Flex Ltd (FLEX) 2020 Q2 法說會逐字稿

Good afternoon, and welcome to the Flex Second Quarter Fiscal Year 2020 Earnings Conference Call.

Today's call is being recorded.

(Operator Instructions)

Slides for today's discussion are available on the Investor Relations section of the flex.com website.

As a reminder, today's call contains forward-looking statements based on current expectations and assumptions, and these statements are subject to risks and uncertainties that could cause actual results to materially differ.

Such information is subject to change, and the company undertakes no obligation to update these forward-looking statements.

For a discussion of the risks and uncertainties, see Flex's most recent filings with the SEC, including current annual and quarterly reports.

If this call references non-GAAP financial measures for the current period, those measures can be found in the appendix slides.

Otherwise, they are located on the Investor Relations section of the Flex website along with the required reconciliations.

With us on today's call are Revathi Advaithi, Chief Executive Officer, and Chris Collier, Chief Financial Officer.

After the speakers' remarks, there will be a question-and-answer session.

I will now turn the call over to Revathi Advaithi, Chief Executive Officer.

Please go ahead.

Thank you.

Good afternoon everyone and thank you for joining us on the call today.

So we reached the midpoint of our fiscal year and I'm really excited to share the progress for second quarter and talk about how we move forward.

While I reflect on the last 6 months, you know, we set about a journey to shift our portfolio mix while improving margins and delivering appropriate levels of adjusted free cash flow.

I'm really happy that our results this quarter are showing that this can be done.

Our second quarter performance, like Q1, is another step in the right direction.

Of course, I want to start off by thanking our nearly 200,000 Flex employees who have worked really hard and further built on the legacy of this great company.

So I want to thank the Flex team.

Let's start with Slide 3. This has been a very dynamic and exciting period for Flex and we've done a lot of transformational activities that we've been managing through.

What I'm really pleased is that this has been capped off with a really strong financial performance.

So let me talk you through the financial metrics.

We achieved revenue of $6.1 billion and this reflects our underlying mix change strategy and displays growth in core areas like industrial and energy.

We realized an adjusted operating margin of 3.7%, showing significant gains in our conversion and benefits of our portfolio mix.

We delivered adjusted EPS of $0.31 and this is right where we committed.

And our adjusted free cash flow generation of $187 million, resulting in an adjusted free cash flow conversion that's returning to historical performance levels, and where we are targeting to operate our business.

So let's go to Slide 4. We've done a lot this quarter, building on what we started in first quarter.

Firstly, our teams have done an exceptional job executing on our mix strategy, as we've been reducing exposure in India and China, and reaching an amicable settlement with Huawei.

At the same time, we've focused on our core growth segments and getting back to enhancing our sustainable, disciplined execution efforts.

We've had many new business wins this past quarter and there are a few wins in particular that highlight our technology leadership and global capabilities, and I want to share some of those with you right now.

So the first example is one of a design led win in our CEC space, where we designed and manufactured a storage media solution that transfers, stores, and catalogs media within the datacenter.

This solution is one of several design led wins we have with this customer and is going to be deployed across the customer's datacenter network.

We continue to increase our geographic penetration with significant design-led wins in Europe and China, and that expands our position in autonomous and electrification outside of North America.

And in addition, our communications and connectivity knowhow have led to a new major win in the automotive space for an integrated connectivity module for a major North American automotive manufacturer.

And then in our health solutions area, we continue to secure many design led wins in point-of-care diagnostics and drug delivery.

We solidified our lead in the diabetes market with a significant continuous glucose monitoring device win.

Additionally, we are encouraged in the increases in customer outsourcing we are seeing that reinforce a market trend that really bodes well for us in this space.

But in all these examples, we're leveraging our deep experience across design and manufacturing capabilities, along with our strong customer collaboration to provide meaningful solutions to their manufacturing and design challenges.

So in April, 6 months ago, when I first talked to all of you, we committed to doing 4 things -- managing our mix, driving disciplined execution, winning more design led businesses, and consistently driving free cash flow.

Now, the reason we chose those 4 areas was because it was clear that growth is not the challenge in our industry but delivering incremental margin with EPS growth and the right levels of free cash flow typically has been.

And doing so consistently really matters.

So our performance this period across these 4 elements really demonstrates that we're executing our work is paying off.

Now, combining these 4 priorities with the right type of profitable growth will be the powerful story as we move forward.

We believe this disciplined approach that we have created will create a lot of positive momentum for Flex and will drive shareholder value.

So I want to take a few minutes to share with you some thoughts on our strategy going forward.

You know, we've talked a lot about optimizing our mix and improving our execution, and we have accomplished a lot in these areas and we'll continue to refine and optimize.

Customers are telling us that we have outpaced the industry in technology innovation, particularly in health solutions and automotive, and our energy and power sector, as well as 4G and 5G.

So technology leadership is very important and we plan to maintain our leadership position.

Our goal is to ensure that our commercial plans in the segments focus on driving growth in technology to win the right type of business.

And operationally, we'll simplify and optimize our factories to the high-scale efficient, agile model, or the high mix, lower volume, longer life cycle model.

The great news is that we know how to do this really well and we have a pedigree like none other to meet these demands.

Our plan moving forward is to run end-to-end business segments with emphasis on differentiated engineering and operations manufacturing service models, which are tailored to meet individual customer needs.

Of course, the core of our strategy has always been enthusiastic and passionate Flex culture that makes all of this possible.

I'm very excited about this path that we're talking and we're looking forward to hosting an Investor and Analyst Day in fiscal year '20 Q4, where we'll further expand on our approach.

I'm really pleased with our performance this quarter.

We have taken another big step in the right direction and our plan is working.

I'd like to turn the call over to Chris who will walk you through our financial results in more detail, and then I'll come back with some closing remarks.

Chris?

Thank you, Revathi.

Please turn to Slide 6 for our second quarter income statement summary.

Our second quarter revenue was $6.1 billion, down 9% versus a year ago and at the low-end of our guidance range.

Our Q2 adjusted operating income was $227 million, which was within our guidance range and up 2% year-over-year.

Our adjusted net income was $158 million, resulting in an adjusted earnings per share of $0.31, which was at the midpoint of our guidance range and up 7% year-over-year.

Second quarter GAAP net loss was $117 million and was lower than our adjusted net income, primarily due to $19 million of stock-based compensation, $14 million in net intangible amortization, and $226 million in net restructuring and other charges, as we accelerated our strategic decision to reduce exposure to highly volatile products in China and India, and we undertook targeted actions to reduce, streamline, and align our operating cost structures.

We had previously guided to a range of $145 million to $265 million for these charges, the bulk of which we incurred in our second quarter.

Now, please turn to Slide 7 for our quarterly financial highlights.

This quarter, while our adjusted gross profit was down 5% year-over-year to $414 million, our adjusted gross margin improved a healthy 30 basis points year-over-year to 6.8%, reflecting our improving mix of business and benefiting from operational efficiencies.

We continue to manage the enterprise with a strong cost discipline.

Our second quarter adjusted SG&A expense declined 11% year-over-year to $186 million, even as we further invest and reposition spending to support and extend our design and engineering capabilities.

Our SG&A as a percentage of revenue is expected to remain in the 3% to 3.2% range, thereby providing sustainable operating leverage.

The combined impact of our improving business mix, operational execution., and strong cost discipline translates into improving operating margin and profitability.

Our quarterly adjusted operating income was $227 million, which was up 2% from the prior year.

Our year-over-year operating margin expanded by 30 basis points to 3.7%, which reflects our fifth straight quarter of year-over-year margin expansion.

Please turn to Slide 8 for our second quarter business group performance.

During the quarter, our revenue reflected expected pressure from our restructuring actions, as we proactively reduced our high volatility, short cycle, low margin business, as well as weakness in certain end markets.

Revenues for high reliability solutions, industrial and emerging industries, and the consumer technology group met or exceeded our prior guidance.

HRS revenue was $1.2 billion, declining 2% year-over-year.

Health solutions was down 5% as it experienced minor timing push outs or weaker than forecasted demand for a small subset of products, which combined resulted in a temporary slowdown this quarter.

Auto was up 1% as it continues to ramp new business across its portfolio and navigates a slower growth environment.

Our IEI Group grew revenue 14% year-over-year to $1.8 billion and benefited from strong performances from home and lifestyle and energy customers in programs, even as semicap equipment remains muted.

CTG declined 21% from the prior year to $1.4 billion, reflecting anticipated revenue reduction as we lessen our exposure to high volatility and low margin short cycle businesses.

We've made good progress on our repositioning and anticipate that these activities will lessen as we complete the targeted portfolio rationalization by the end of this fiscal year.

Lastly, CEC revenue declined 19% year-over-year to $1.7 billion, as a result of reduced demand with certain telecom and networking customers, and the impact from our Huawei settlement.

The underperformance was broad and encompassed some of our largest customers.

Reduction in our customers' forecasts is consistent with the indicators we are seeing from the market and signaling a near-term slowing of telecom CapEx.

Turning to profitability.

We were pleased to deliver 3.7% adjusted operating margin in the quarter, even on the lighter than expected revenue.

Profitability of HRS was solid and resulted in a 7% adjusted operating margin, reflecting our conscious decision to accelerate investment into the ramp of our largest ever health solutions program, which should bring an uplift to both revenue and operating profits as it moves into full-scale production in fiscal 2021.

IEI continued to benefit from strong operational leverage and from ramping programs with greater design and engineering content, which resulted in a record adjusted operating profit and a very strong 6.2% adjusted operating margin for the quarter.

CEC's 1.8% and CTG's 1.9% adjusted operating margins remain pressured, as we transition our portfolio and reposition our operating structure.

We want to reiterate that enterprise margin expansion remains the cornerstone of our strategy and we are driving commercial discipline and operational efficiencies in order to deliver profitability.

Turning to Slide 9, let us review our cash flow generation highlights.

Our second quarter performance displayed solid cash flow execution, consistent with our expectation to return to positive adjusted free cash flow generation in fiscal 2020.

We continue to operate with disciplined net working capital, which remains inside our targeted range of 6% to 8% of revenue.

We are confident in our ability to manage the business within this range.

In particular, inventory management remains an area focus and one where we believe we can further optimize.

This quarter, we ended with $3.7 million, or 60 days' worth of inventory, down 16% or 2 days year-over-year.

We expect to further improve our inventory management as we continue to drive better demand planning activities across the enterprise.

Our net capital expenditure totaled $95 million for the quarter, its lowest level in over 3 years, and was lower than our depreciation for the quarter.

We were operating at well (inaudible) our global infrastructure and benefiting from prior years investments that are now supporting new technologies, products, and programs.

Another strength of our global system is our ability to redeploy installed capacity where it is needed, among different sites and businesses, which enables us to optimally leverage existing assets.

Taken together, these factors contributed to decrease capital expenditures for the quarter, even while we continue to invest in the CapEx necessary to support our higher-margin, long lifecycle programs in our IEI and HRS businesses.

We remain confident that we have sufficiently invested to support the profitable long-term growth.

As we entered the second half of fiscal 2020, we expect that our CapEx will continue to closely align with our annual depreciation level, thereby benefiting adjusted free cash flow.

This quarter, we generated $187 million in adjusted free cash flow.

Our adjusted free cash flow generation for the last 12 months is $548 million and results in an adjusted free cash flow conversion of 89%.

We continue to make progress to operate with discipline and strive to generate free cash flow conversion in line with historical levels.

Lastly, we remain focused on delivering shareholder return, as we repurchase roughly 6 million shares for $60 million during the quarter, and we have repurchased $241 million over the last 12 months.

Please turn to Slide 10 for our third quarter guidance.

Revenue is expected to be in the range of $6 billion to $6.3 billion and reflects the impacts of our targeted actions to reduce our high volatility, short cycle, low margin business, and continued weakness in certain end markets.

HRS revenue is expected to be flat to up low single-digits, as we anticipate modest auto demand expansion due to ramping new programs, coupled with a stable demand in our health solutions business.

We expect ongoing strength in IEI with 10% to 15% growth as we continue to ramp business in home and lifestyle and energy.

CEC's revenue is expected to be down 20% to 25%, reflecting the distinct reductions in customer demand, continued softness in end market demand in our telecom and networking offerings, on top of a difficult year-over-year comparison as we had a peak third quarter last year.

And for CTG, we expect revenue to be down 25% to 30%, reflecting the targeted reductions of highly volatile products due to distinct actions, resulting from the pruning of our consumer portfolio.

Our adjusted operating income is expected to be in the range of $230 million to $255 million, which reflects continued adjusted operating margin expansion.

Interest and other expense is estimated to be in the range of $45 million to $50 million.

We expect our tax rate in the quarter to remain in the mid-range of 10% to 15%.

Adjusted EPS guidance is for a range of $0.32 to $0.36 per share based on weighted average shares outstanding of 512 million.

Our adjusted EPS guidance excludes the impact of stock-based compensation expense, net intangible amortization, and the impacts from restructuring and other charges.

We have completed the bulk of our targeted restructuring and other actions, as we have swiftly moved to align our operating costs.

We expect that we will incur the remaining estimated charges over the remaining quarters.

As a result, we expect a GAAP earnings-per-share in the range of $0.21 to $0.25.

With that, let me turn it back over to Revathi for some closing comments before we open the call for Q&A.

Thank you, Chris.

We had communicated an EPS range of $1.20 to $1.30 in April and we remain comfortable with that range.

Our teams are really focused on meeting our commitments and we have taken thoughtful but swift actions on our portfolio that have put us on a path to improving operating margins.

We have demonstrated strong free cash flow conversion.

Our 4 focus areas have helped stabilize our performance and this enables us to really expand our efforts around disciplined growth going forward.

I would now like to have the operator open the line for questions.

(Operator Instructions) The first question comes from the line of Mark Delaney from Goldman Sachs.

Nice job on the free cash flow and margin expansion that the company reported today.

I was hoping to just better understand the situation that the company is seeing in China.

And maybe from a couple different dimensions.

You talked about winding down the business with Huawei.

I understand it was in the P&L guidance already, but if you could just talk a bit more about where Flex stands with that.

And more broadly, there's been some press reports about the potential difficulty of certain U.S. companies doing business in China as part of the trade war.

I know it's still an important region for Flex long-term.

Can you talk about any more challenging conditions that Flex may or may not be seeing in the China region?

Mark, thank you for the question and thanks for the comments on our cash flow and margin expansion.

We really do believe our work around execution is paying off and you'll continue to see that progress moving forward.

Now on China and Huawei, Mark, let me start with Huawei.

As I said in my prepared remarks, we really reached a settlement with Huawei and have put that situation behind us right now.

And in terms of overall China, we still have a very strong position in China and our teams have done a really good job of stabilizing our situation with Huawei, but really focusing across the board in terms of growing the rest of our business.

So our footprint is still strong.

We have a significant presence in the region and we feel fairly comfortable that we're in a strong position moving forward.

now, in terms of overall supply chain and what happens with trade conflicts, we're well positioned with our customers to go wherever they want us to go in the world.

And we are following our customers as they see fit in terms of moving supply chain.

But our position in China remains strong.

We're in a great position right now after going through the actions we did.

And we're fairly bullish in terms of continuing to building our presence there and moving forward.

So we really feel good about where we are with China right now.

Helpful.

My follow-up question is on the HRS segment.

Auto has been a headwind.

I think the company has been benefiting from some product cycles and guiding all of HRS up flat to up 5. Maybe just talk about some of the puts and takes to HRS revenue growth and the potential for that revenue growth to be able to pick up back towards what have been historically business that the company has been able to grow high single or even double-digits.

And you talked about some good backlog and some program wins in medical and auto.

So maybe just kind of help us understand what's the timeframe that we should be thinking about for improved growth within HRS.

Thank you.

Thanks, Mark.

We feel very bullish about our HRS segment, both in automotive and in health solutions.

And we have talked in the past about the strong bookings we have in both the segments of automotive and health solutions, and particularly kind of in very forward-looking spaces like autonomous and electrification on the automotive side.

So the automotive sector, as all of you know, has faced some market challenges.

And we have seen the effect of it.

But the fact that we are kind of returning to growth in that segment really shows that our bookings is paying off and we're gaining market share as we are driving for growth.

Structurally, we're well positioned both in electrification and autonomous.

And so we really feel strongly about that, that we will continue to see growth.

And we'll track with market in terms of any market issues, but our bookings will reflect share growth in the area.

In terms of health solutions, we saw a quarter that we had some puts and takes, particularly with some program brands and some customer move outs.

But the numbers are really small.

At the end of the day, it's $20 million if it's a 5% decline in health solutions.

And we made a real conscious decision there to ramp up some very large programs that we have because we could do that.

This quarter afforded us the cushion to be able to ramp these programs and customers wanted to see us do that.

So we feel very good about where we're pushing for ramping of both automotive and health solutions in terms of new bookings.

And overall, I expect HRS to return to growth, one, as the automotive sector starts to upswing, we'll see the effects of that.

But our bookings in medical and automotive should start to pay off, I would say, through early next year to a stronger mid-single-digit growth.

And we're still seeing record bookings even year to date.

So feeling really bullish about the sector and our position in the sector.

And your next question comes from the line of Paul Coster from JPMorgan.

I think, Revathi, at the moment, everyone is applauding the margin expansion.

But I imagine a year from now, operating margin expansion, I imagine a year from now you'll want to be measured by slightly more sort of sophisticated array of metrics.

Because there's no guarantee, I would have thought that margins will continue to expand.

I mean mix could impact, for instance.

Can you just talk a little bit about how you see the company's key performance metrics evolving over the next year?

Thanks, Paul.

I'll take a minute and just savor the comment on operating margin expansion.

Because the trick in this sector has been how do we manage mix, and improve margins, and deliver EPS at the same time.

So this year for us has really been focusing on that.

And you can see that with our current quarter and our future guidance that we're on track to do that and do it well.

But I absolutely agree with you that we have to focus on the segments we're in and continue to drive profitable growth.

Driving large-scale growth has never been the challenge for the segment, as all of you know.

But making sure that we're driving profitable growth is important.

We feel really good on the segment plans we have developed, the design wins that we're seeing, and a real push for driving a mix change with the right type of growth in the segments that drive a higher value margin expansion for us.

So we do want to be measured on both.

And as I told you in my prepared remarks, our focus in the first 6 months was on the 4 areas I talked about.

But moving forward, we're also pushing for very disciplined growth strategy across our segments.

And the real key is the disciplined growth strategy.

But Flex has a great heritage and a fantastic pedigree on technology on these segments.

So we know how to do this.

This is not a question of we don't.

So for us, getting back to growth is not a hard thing to do.

It's really important for us to make sure that we're getting back to growth but the right type of growth.

And the mix changes we have done really positions us well to take advantage of that, Paul, moving forward.

So I would say that everybody should be feeling very confident of our ability to make that happen.

I'm sure you've been sort of stress testing your business since you've been in this position.

Do you have some sense of how the Flex business (inaudible) will evolve in a slowing economy or even a recessionary environment should that happen?

I think all of you have seen the history in terms of kind of what happens to this space in a slowing economy, or a recessionary environment.

Usually, we're very countercyclical in terms of cash generation.

And of course, we will continue to be that way.

But I think the other important thing to take away, Paul, would be to say we have done very well in the past few months in terms of managing our overall margin performance and our EPS performance, even as revenue has declined.

So I would say even in a recessionary environment, what I'd really expect the team to do is to really focus on how we manage our cost profile both from a gross margin standpoint and also making sure that we have the right focus in terms of our overall SG&A costs.

So I think our history says that we've done great on cash, but our last few months should tell that we'll continue to do well even managing our margin performance if revenues are impacted in the recessionary environment.

And your next question comes from the line of Steven Fox from Cross Research.

I'm sorry if I missed this but I was curious if you could sort of detail how much of the year-over-year decline was sort of self-inflicted in terms of walking away from business and disengaging from Huawei?

And what the growth rates were to look like excluding that?

And then I had a follow-up.

Steven, we said we had predicted last quarter, right, that our disengagement from kind of this high cyclicality businesses would be the impact of $300 million to $400 million a quarter.

And we continue to stick with that range that we have given.

That's the impact that we're expecting to see and we have seen the same in our Q2 results and in our guidance moving forward.

Okay.

So you're in that range right now after the quarter was done?

That's correct.

Great.

And then just bigger picture on IEI.

You mentioned some of the core markets that you're focused on.

I was wondering -- those are sort of broad categories.

I was wondering if you could give us some more detail in terms of what types of new programs you're having the most success with and how you can drive further growth in some of the broad categories that you mentioned within IEI.

Thank you.

Steven, let me just touch on 2. There are probably 3 major categories in IEI, the way the segment is reported today.

But let me talk about 2. One is the industrial side of the business itself, right, which is focused on most of the diversified industrials.

And as you know, the penetration of EMS providers in that space is really small.

And we have really developed a strong go to market in that space.

It's a lot more smaller customer.

So it's a higher mix but it's also longer life cycles of products, more technology focused, better margins.

So we're really driving a commercial strategy in terms of our base industrial program itself.

And we feel really good about that because there's a lot of penetration that can be done in that space.

It's a very diverse segment and we're really pushing to win strongly in that.

That's also a more vertically integrated segment in terms of not just electronic but electronics to mechanical capability, all the way to controls.

So that is one big area that we're continuing to drive for growth, and we feel good about where we are today and where we are going forward.

The second I would say is on the energy space.

You know, we have a very strong presence in terms of our energy portfolio with our NEXTracker business and we're really driving an expansion in that space, not just with the basic products we have but with more software penetration that really optimizes the performance of the solar segment itself.

And so feel very strongly about that also.

So really good performance I'd say both in industrial and base energy.

And those are the 2 I'd really pick out to say we're driving and we feel very strongly that since it's not a highly penetrated space, we can continue to drive growth in that.

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

Just to start off with a high-level question (technical difficulty)

Very strong sound disturbance.

Okay, that went away.

But I think I understood your question.

Your question was you have 2 segments that have lower margin, 2 segments that are higher margin.

So (inaudible) portfolio moving forward.

So here's what I'll tell you, Ruplu, is that we're going to talk a lot about this in our investor day in mid-Q4.

But around these 4 segments, there is quite a bit of interdependency that we'd like to take advantage of.

So if you think about our CEC business, it gives us scale but it also gives us tremendous technology platform that's important to the rest of our businesses.

So our entire autonomous strategy is built off of the engineering and technology knowhow that we got from the CEC business.

So the diversity of our portfolio I'm sure is always one that lots of people will have questions on.

But what we want to talk about mutual funds is how can we be market share leaders in all 4 segments and how can we drive the right type of growth in each of these 4 segments.

Of course in [2] you can, as you can tell that we are in a higher margin space.

I would say in CEC and consumer, our goal is to change the mix at this point in time and really figure out how we can focus on wins that are more accretive and more focused on design, and be more selective in both of those spaces.

And I think the other big thing that we're looking to do, and I said that in my prepared remarks, Ruplu, is that the real change has to also be in an operational model and the operational efficiency required to deliver a high scale business and a high mix business.

And we're solving that trick of how you operationally manage those 2, one for efficiency and scale and the other for mix and technology is really important to drive accretive margin growth in both -- in the 4 segments.

So yes, simple answer is every portfolio has some mix but as an overall, we think that today the diversity of our portfolio works for us.

And you can see that in our results this quarter, right.

What has really helped us is the diversity of our portfolio and even the ups and downs across the segment, we've delivered overall strong operating margin growth and EPS growth.

So more to come in terms of our investor day but we think there's some core technology capabilities that we get from our CEC business that leverages the rest of our portfolio.

Your next question comes from the line of Jim Suva from Citigroup.

This is actually Michael (inaudible) for Jim Suva at Citi.

My one question is more general in nature and it's that in looking to the rest of the year, would you mind framing how we should look at 2 things.

And the first is 5G ramping and the second would be about how we should think about India demand.

So let me talk about both, Michael.

One is the 5G ramping.

A lot has been talked about 5G over the last few months.

We believe we are fairly well positioned in terms of 5G technology kind of with the top 2 European players, and we have a very strong presence.

In terms of telecom ramping itself and 5G ramping itself, it has been somewhat spotty.

Europe and Asia have been slow.

North America has ramped up a little bit faster and we think any large infrastructure rollout is going to have cyclicality.

And you know, as you have seen all the announcements that have come out in terms of 5G rollout from the large telecom players is that it's based on geography.

There is some movement in terms of some geographies going faster than the other.

And we are seeing the same impact because we are suppliers to all of them.

So to me, it's not a question of whether it's going to happen or not.

It's just a question of timing.

And when it does happen, we're well positioned, I would say, with all the major 5G providers.

In terms of India itself, how our base India business was before, Michael, we have talked about that we have ramped it down significantly from where we were, particularly our dependency on the more higher cyclical products.

Our focus is on growing India but really changing the mix and we have a really strong pipeline for India that's more focused on kind of the higher margin, better mix products.

And we're seeing a really big push for movement of some manufacturing capabilities in India.

So our timing is perfect in this because we really have the scale and presence that we had developed before.

We ramped that down this quarter and we are working on ramping it up with the strong pipeline we have.

But we're being very, very thoughtful about the right kind of business and taking advantage of the position we have.

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

This is Madison on for Adam.

You talked about a focus on design and engineering led engagements, as the operating margin can be nearly double traditional EMS business.

I know you gave a lot of good examples you were doing, but can you touch on some of the metrics around these types of engagements, whether it be the pipeline, win rates, or backlog?

And how do you think about the growth profile of these types of engagements?

So Madison, we'll talk more about this when we do our investor day in mid-Q4 because I think we really have to focus on showing you the right type of engagements that we're looking at from our bookings pipeline and really give you more examples of how these can scale up, right.

Because the thing about design-led engagements is, is it just one-off?

And if it's only one-off, it tends to be a smaller portion of your mix.

Our goal is to really drive a platform type engagement in terms of our design led wins and you can scale it across multiple customers.

And IEI and HRS are both really very, very different.

If you look at IEI's performance today, you can clearly show that the design-led wins are shorter cycle.

You see it faster in terms of your bookings and your conversion to revenue.

HRS is a whole different ballgame.

Like, the design wins that we have working on today really takes a couple of years in terms of a gestation period for it to show up in our overall revenue.

So very different based on segment.

But I'll really talk to you more about it when we do our investor day and really focus on kind of forward-looking metrics of how we should see this expand show up in our mix.

And we'll have a lot more detail then.

Great.

I'll be looking forward to that.

And then just a follow-up for Chris on cash flow.

So you've talked about a commitment to generating positive free cash flow moving forward.

So is there a way that we can think about free cash flow for the full year?

You've obviously been very disciplined on CapEx here.

So do you think you can surpass the roughly $600 million level that we've seen historically?

And then if you could just remind us of capital allocation priorities in lieu of this?

Thanks.

Sure.

So I would start by thinking through the leverage that we are driving in terms of our free cash flow.

And what we highlighted on the call is if you look back over the last 12 months, we generated $548 million, roughly 89% free cash flow conversion rate.

What we're doing very well is we operating with great discipline over CapEx in bringing that back down in line with depreciation, and as we saw this quarter, even below depreciation.

That provides a nice uplift.

You know, net working capital management continues to be something that we've been doing well at but we highlighted today that there's room inside of inventory to get much better.

And then you extend it to the other big lever in terms of our profitability.

And as we've been managing with greater predictability, good discipline, our earnings cycle is getting better, earnings generation is getting better.

So our goal is to get back to historical levels of free cash flow conversion and those are akin to, like, a 90% free cash flow conversion.

I think we're making good progress.

We've had 4 straight quarters now of real healthy free cash flow conversion.

And the other thing is this year, we're also absorbing a fair amount of restructuring costs as we go through that.

That restructuring activity is necessary as we reposition the portfolio and we optimize the cost structure.

And that's well over $125 million of cash that we're absorbing this current year.

So as you look forward, just think of us making progress to deliver in that historical free cash flow range.

And that leads right into supporting our very disciplined capital return view.

It's going to be disciplined in terms of going and taking up free cash flow, and providing that sound financial condition for the company, yet also extending and fulfilling our long-term commitment to shareholders through the repurchase.

We had historically been operating with a conversion of over 50% of our free cash flow in terms of the share repurchase.

And if you look back over this past 12 months, we've been following that same aspect.

So it remains a key feature for us and we're just going to operate a very prudent capital structure going forward.

We don't have many requirements in terms of M&A as we have a really well built-out global system today.

We have solid capabilities to support our core target growth markets.

So I think we can have an ability here to operate with a balanced and flexible financial condition and continue to fulfill our shareholder return.

Your next question comes from the line of Christian Schwab from Craig-Hallum Capital.

My question has to do with revenue for this quarter and I understand we knew we were going to exit some of these low margin, high volatile, short cycle businesses.

My question has to do with forecast to shipment, if you want to comment on that, whether it be your top 10 or top 20 customers, if there was a material difference between forecast and shipment during the quarter.

Christian, I'll answer that.

Chris said in his prepared remarks, the major difference I would say in terms of the forecast and where we ended up was kind of shift in our CEC business.

We definitely saw in-quarter slowdown in the telecom sector, like we talked about that, impacted CEC revenue different than what we had actually thought would happen.

But, you know, what's really good about all of that is even with that change in short cycle, the overall revenue or the diversity of our portfolio really plaid out well and we were still able to hit our overall EPS, our number, and improve our margin at the same time.

So yes, there was movement in terms of telecom and CEC but what really played out is how we're managing mix and how we're taking advantage of the diversity of our portfolio and focus on execution, and still delivering our EPS and margin improvements.

I guess the reason for that question is you guys know better than anyone does that general purpose [shift] lead times have collapsed, right.

So it wasn't all that long ago the times were 26 weeks and now, we're at 8 weeks, which I think explains a large semiconductor's conference call this week.

And we have MLCC chips no longer an allocation.

So our techs suggest that there's a lot of companies who feel very comfortable drawing down investments themselves to generate cash for themselves.

And it seems to me to be a typical semi world correction that could be going on as lead times are getting back to normalized levels.

And my guess is they have to at least bounce back to 12 plus or minus.

Would you agree with that as part of some of the demand degradation that is going on?

So what I would say, Christian, is that we have definitely seen, I think like you said, it's a well-known issue that lead times are down and particularly in MLCC chips.

I mean we are definitely in a whole different situation from where we were last year and we're in a more manageable framework in terms of lead-time across the board.

But for us, the revenue range was really a result of the telecom space in CEC.

So that really drove our overall kind of revenue change in CEC.

We're not seeing any major impact from the lead time change and the fact that supply constraints has gone away in MLCC chips.

We're really not seeing that in terms of a revenue constraint overall.

We think that that issue is behind us.

And then the supply chain is really different for each of our segments, right.

Our HRS versus CTG and CEC supply chains are different.

IEI is very different, not very component focused.

So revenue shift in the quarter was due to telecom and then we think that the overall lead-time shrinkage really isn't impacting us significantly from shifting revenue and working its way to the customer value chain.

Due to technical difficulties, we are reopening Ruplu Bhattacharya's line from Bank of America.

Thank you for taking the follow-up.

On IEI, you had substantial margin improvement, 4.2% last year quarter, and now 6.2%.

So Revathi, can you help me bridge how that 200 basis points improvement came?

And do you think there's more opportunity for you to expand margins there?

And how should we think about operating margin in that segment?

So Ruplu, there definitely are 2 things that are happening in IEI.

one is our growth overall is strong.

So that definitely helps from an absorption or a conversion standpoint and that improves our margin.

And then we're really seeing, again, base business growth is across all sectors of IEI, both our industrial, our energy, and our home and lifestyle business.

And all 3 have higher margins in general and are converting at the right level.

In terms of -- and our mix also within that portfolio is improving overall.

How I think about it moving forward is obviously, I would like to see our margins continuing to improve.

Like I said before, both are in the industrial and energy space, it is so -- the penetration, there is so much room for improvement in terms of overall penetration for EMS players in that space that we feel really good that as we drive to a stronger growth in that, we'll continue to see better absorption and we'll continue to see margin improvement.

And then all this is within the confines of the semi space being fairly constrained, as you know, right.

And our expectation as that comes back online, we should also see improvement as a result of that.

But at this point, what I really want from that business is continued growth.

And we feel really good in terms of where the margins are heading in that segment.

And there are no further questions at this time.

Okay.

Thank you all for joining us and as you can see from all the questions that you all asked us, also really good performance from us in terms of operating margin, and cash flow performance.

We're really doing a lot of hard work in terms of managing our mix, which has been impacting our revenue in the recent quarters.

We feel really good in terms of our forward-looking focus on how we return to profitable growth, but at the same time keep the benefits that we see from operating margin expansion and cash flow performance.

So we're really delivering on the path we set forward 6 months ago, which is about disciplined execution.

And we're really looking forward to talking to all of you in our investor day in the mid-fourth quarter, and talk to you more about our long-term strategy and where we're taking this company.

So really excited to set that up for all of you.

And thank you for joining us.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.