we will focus on that for sure.

In terms of monetizing and unlocking value, we -- you have seen in the last couple of years that we haven't hesitated to take portfolio decisions whenever we needed to. And I think that's been my track record and also Paul's track record on how we have managed businesses. So our job is to continuously manage our portfolio. We'll work the mix. We also will make sure that we're finding and investing in new opportunities. And also, we'll find the best ways to monetize assets that we think will provide the maximum long-term shareholder value, and we're very committed to doing that.

I want to step back and just quickly tell you that we've been here on this journey only for 2 years. And in that 2 years, we've got a lot done. We've had disciplined execution, we've managed our portfolio, we have reoriented our segments to drive organic growth and we're in a fantastic position today to really look at how do we manage to monetize assets we need to, but also how do we invest long term in our portfolio where we need to drive growth. So it's a good high-class problem to have and we're excited with our position in that.

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

I was wondering if you can give a little bit more detail in terms of you said you're making investments to grow the business. Is this a capital-intensive business? Can you give us any sense of the debt on the balance sheet of NEXTracker? And what type of CapEx is required to grow that over the next couple of years?

Yes. Ruplu, I'm not going to go a whole lot beyond what I already said, which is in terms of revenue and margin performance. I would say in terms of what's needed to grow solar businesses in general and the capital intensity of the business, I think you can read that from any industry reports. In general, it's an asset-light business, but I think there's enough industry reports on tracker businesses itself. And I would say we're very much in line with that.

Okay. And then you've been pruning the portfolio in the other side of the business on the CTG -- the former CTG and the CEC and now in the Agility Solutions part of the business. Is that pruning done? Or is there still more pruning to be done on that side of the business?

So Ruplu, I've said this before is that our 6 segments have been clearly defined and set up, including the 3 within Agility. And how we -- our 6 business units and how we think about our Agility businesses. Within the portfolio, we'll always be looking to improve our mix, right, to go to higher-value customers and manage customers where we don't think there's long-term value for us and the customer. And that's how we are managing it. I've said that I don't see any large-scale pruning left to do, but managing within that is always our job. I think you'll all expect us to do that constantly.

Right. And just for my last question, if you can just clarify this. So from a strategy standpoint, are we hearing correctly that from a product portfolio standpoint, you would be open to looking at both assets in the Reliability Solutions segment as well as Agility Solutions segment to unlock shareholder value? So if it makes sense to divest those assets, you would be open to doing that, I mean, depending upon how things go? So from a strategy standpoint, is that the correct way to look at it?

From a strategy standpoint, Ruplu, I think I made it clear in my comments I said before is that if we need to monetize assets and they have a better value somewhere else, we'll always be open to doing that. But I've also said that from a long-term shareholder value perspective, we're also focused on investing in our Reliability business, within health care and Automotive and Industrial because we think that long term, the best value for our shareholders comes from investing in those businesses and driving growth and profitability in those businesses. So you have to look at the strategy holistically, I think they are both parts of that to execute on.

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

Congratulations on the strong results. I was hoping to start with a question also on NEXTracker. And Revathi, you mentioned looking to be open to best monetize and create shareholder value. Can you give us any more details about how Flex plans to measure or gauge whether or not you think Flex is receiving fair value for the NEXTracker business?

Yes, I'd say -- Mark, how I would say is that we feel that NEXTracker is a great asset and how we are managing and how we are growing that business within our portfolio. And I think in terms of the value of each of our businesses, not just NEXTracker because we have other fantastic businesses within our portfolio, will be measured based on independent businesses that exist in their space and the valuation that's assigned for those businesses.

So I think that's the only big picture answer I can give you, Mark. But I just want to make sure I go back to the question of that we have many assets that we think are great assets. We're really pleased that people are recognizing that there is power to those assets and that our valuation should reflect those assets. So we're super excited about that. And there will be assets that we'll monetize, but there will also be other places that we'll invest and that's how we should think about the story.

No, that's really helpful and thanks for all the other comments you made on that business. I think it's helpful for investors.

My second question, I wanted to touch on your comments about seasonality in fiscal 4Q. And when I look back historically, the range has been approximately down 5% to down about 15% quarter-on-quarter. Is that what you're alluding to when you're talking about seasonality? And I do have to clarify just because as the company has been evolving its mix with businesses, there's been a bit less consumer exposure, which -- that's one of the businesses in particular that has historically created that seasonality in the March quarter. So I'm curious, is that the historical numbers? Is that the right way to be thinking about it? Or is there some sort of new seasonality we should have in mind for the March quarter?

Yes, Mark, this is Paul. I do think that's the right way to think about it. I think over the last several quarters, the company has done some pruning that, in theory, down the road should have an effect on seasonality. But If you go back in time and you just look at the history, it's been a 10%, 11%, 12% sort of a sequential decline from seasonality as we've moved from our fiscal Q3 into the fiscal Q4. And I don't think you'll see a significant change to that as we move ahead into this upcoming fiscal Q4. There's a lot of moving pieces with this, as you can imagine. The comps are interesting as you come into the year-on-years in Q4. But given the snapback effect and what may or may not happen in health care, we certainly are expecting some quarter-on-quarter top line contraction as we move into Q4.

And Mark, the only thing I'll add is that, yes, we've definitely reduced the seasonality effects in Q4 from what we've historically had, just because of how our mix has shifted. So there's definitely some improvement because of that. But we do think that there will be some seasonality because it's post-holiday season and things like that. And also that COVID really adds some confusion to all the story in terms of how we see these quarters play out also. So there is, I think, some predictability issues because of that.

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

I wanted to ask about your -- the datacom part of the Agility Solutions business, the telecom, the cloud business, which seems to still have some fairly good traction. And then also the infrastructure products, the networking servers, storage, where we are seeing weakness and continued weakness in on-prem. Are you seeing any signs from your customers that they're expecting a turnaround at all in that business anytime soon?

Yes. I think what we have said is that we're not seeing an immediate turnaround in that business, and that's what we reflected in our -- even in our script. And I think we're hearing that consistently from our customers, too. So I think our overall view is that we see critical infrastructure investments continuing. We see that, that will be reflected in cloud. But we do see that enterprise spending will continue to be weak in this space. And that's kind of how we think overall our CEC business will operate.

Yes. I'll just pile on that a little bit. I can't imagine there's many CFOs out there who are wanting to invest heavy in enterprise right now, given the pandemic. So that will probably, like Revathi said, continue to be a bit soft.

I also have read some external stuff about cloud that is saying that maybe there's a little bit of digestion coming into the calendar year Q4 that might be a bit of a watch item. But as we mentioned in the prepared remarks, we are expecting about flat CEC moving from Q2 to Q3.

Yes.

Okay. Great. That's helpful. And then, Paul, just a question on the OpEx line. You did talk about some of the austerity measures going away. So I guess, there's some expenses coming back. So what should we be thinking about SG&A over the next quarter or 2?

Yes. So SG&A, you look back 6, 8 months ago, I think we had talked about 3% to 3.2% or something like that. That's kind of how I would be thinking about it if I were you, as we move forward. There is going to be a little pressure, as you alluded to. Austerity measures are rolling back, and we continue to have COVID costs. COVID -- I think, all the questions have been on NEXTracker. But the COVID is going to be -- continue to be a headwind for us in Q3 and in Q4. So maybe a little bit of pressure there.

If I kind of think about the walk, op margin walk just from Q3 to Q4, volume is not significant quarter-to-quarter, up maybe $200 million, and I don't see a whole lot of drop-through on that. COVID is probably neutral from quarter-to-quarter, but we do have headwind from austerity measures, maybe a little bit of tailwind from other productivity. But look, we're going to continue to be disciplined as we've said before and do our best to keep the controllables in the box.

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

First off, any sort of puts or takes that you can think of that might arise from the composition of the next Congress and presidency post the elections, for instance, if it's a greenish tinge to an infrastructure spend. Is that good or bad for you?

Yes. I'd say 2 things. One is, I'll first start with trade, even though your question was on green, Paul. I'll say that on trade, we expect that the overall kind of -- based on whether President Trump continues or we have a new government, we think the focus on China continues to some extent. We believe that the focus on regionalization will continue to be a conversation across our customer base just to derisk whether it is due to geopolitical issues or whether it's related to health pandemic issues.

We think the green investment is a plus for us. We have a fairly large energy business that will benefit from that. So we're bullish in terms of the investments that have been outlaid in terms of the green energy program. And if that pans out, we view that as a plus.

Got you. And then unfortunately, I do have a NEXTracker couple of quick questions. Can you give us any sense of how much higher than the $1 billion you're at in terms of revenues there?

And then, Revathi, you mentioned twice long-term shareholder value. And of course, we all applaud that. And -- but in this particular case, even if you're creating synergies and adding value in the running of that business, you just can't get that kind of valuation whilst it's inside a larger company. So it feels like short term and long term are basically kind of dental here that you have to kind of go with where the market valuation is telling you to place the asset.

Yes. Paul, maybe you missed the first part of our comments. We did say that the business size in terms of revenue is a little north of $1 billion. And the operating margin is in line with industry peers in terms of double-digit operating margin.

In terms of the comments itself, I think I made a holistic comment that we will look at ways that we can identify and monetize any opportunities we think that is better valued externally than internally if that needs to be the case. But our goal and focus, obviously, is to create long-term shareholder value. So in terms of monetizing assets, investing in assets, they all go into the picture in terms of how we make these decisions. And that's how long-term shareholder value is an important scene for us and our long-term shareholders. They've been very clear about that also. So you have to think about both sides of this equation.

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

A couple of questions on the Reliability Solutions business. The margins under the new structure, the best you've had in the 6 quarters we're looking at. The incremental margins are 12% year-over-year, 15% quarter-over-quarter. So can you just sort of explain how much of that improvement is mix versus just natural operating leverage versus better costs?

And then secondly, on the Auto piece of the business, you're saying that it's going to be down year-over-year for the rest of this year -- fiscal year, I guess. What are the external factors on that? I mean is it just because of global production or is there any customer-specific, geographic, model-specific things going on there?

Yes. Thanks, Steven. So in terms of liability margin, I'd say it's a combination of things. One is obviously, the Health Solutions business having a strong performance in the quarter with all the kind of work we've done for COVID-related work definitely helps in terms of improving the overall business performance. I'd say Industrial was pretty much in line with what we have typically seen from the Industrial businesses. And Automotive, while it had a good snapback from Q1, is still down year-over-year basis, right? So -- and so, I'd say if I think about all of that holistically and we had kind of the mixes of COVID costs and our austerity benefits that somewhat narrow off each other, but provide some upside to make the margin performance for that business pretty strong.

So I would say that good performance overall, we're running the business in a more disciplined way. That's a huge plus. We have got benefits from COVID upside, that helps. We have Auto recovering, which was a plus. And how we're managing that recovery is really good. And Industrial is kind of performing as we expected to. So I think good performance across the board and a combination of factors of growth and productivity.

In terms of Auto being down year-over-year, whether we like IHS or not, that's kind of the best indicator there, that's of where the market is going. They're calling Auto right now at 18% year-over-year down. We think we're actually going to be better than that. And the reason we'll be better than that is just because of the underlying trends of where we participate in the Auto business where we have more in things like electrification and in connectivity and electronics components, which provides a higher value per car really helps us better than the overall IHS numbers.

So we think we'll be better than the minus 18%, but the underlying trends are down, and we're going to be better than that, is our view on it.

Your next question comes from the line of Tim Yang from Citi.

This is Tim Yang calling on behalf of Jim Suva. A follow-up question on Automotive. I think you've guided December quarter Automotive to be up low to mid-single digits. I think this is below auto production growth forecast from IHS of up roughly 9% to 10% sequentially for the quarter. So maybe can you just elaborate about like why your sequential growth is a little bit below auto production for the quarter? Is it more like an inventory or customer-specific issues or something else?

So Tim, do me a favor, will you? Could you repeat the first part of that question?

So your December quarter guidance for Automotive is up like low to mid-single digits quarter-over-quarter. And then I think for the auto production forecast for December quarter from third-party agencies, I think they are forecasting 9% to 10%. So can you maybe just address on why your sequential growth is a little bit below the forecast?

Yes, sure. So let me take that. And so you got to look back to where we were coming from. So you go back to Q1. I mean we had troughed like we hadn't troughed in a long time. I mean Automotive year-on-year was down, call it, 50% or so. That snapped back significantly in Q2. And as you probably heard in our prepared remarks, we were up high single digits in Automotive.

Looking ahead to Q3, now this is -- I'm pivoting to a sequential basis, saying we'll probably up -- be somewhere between low to mid-single digits sequentially. So continued recovery, but that is still down. To Revathi's point on the prior question from Steven, look, IHS, whether you like it or not, continue to project down Automotive rates below pre-COVID levels and down high teens year-on-year.

So if we can print a mid-single-digit -- high single-digit down year-on-year performance like we did in Q2, to me, that would be a win. And it would be a win for the reasons that Revathi mentioned. We're growing other parts, think of it share of wallet, if you will, areas like autonomy, electrification, connectivity, those are all great and in our space. And as that share of wallet grows, we should outperform overall Automotive.

And I think from a sequential perspective, Tim, the way I'd think about it is that we could be more conservative for sure. And one of the reasons could be that we're trying to manage kind of the timing of orders, supply constraints and things like that, that we're trying to manage for the Automotive business because it's had a pretty big snapback from where it was.

So I think you could say that could be the difference between where we're at and what you are saying the projection is that of 9% to 10%. But if supply constraints are better and we're able to get all our shipments out, it could be better than what we have in here.

Got it. This is very helpful. In the past, I think Flex benefited from the major gaming console ramping in holiday season. Would that be the case for Flex this year or your exposure to that and the market has actually changed?

No, I really don't even know what our exposure to that is. So I'm assuming it's not that big. So it's not significant for us.

Your next question comes from the line of Shannon Cross from Cross Research.

Revathi, you did well across the board to a large extent this quarter. But I'm wondering what areas had sort of the most outperformance or surprised you relative to where you were forecasting for the quarter? I don't know maybe Auto, but I'm curious as to sort of where you saw the most upside. And then perhaps where you see the most upside in the current quarter that we're in? And then I have a follow-up for Paul.

Yes. Thanks, Shannon. Yes, we did do well kind of across the board on all metrics. And you nailed the most important one that was much better than what we expected, which was Automotive. But frankly, we had upside in quite a few segments. Our Lifestyle business performed very well, and that came from continued strength in appliance and floor care. And that was pretty strong. So that was a positive from where we thought things were. We had already mentioned that we expected CEC to be strong because of the infrastructure investments and we were able to make a lot of those shipments. So that definitely helped us.

I would say on the -- Consumer Devices did rebound from a low, but it was lesser than what we expected because of emerging markets being slower. So that's kind of how overall Q2 played out. So -- and then I would say, looking forward, what we're hoping for from an opportunity standpoint is that Automotive will continue the snapback, like I talked about, if we can manage the supply constraints. But Shannon, at the same time, with all the noise around COVID in Europe and continued shutdowns happening across the world, we're kind of watching that very closely also. So those things could swing things pretty quickly.

Yes, I think that's a good caution.

Yes.

Great. And then Paul, granted you've only been there a few weeks, but I'm just curious where you're seeing perhaps the most opportunity as you sort of balance what you -- you've seen in the last few weeks with what you did at Aerojet -- I can even say it, Aerojet Rocketdyne. Sorry.

Sure. So if there were to be one observation that I would have, it would be this. And this is based on going through a number of different factories either in-person or virtually. Incredible amount of capability with the company. I mean we make highly engineered products, just ridiculously small, highly engineered products at incredible rate. And our ability to sort of pick up operations and move them from one part of the globe to another is just incredible.

So I guess, the one surprise for me maybe would just be margin rates. Given the capability scale of the company, it's -- I'm a little surprised that in some cases, we run at low single-digit margin rates. And so that would be sort of my first observation. And my question would be, how much is that -- how much of that is blocking and tackling, disciplined stuff? How much of that is just sort of consistent with the EMS industry? And is there room to grow?

But I think where Revathi and I have been completely aligned since this process, start of the summer, is focusing on disciplined execution, how can we get the margins up? How do we change the overall mix of portfolio, to change the profile of the business into a more predictable, higher earning company. And that's to, Shannon, answer your question, that's going to be my focus over the next several quarters, years.

And your final question comes from the line of Christian Schwab from Craig-Hallum.

Congratulations, guys, on a great quarter in this environment. My question had to do within the prepared comments. We talked about all of the changes and product repositioning that we're doing and thought of yourself more of like a diversified manufacturing business, not an EMS business. And I assume that's because you think the multiple that you historically have gotten is too low. And I'm wondering if you could give us an idea of some of the companies that you have in mind that you think your business is more similar to than just be considered a contract manufacturer.

Yes, Christian, thanks for that question. Yes, so i think you have to think about our business in 2 parts, right? And the reason we have gone to this 2-business-segment model, which is the Reliability and the Agility segment would be because the Agility segment functions more like the traditional EMS business or the traditional contract manufacturing business.

And then at the same time, when you think about the Reliability business, which is in high-value businesses like Health Solutions and Automotive and Industrial, that really functions like any of the diversified industrials functions, right? A lot of technology investments, long customer affinity cycles, very difficult manufacturing processes.

So I would say that for the Reliability business, we definitely feel that our multiple should be a lot higher than what we're getting assigned. So that is how I think about it. And I would put it in, obviously, if I'm selling the story, which I am, Christian, and thanks for this question, I'd say that what Reliability should get assigned is a diversified industrial multiple. And you should be able to pick any of them and say, you look at that group of companies and you should be able to assign that multiple for Reliability business.

And I think Agility gets the traditional EMS multiple, but as we continue to move that business in terms of how we run it and how we manage it, that will shift. But that's the -- how I look at the 2 parts.

20x EBITDA sounds pretty good to me, Christian.

So here, as I wrap up, I'll just say thank you all for joining us today. And even though these are unprecedented times, I'm sure this quarter gives you a tremendous amount of confidence in the future of Flex, and it gives us too. And I wish that all of you just remain safe and in great health, and we look forward to talking to you again next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.