Flextronics International Ltd. (FLEX)

UBS Global Technology and Services Conference Call

November 16, 2011 3:30 PM ET


Paul Read – Chief Financial Officer

Kevin Kessel – VP, Investor Relations


Amitabh Passi – UBS


Amitabh Passi

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Okay. Thank you everybody. I think we’ll go ahead and get started. Good afternoon. And welcome to the UBS Technology and Services Conference. My name is Amitabh Passi. I’m the senior analyst covering the technology supply chain companies and wireless handset companies. It’s my pleasure to welcome Flextronics here today.

I will be doing this in a fireside chat format. I’ll ask a few questions and then please raise your hand if you have questions. And presenting the company today is Paul Read, the CFO along with Kevin Kessel, VP of Investor Relations. So thank you, Paul.

Paul Read

Thank you. Thanks for having us.

Amitabh Passi

So, Paul, maybe we are sort of six weeks into the December quarter. I was hoping you could start off maybe by just giving a sense of sort of from a macro perspective, how’s business trending relative to your expectations earlier when you provided guidance? Where are you seeing upside risk, downside risk?

Paul Read

Yeah. Where I would probably characterize it is, this is continuing to be soft demand environment generally across the Board. Every month seems to get a little bit weaker, not drastically, no major corrections, but definitely a slower trend.

There’s pockets of improvements. Seasonally you have consumer products launching or delivering this -- last quarter this quarter, so there is that seasonal benefit. But I think we saw a big correction in the September quarter of the semi cap equipment. That correction has slowed down. It’s still little soft but it’s kind of bottoming out and so that’s probably one of the headwinds here.

But we have another -- number of new programs launching in other parts of the business, in the industrial space, medical, automotive, these kinds of areas. In the traditional datacom, telecom, we guided kind of flat to down in that area and no change there really. So nothing major magnitude of change, still within our guidance range, but just a general softening.

Amitabh Passi

Is there a general softening across all end markets, is it in any particular end market more so than others?

Paul Read

No. Not really. It’s fairly general. The consumer period in September heavy and I think if you strip out the ODM PC business that’s exiting for us take that to one side, in the other categories it’s either stable, in other words flat or softening, just down a little. So we’ve a lot of new bookings and launching new products, et cetera. So, the start of the next year, that’s, as per our guidance it’s kind of flat.

Amitabh Passi

Okay. And then can you remind us where we are with respect to exiting the PC ODM business. I think it supposed to be out by the end of this quarter, maybe you can provide us an update how that’s progressing?

Paul Read

Yeah. So it progress as planned. I think we ship our final products this month. So, yeah, there’s definitely a hard hold and all the activities to do with cleaning up and transferring to the new supplier, et cetera. That’s all on track. And repositioning the assets, there was over 200 machines SMT machines that have be -- will be redeployed within weeks here. We have demand for all of those. And that will certainly help going forward in terms of lowering the CapEx spend for next year.

So pretty pleased with the way we’ve managed the assets through this business and we’ve got a pretty good hard hold this month and a clean start in the New Year.

Amitabh Passi

Okay. Maybe I can just touch on margins briefly. I think you reported 2.2% operating margin in the September quarter. The December quarter guidance, I think implies slight improvement despite an incremental 25 bips of headwind from the PC ODM business?

So the first question was, if you could just remind us how you get that margin improvement in September and then once we, sorry, in December? And then once you move into the March quarter, can we expect an incremental 50 bips with the PC ODM behind it?

Paul Read

Yeah. The December quarter is heavily negatively influenced by the PC ODM exits. We told everybody that we’re spending roughly $50 million in December to exit that business on a one-time basis and that’s still on track.

So when you take away the -- take away those numbers and you look at the mixed profile in March, for example, where there is less consumer exposure, because it’s typically a down quarter in terms of the amount of consumer business, because it’s post to holiday period.

We’re looking at a 3% plus margin profile and that’s what we said was 3% to 3.5% in March, which is clearly a huge turnaround from the December period when we’re looking at low 2% numbers. And so, that correction is really ODM PC, as well as in March, we always get a better mix and about 3% to 3.5% is kind of something that’s we’re targeting for and on track to achieve.

Amitabh Passi

And what’s implied with respect to the components business?

Paul Read

Well, the reason we gave a range of 3% to 3.5% is, we’ve always set components of worth about 30 basis points of improvement when they hit a target, short-term target of 4% margins. And so, if they don’t hit that target, they hit the low end of the, they hit zero percent then they’ll be at the low end of that range, if they hit 4%, they will be at high end of that range. So that’s really what determines the range of achievement in the March quarter for the overall company and that’s how we’re looking at it.

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