Flextronics' CEO Discusses F2Q 2012 Results - Earnings Call Transcript

Flextronics (NASDAQ:FLEX)

F2Q 2012 (09/30/11) Earnings Conference Call

October 20, 2011 5:00 PM EST

Executives

Kevin Kessel – VP, IR

Paul Read – CFO

Mike McNamara – CEO

Analysts

Shawn Harrison – Longbow Research

Sean Hannan – Needham & Company

Jim Suva – Citi

Matt Sheerin – Stifel Nicolaus

Kevin Labuz – Deutsche Bank

Brian Alexander – Raymond James

Louis Miscioscia – Collins Stewart

Steve O'Brien – JPMC

Amitabh Passi – UBS

Craig Hettenbach – Goldman Sachs

Amit Daryanani – RBC Capital Markets

Brian White – Ticonderoga

Operator

Good afternoon, and welcome to the Flextronics International Second Quarter Fiscal Year 2012 Earnings Conference Call.

Today’s call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Kessel, Flextronics’ Vice President of Investor Relations. Sir, you may begin.

Kevin Kessel

Thank you, Lisa. And welcome to Flextronics’ conference call to discuss the results of our fiscal 2012 second quarter ended September 30th, 2011.

Joining me on the call today is our Chief Executive Officer, Mike McNamara, and our Chief Financial Officer, Paul Read. The presentation that corresponds to our comments today is posted on the Investors section of our website under Conference Calls and Presentations and it can also be accessed directly from the link on our homepage.

Our agenda for today’s call will begin with Paul Read reviewing the financial highlights from the second quarter of fiscal 2012 and Mike McNamara will follow-up with the discussion of the current business environment and developments and trends within our individual business groups, and he will also conclude with our guidance for the third quarter of fiscal 2012 ending in December. Following that, we will take your questions.

Please turn to slide two, for a review of our risks and non-GAAP disclosures. This presentation contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from those set forth in this presentation. Such information is subject to change, and we undertake no duty or obligation to revise, update, or inform you of any changes through forward-looking statements. For a discussion of the risks and uncertainties, you should review our filings with the Securities and Exchange Commission, specifically our most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments thereto.

This presentation references both GAAP and non-GAAP financial measures. Please refer to the schedules to the earnings press release and the GAAP versus non-GAAP reconciliation in our Investor section of our website, which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures.

I will now turn the call over to our Chief Financial Officer, Paul Read. Paul?

Paul Read

Thank you, Kevin. And welcome, everyone to our call. Please turn to slide three.

We generated $8.04 billion in revenue for our fiscal 2012 second quarter, which was above the high-end of our guidance range of $7.6 billion to $8.0 billion. Revenue rose to $622 million or $0.08 from the $7.42 billion we reported last year and 7% sequentially.

Our second quarter adjusted operating income was $176 million, down 17% year-over-year and GAAP operating income was a $161 million for the second quarter, down 19% versus our prior year. Adjusted net income for the second quarter was a $158 million, down 12% from the year-ago and GAAP net income for the second quarter was $130 million, down 10% year-over-year.

We reported adjusted earnings per diluted share for the September quarter of $0.22, which was within our adjusted EPS guidance of $0.21 to $0.23 and up 5% sequentially. Our GAAP EPS for the second quarter was $0.18, which was up 6% sequentially.

Our diluted weighted average shares outstanding or WASO for the quarter was 731 million. This was a reduction of 7% or 53 million shares in flow compared with 784 million shares reported a year-ago, which was driven by our share buyback program. During the quarter we started our fourth $200 million share buyback program since June of last year and we repurchased approximately 19 million shares for a $106 million at an average cost of $5.51.

Overall since our recent share repurchase began back in June of last year, we have repurchased $706 million with our stocks totaling approximately 114 million shares or roughly 14% of our outstanding shares prior to the commencement of these programs.

Please turn to slide four. September quarterly revenue expanded both sequentially and year-over-year. We experienced revenue growth on a sequential and year-over-year basis in all segments. Our Industrial and Emerging Industries, barring [ph] our Industrial and Emerging Industries, which Mike will expand on further in his prepared remarks.

Adjusted operating income totaled $176 million and adjusted operating margin was 2.2%. This was negatively impacted by losses equating to approximately 50 basis points in our ODM PC business that were expected. And we are in the process of exiting. It was also significantly impacted by the large reduction in revenues experienced in our Industrial and Emerging Industries segment, which was primarily isolated into the capital equipment business in this segment. Recall that this segment carries greater than the corporate average adjusted operating margins and therefore had a 20 basis points negative effect on margin in the quarter versus expectations.

During the quarter, also incurred certain one-time restructuring cost to right size certain facilities, which had an approximately 15 basis points negative effect on our adjusted operating margin was versus expectations. These three elements together create an overall negative on our adjusted operating margin of 85 basis points.

Our EBITDA was $295 million in the September quarter, flat with the prior quarter. However, on an EBITDA margin basis, we declined 20 basis points to 3.7% due to the strong sequential sales increase which provided no meaningful earnings contribution. Our LTM EBITDA expanded to $1.2 billion from $1.15 billion a year-ago.

Our adjusted EPS of $0.22 was up 5% from the $0.21 we reported last quarter. The ODM PC business losses negatively impacted adjusted EPS by almost $0.03.

Please turn to slide five. In our September quarter, the ODM PC business which we’re exiting generated $743 million in revenue and accounted for a $20 million adjusted operating loss as projected. This business is peak for us in the seasonally strong September quarter. We’re in the process of accelerating the exit and would have completely disengaged from this business during the December quarter. As a result, we anticipate a sequential reduction of $550 million in revenue for our last quarter of production. This is earlier than anticipated exit will increase operating losses as we absorb the increased transition relating cost. Mike will provide more details around this when we discuss guidance for our December quarter later.

Please turn to slide six. Net interest and other expense was $1.5 million, down from $22.2 million last quarter due to greater FX gains and a reduction in other non-operating expenses. Our FX performance this quarter exceeded our expectations provide in the normal $16 million upside due primarily to certain strategic RMB positions. While this quarter was dramatically lower than our expectations for net interest and other expense which was to be in the range of $15 million to $20 million range, we continue to believe this range is appropriate to model going forward.

Adjusted tax expense for the second quarter was $16 million, reflecting an adjusted tax rate of 9.2%, which approximated outlook for the quarter of 10%. For our upcoming quarter we believe modeling a 10% tax rate is appropriate.

Finally, turning to the reconciliation items between our GAAP and adjusted EPS, stock-based compensation was $14.2 million in the quarter, above last quarter of $12.3 million and represented $0.03 EPS impact. Intangible amortization net of tax was $14 million in the quarter, up from $12.7 million in the last quarter and represented a $0.02 EPS impact.

Please turn to slide seven. Inventory modestly increased by 3% sequentially or a $128 million to $3.9 billion. However our sales growth of 10% was more than double our inventory growth rate resulting in inventory turns increasing to 8.1 turns from 7.8 last quarter. We remain confident that we can drive continued improvements in our inventory management throughout fiscal 2012. Our cash cycle remained flat at 19 days sequentially. Our inventory days decreased by two days which was offset by an increase of two days in our DSO. Our DPO was consistent with the prior quarter. We expect to manage our cash conversion cycle in the high teens range going forward.

Now turning to the net working capital chart on the top right of this slide, overall net working capital increased to modest $61 million sequentially. Our net working capital as a percentage of sales decreased to 5.8% from 6%. We believe our business is structured to run net working capital level between 5% and 6% of sales going forward even as we disengage from the ODM PC business, which is being running at negative net working capital.

As a reminder, our ROIC calculations which is documented in a footnote below the graph is LTM adjusted operating income net of tax divided by the sum of the stockholders’ equity plus net debt. Our ROIC for the quarter remained very healthy at 25.8% slightly below the 26.5% last quarter and below the 29% from the September quarter a year-ago.

Please turn to slide eight. Cash flow from operations is a positive $300 million during the quarter. Net capital expenditures for the quarter was $124 million and free cash flow amounted to $176 million. We’ve generated $437 million in cash flow from operations and $200 million of free cash flow for the first half of fiscal ’12. During the quarter, we spent a $106 million buying back our stock and have spent $306 million year-to-date.

Please turn to slide nine. We ended the quarter with $1.596 billion in cash, up $38 million versus the prior quarter. Total debt remained constant at $2.2 billion. Our net debt decreased to $613 million from $656 million from last quarter. Our debt-to-EBITDA level ended the quarter 1.8 times, stable which is stable with last quarter and down from 1.9 times last year.

The chart at the bottom of the slide shows a significant debt maturities by calendar year compared with our current liquidity. This reflects a completion of this week of the new credit facility. We are pleased to announce the successful completion of a $2 billion credit facility consisting of $1.5 billion revolving credit facility and a $500 million term loan facility, which matures in October 2016. $1.5 billion revolving credit facility replaces our existing $2 billion revolving credit facility, the $500 million term loan facility refinances our existing term loan facility which was set during October 2012. The $2 billion credit facility is unsecured and contains customer customary covenants.

With that, I will turn the call over to our CEO, Mike McNamara.

Mike McNamara

Thank you, Paul. And thanks to everyone who joined the call today. Before I cover the details of our business groups’ performance, it’s worth taking a step back and set the context for the macro climate that we are in. We are currently experiencing a sluggish and slowing macroeconomic environment. While we don’t see any corrections on the horizon, clearly the technology supply chain continues to be plagued by uncertainty and packets of softness. We have seen instances where customers are displaying weakness due to inventory corrections and other strictly due to end demand and weakness, given the broader backdrop.

On balance, our business groups were able to weather the macro challenges, with one clear exception being our Industrial and Emerging Industries business group, which suffered a 17% sequential decline versus our expectation of a mid single digit decline. Its decline was driven a broad based weakness, including a substantial decline in the capital equipment business, which focuses on both semiconductor and solar capital equipment.

Outside of our Industrial and Emerging Industries business group, our three remaining groups grew both sequentially and year-over-year driven by new outsourcing programs that outweighed the macroeconomic headwinds. Their strength was enough to help us deliver revenue above the high end of our guidance range, despite the much sharper than expected declines in our Industrial and Emerging Industries business group.

Our revenue performance amongst our top 10 customer base was also healthy, primarily driven by new outsourcing wins with eight of our top 10 customers growing sequentially and seven of our top 10 customers growing year-over-year. Our working capital management remained strong, which aided our ability to generate quarterly free cash flow of a $176 million, allowing us to continue to aggressive buy our stock back.

In terms of our ODM PC business, we have clear line of sight to exit this business completely during this quarter. This is one of the major initiatives we have been managing in the past couple of quarters in our drive to our targeted operating margins and we are confident that we will successfully eliminate this burden on our profitability. As a result, our March quarter still reflect the full 50 basis points improvement in our operating margins.

Please turn to slide 10. Our integrated network solutions business group is comprised of our telecom infrastructure, data networking, connected home server, and storage business. Integrated networking solutions revenue was almost $3 billion in the quarter, up 9% year-over-year and 7% sequentially. This strong performance was slightly above our expectations for mid single-digit growth sequentially as we saw strength with the majority of our core data networking, telecom and storage customers, and only two of our INS customers experienced revenue decline above $10 million sequentially.

This performance comes on to heal the last quarter’s strength in which the segment rose double digit both year-over-year and sequentially. For next year we expect revenue from integrated networking solutions to decline in the mid-to-high single digits sequentially driven primarily by reduced demand across some of our larger telecom customers. For fiscal 2012, we continue to believe growth in the 10% range is achievable, spread by continued strong bookings with both existing and new customers.

Industrial and Emerging Industries comprise 12% of total sales versus 15% the last quarter. Sales were disappointing and came in just above $950 million reflecting a 17% sequential drop and a 4% decline from a year-ago levels. The biggest driver of this decline was capital equipment, which fell more than 40% quarter-over-quarter. The capital equipment business was a little larger than $1 billion a year. And due to the product complexity and the capital employed, we operate this business at an above the corporate average operating margin.

As a result, it dramatically reduced capital equipment operating profitability had a meaningful impact on our consolidated operating profit. It is worth noting for a perspective that our Industrial and Emerging Industries group achieved record to quarterly sales at $1.15 billion just last quarter on the back of a very strong 17% sequential growth. We continue to see very positive activity levels with other customers across our Industrial and Emerging Industries group. Our business development activities remain very stronger in the quarter with roughly $300 million in new wins booked. We’ve now booked roughly $700 million in new wins in the first half of 2012 versus $1.3 billion booked during the entire fiscal 2011. So our overall pace so far this year is tracking well. For next quarter, we believe this group will experience low single digit sequential growth.

Our high reliability solutions group is comprised of our medical, automotive, and defense and aerospace businesses. It comprised 7% of total sales consistent with last quarter. Sales grew 3% sequentially and 32% year-over-year and it eclipsed its all-time record to quarterly revenue achieved last quarter. Overall, sales in this group were in line with our expectation for mid single-digit growth. The momentum in this group remains very strong, particularly in the medical and auto areas. Next quarter, we forecast this business to be to flat. However, it is still forecasted to grow greater than 20% on a year-over-year basis.

Our medical business saw a healthy growth, both sequentially and year-over-year, led again by strength in medical equipment and drug delivery. During the second quarter, we booked roughly $100 million in new programs which is approximately twice the level booked last quarter. And our sales pipeline expanded even further approaching $650 million and being strength amongst consumer health, medical equipment, disposables and drug delivery.

Our automotive business recorded its ninth consecutive quarter of sequential growth and remained on track for another very strong growth year in fiscal 2012 after posting close to a 15% year-over-year growth this quarter. We continue to see strong trends across the board in the areas we engage in such as in-car connectivity, ambient lighting, and LED electronics, power electronics, and the electric vehicle markets.

High velocity solutions comprise 44% of total sales up from 41% and revenue rose above $3.5 billion from just over $3 billion last quarter. This business group includes our mobile smartphone business, consumer electronics including game consoles and printers, and a high velocity computing including the ODM PC business we’re exiting and the EMS PC business we are keeping. This Business Group had the strongest growth in the quarter deriving 15% sequentially and 8% year-over-year and drove the majority of our sequential revenue growth.

Our mobile and consumer businesses were sharply on a sequential basis and we’re stronger than our more conservative expectations. Strengths from new program ramps with our largest mobile customer combined with favorable seasonality in the game console market drove the majority of the growth. In high velocity computing, our business experienced strong double digit sequential and year-over-year growth is driven principally by the final peak product ramps in our ODM PC business as well as growth in our high velocity enterprise EMS PC business. Overall, next quarter, we expect our high velocity solutions business to decline high single digits driven by the significant revenues declined associated with our exits from our ODM PC business and less seasonal demand for consumer electronics.

Our components business, which include Multek Vista Point and Power grew its revenues roughly mid single digit sequentially, which is half the rate of growth we had forecasted due to inventory rebalancing within the supply chain that mostly impacted our Vista Point and Flex Power businesses. Nevertheless, from a profitability perspective, we saw improvement in all three component business during the quarter with a consolidated bundle breaking even overall.

Our services business, which is focused on various post manufacturing and aftermarket activities such as logistics and repair and warranty, we’re high single digits during the quarter. Operating margins remained well and above the corporate average. In addition, a number of significant new program wins will begin to ramp late next quarter which should position our services business well going into fiscal 2013.

Now, turning to our guidance in slide 11. Our third quarter revenue is expected to be in the range of $7.3 billion to $7.7 billion, which includes a sequential reduction of approximately $550 million ODM PC revenue associated with the accelerated exit of this business. This is the largest driver of our sequential decline in sales, which corresponds to a range of 4% to 9% and 7% at the midpoint. Our adjusted earnings per share guidance of $0.18 to $0.22 includes a cost of approximately $0.06 a share associated with the early exit of the ODM PC business. Our adjusted EPS guidance is based on an estimated average weighted shares outstanding of approximately $725 million, which incorporates a full quarter benefit of the share buyback we completed during our second quarter.

Quarterly GAAP earnings per diluted share are expected to be lower than the adjusted earnings per share guidance I just provided by approximately $0.04 for intangible amortization expense and stock-based compensation expense. The December quarters for us represent a period of transition and we expect our March quarter operating margins to rebound to roughly a 3% to 3.5% range.

That concludes my comments and now I’d like to open the call for Q&A. Operator, can you please poll for questions?

Question-and-Answer Session

Operator

Sure, one moment. Shawn Harrison, your line is open.

Shawn Harrison – Longbow Research

Hi, thanks for taking the call. First on the ODM PC business, just a clarification in terms of that $0.06, is that in addition to the losses of $0.03 you experienced this quarter so it would be a total of $0.09 drag or is that $0.06 inclusive?

Paul Read

Hi Shawn, this is Paul. No that’s inclusive. It’s a total cost of $0.06.

Shawn Harrison – Longbow Research

Okay, okay. And then there would be a $250 million sequential revenue drop give or take into the March quarter from the ODM.

Paul Read

Roughly that. It’s more of $200 million.

Shawn Harrison – Longbow Research

Okay. And then moving on to the components business, it broke even this quarter. Were all businesses above break even, it doesn’t sound like that. It sounds as if Multek helped out the rest of the Group. But if you could maybe elaborate on the components, how each of them trended during the quarter and the expectations for profitability into the December quarter as well, and kind of fitting your margin trajectory.

Paul Read

Yes, certainly. You’re right. Multek is carrying the weight of profitability, the other two are slightly unprofitable, not materially unprofitable but just slightly unprofitable, but the bundle is break even is kind of thing. We’re expecting a continued improvements through the March quarter. Certainly operationally these businesses are generating profits. We have some charges like we talked about in power for example that we’re rightsizing or closing some facilities which is affecting some short-term net profitability of these businesses, but it’s definitely showing from improvement.

Shawn Harrison – Longbow Research

And the expectation is they would be profitable in the December quarter and into the March quarter as well.

Paul Read

I think the December quarter will be flat. I think we have some revenue challenges there in power and camera modules, Multek is making good progress. But I think that you have to look at the flat performance in the December period. But certainly March looks much better for us.

Shawn Harrison – Longbow Research

In that 15 bps that you mentioned in terms of one-time cost, was that excluding some of the charges you were taking in the components business or that 15 bps include some of the charges taking on the components business?

Paul Read

Yes, that would include that.

Shawn Harrison – Longbow Research

And does that go away in the December, that 15 basis points or do you continue on tying to that same type of restructuring in aggregate?

Paul Read

Yes, we still think we’ll have that level of restructuring in the December quarter.

Shawn Harrison – Longbow Research

And then it goes to zero on the March quarter.

Paul Read

Yes.

Shawn Harrison – Longbow Research

Okay.

Paul Read

March has really appeared for us as kind of a get a lot of things shape and being certainly clean from an operational perspective.

Shawn Harrison – Longbow Research

Thanks so much for taking my questions.

Paul Read

Thank you, Shawn.

Operator

Sean Hannan with Needham & Company, your line is open.

Sean Hannan – Needham & Company

Yes. So just a quick question. And thank you very much for providing some of the detail around your expectations for the different segments. On an ex-ODM basis, you’re essentially looking for a flat quarter, some of that was explained. Is there a way perhaps when you think about your top 10 customers, how many of those are actually looking for up versus flat versus down quarter, some prospects around that would be helpful.

Mike McNamara

That’s kind of a tough question. I think you’re correct in your analysis that it’s roughly flat, September to December once you strip out the ODM PC business. We’ll have some downside in some of the consumer related business typically the September quarter ramps the higher on those consumer related business. So things like gaming consoles and that will be down. We do expect some continued strength in our smartphone business particularly in one of our larger customers with RIM as they continue to ramp their supply chain, as they seek to manage demand from a number of their new product ramps.

We expect to probably have some downside in some of our networking customers coming forward, so some of our telecom and data networking, we see a little bit of softness and we expect that going down a little bit. But it’s kind of a mix overall. But a little bit less – lot of seasonality coming in, in terms of consumers, some offset with RIM trying to capture with its supply chain and its channel inventory trying to fill that channel inventory and some slowdown in the general rest of the businesses that we’re seeing in terms of the overall macro.

Sean Hannan – Needham & Company

That’s helpful. And then segue on the business development front again, you would provide a little bit of commentary just looking to see if we could expand there. Can you characterize how you have viewed the pace of business development and winning new programs today considering the current macro environment and uncertainty for each year for savings? And then what kind of change you’re seeing perhaps now in those segments versus a quarter or two ago, how is that value proposition perhaps change or even become enhanced or modified?

Mike McNamara

Yes, I can try to roll through groups. Automotive for whatever reason continues to hold on very, very nicely, and I think that’s pretty representative of what you hear through the entire automotive supply chain. Their continues to be a lot of smartphone business that is helping to some of the growth. The medical and aerospace and defense kind of business and still many of the different Industrial categories, even though we talked about a 17% reduction in Industrial, remember that’s on the – following a very, very strong quarter last quarter. But in general, the Industrial businesses continue while they have slower growth rate – the underlying OEMs have slower growth rate I think as a result of the macro.

Alternatively the adoption of outsourcing continues to increase. So we’re continuing to be bullish about the ability to grow that on a go-forward basis in the double-digit range. Medical continues to do more and more outsourcing, so I think it’s probably been enhanced by this environment as opposed to being a problem. And telecom data com is really kind of no change. I mean that tends to reflect a little bit more the overall environment and whether or not they have strength or whether or not they have weakness. So I think some of the things are being helped from what I call kind of the new product categories are helped such as automotive, medical, aerospace and defense, and many Industrial categories. We’re obviously having a slowdown in capital equipment and we’ve actually expected that to continue for the next couple of quarters. And smartphones continues to be actually pretty strong across the board.

Operator

(Operator Instructions).

Mike McNamara

So if I could get just summarize to, so I think the ability to book business in this environment is actually pretty good. I think our pipelines are as good as they’ve ever been. I think our bookings rates, I mentioned a few of them, I think are as good as they’ve been. So I think in all these what I consider to be new product categories, I think there is no shortage of business to be won.

Operator

And as reminder for those asking questions, please allow just one question and one follow-up question, so that others may have a chance to ask as well. And Mr. Jim Suva with Citi, your line is open.

Jim Suva – Citi

Thank you. My first question is probably for Mike and then a follow-up will be for Paul. Mike, can you just help us clarify little bit on the high velocity. One, when we remove the ODM, you mentioned it’s going to be flat to down a little bit if I heard you right, but it looks like one of your key customers is going to be up about 30% in units. So it seems like, I don’t know if you’re not on some new design wins or you’re losing some share there, or you pre-built some stuff, or just seems like a very big bridge there and the differences between that outlook. Maybe you can help us understand or bridge that difference for understanding.

Mike McNamara

We’re ramping that customer pretty significantly. So I don’t know want to say how much, but it’s a significant ramp. Our non-PC ODM high velocity business going from September to December is actually up. So there is actually pretty significant growth. When you look at the overall high velocity group, we’re guiding it down of course, but that’s because we’re taking $550 million of ODM PC out of it. If we strip that away, we actually are having a growing high velocity business and that’s actually a pretty strong rate considering – a couple of the programs will have seasonal declines. So as we do gaming consoles, they will have seasonal declines in December quarter, because most of that volume is shifted by the end of September.

When we look at printing, which is another big category there, that also has a seasonal decline in the December quarter. So you really once you strip out the ODM PCs, you have a seasonal decline in gaming and printing and it’s being offset significantly by pretty significant and strong growth in smartphone. So caught in the entire group to go up it’s probably close to 10%.

Jim Suva – Citi

Okay. Now that makes a lot of sense.

Mike McNamara

For December quarter. So once you strip it all out, I actually thinks it’s – I mean we’re definitely seeing a very, very strong growth rate in our key smartphone customer.

Jim Suva – Citi

Thanks Mike. That makes a lot of sense for the details. And then my follow-up question is probably for Paul. Paul on your stock buyback, if my math is correct, I think you just start about halfway through or just over halfway through with your stock buyback, is the rule still with Singapore law that you can buyback up to 10% of the company. And if so, once you do this $200 million, does that put you there, or what should we think about for your cash deployments going forward, because you’re in a good situation of actually having excess cash, what are you looking to do with that cash?

Paul Read

We’re very pleased with the strong free cash flow that we’re generating. We bought 19 million shares back in the September quarter, which is roughly half of the authorized amounts from our Board of Directors, but it’s still compared to Singapore law where we’re allowed to repurchase 10% for the year, we still can repurchase approximately 56 million shares now right through the July next year, and you’ve seen how actively we’ve been in this space. But it really is dependent on the pricing and the free cash flow generation. So that’s – we’ve still got a $100 million roughly authorized with the Board of Directors from now on.

Operator

Matt Sheerin with Stifel Nicolaus, your line is open.

Matt Sheerin – Stifel Nicolaus

Thank you. So in terms of your commentary on the Industrial side particularly the semi cap side, it sounds like your expectations Mike is that’s going to be weak for a while. And you talked about some cost cutting efforts. I know a lot about is on the PC ODM side, but are you looking to lower your cost structure or your fixed cost in that side of the business, because it’s so depressed now?

Mike McNamara

Yes. We won’t lower our investment or – in Industrial. So we – as capital equipments in response very, very quickly down in the downturn and to respond very, very quick up in an upturn, and it tends to have the short cycles. More and more of these the cycle seem to be shorten and aggressive. So we for sure consider that whole Industrial bundle to be a double-digit growth kind of business, so we won’t lower any of our investment to go after that. Where we will see the investment changes, you’ll see SG&A probably peak in the December quarter and then you’ll probably see it come down to about a $190 million in the FY ’13 and will probably hold in reasonably flat at a $190 million, and I think in the December quarter it’s probably going to peak up to probably $205 million or $210 million. So that is a structural change that you’ll see and that’s a result of exiting a major business group.

So we’ll as we go to exit the computing business, it’s going to give us an opportunity to be aggressive at taking out some of our fixed cost in respond to – and then we’re going to have one less major business group for the company. So you an bet we’re nearly responding to that. You won’t see that in the December quarter, because we’re still closing it down, cleaning it up, and there is charges associated with it, but you will see that fully implemented in the June quarter.

Matt Sheerin – Stifel Nicolaus

Okay. And because it seems like you talked about obviously the margin mix works in your favor when semi cap is doing better. And so to get to that 3.5% operating margin where you talked about one thing has to give a sense like SG&A is going to be one way to get there. And then just on the components business, just a follow-up from some of the other questions, you’ve basically been break even for a few quarters. I know Multek is doing well, but you seemed to be spinning your wheel so to speak in the other businesses next quarter, next quarter. At some – at what point are you looking at some of those businesses in terms of long-term strategic way either getting out some of it or changing the mix, I’m just trying to get that more profitable, because you’ve been talking about this now for a four or five quarters.

Mike McNamara

Yes, I think that’s right. The – once again they all have different situations associated with them and they just take time to fix. And in our case it’s taken longer than we would have hope to. Multek continues to make more and more progress every single quarter, so we’re not too worried about that organization. But some of the other businesses, we’re happen to continuingly restructure and we’ll get some headwind out from a little bit of the slower economy which is just going to take a little bit longer as a result.

But I think how long do we keep them around or not keep them around, I mean it’s really – we’re always evaluating what’s the right thing to do with each of these businesses are and we’ll continue to evaluate that and take appropriate action as necessary. But in the meantime, we’ll work to bring them up and we think March quarter is going to be a transitional quarter for them. And because of some – mostly because our restructuring activities will be done and we can just continue to run more and more volume through Multek. So between those two, we think we’re going to have a pretty decent business, and we’ll just have to – by that we make any kind of strategic decisions about what to do with whole businesses, we’ll just plan on doing the right thing on that as situations are made available.

Operator

And Sherri Scribner with Deutsche Bank, your line is open.

Kevin Labuz – Deutsche Bank

Hi, thank you. This is actually Kevin Labuz on behalf of Sherri Scribner. And I’ve also got a question on the components business. I believe you’ve previously guided on your last call that you expected sequential improvements in that business for profitability throughout fiscal ’12. And if I’m correct, you said this quarter you’re expecting it to be flat in the December quarter. And so I’m just wondering what’s changed between last quarter and now with respect to the profitability there?

Mike McNamara

We’re being a little bit more aggressive. Two things, we’re being a little bit more aggressive on restructuring the operations. So we’re actually being more aggressive of getting to our end goal. So as a result of that we’re just taking more charges than we would have anticipated six-month ago. And what I mean by that is we’re consolidating more factors, we’re driving efficiencies higher, we’re reducing some of the what we consider to be some of the fixed overheads, and that’s one thing. So we’re just being more aggressive there as we want to get to the end goal.

And the second thing is that we do have a slowing economy which is driving down the revenue a little bit. So I would call that the secondary effect and the biggest thing is, is we’re just being aggressive on taking charges that can make it a healthier businesses. But certainly the slowing macro is putting a little bit of – it’s reducing the overall revenues a little bit, so it’s a – and from that standpoint it’s dragging out a little bit. But that’s probably is the secondary effect as opposed to taking the operational charges.

Kevin Labuz – Deutsche Bank

Excellent, thank you. And just when you talk about driving and growing that business, is it goal still to have the businesses in bundle, 4% operating margins by the end of fiscal ’12 or has that changed?

Mike McNamara

No.

Paul Read

No, that’s still the target. And like said, we’re aggressively doing some things to try and hit that number. And we’ve got some headwinds there with the revenues, but we still have that as our goal.

Operator

And Brian Alexander with Raymond James, your line is open.

Brian Alexander – Raymond James

Yes. Back to Matt’s question Mike on the power supplies business, you’ve talked about changing the mix there in the past to improve profitability. So where are we in that evolution specifically on power supplies and is that something that you do organically or is that something you have to do through M&A?

Mike McNamara

Well, we can do it organically, so we’re in process of doing that and we are making progress. But I actually consider that to be kind of a two-year journey if you will. It takes time to – on those high-end power supplies you have to get designed into a whole systems. We’re having real good success of doing that. We’ve actually tried to accelerate that activity.

One of the reasons that we took the power group and moved it under the management of the infrastructure group, the network services group is because we wanted to do. We thought it was a way to accelerate the transition. And having that done, we just hit that about six months ago. As you know, when we came out with the new four business groups, it actually had a remarkable effect on building our confidence, but we’re going to be able to move that transition even quicker. So that has paid off into a pretty strong move. So I think it takes some time. Would we do some like tuck-ins M&A to accelerate the high-end? The answer is yes, we would. So I don’t think it’s a requirement, it’s just it would help move it quicker, faster by being able to a tuck-in on the power.

Brian Alexander – Raymond James

Okay. And then just post the ODM exit, you’re going to be at 2.7% margins, and margin I know a lot of people have asked this question. But if I assume no more charges, that would get you to 2.85% in the March quarter, improvement in components maybe gets you to the low end of the 3% to 3.5%. What gets you to the high end and how long does that take? Thanks.

Paul Read

I think there is – we’re bearing some restructuring right now, 15 basis points to 20 basis points, both in the September and December quarters, which is built into our guidance as well. So that’s going to get you more up to the 3.5% target.

Brian Alexander – Raymond James

That would get you from 2.7% to 2.85%, Paul. So if components get to the 4%, maybe that gets you 3.1%, 3.2%, and I’m still struggling how we get up to 3.5%.

Paul Read

You have to – first of all if you take the guidance we’ve given you for December, we’ve given you $0.06 a share which is roughly 75 basis points of margin change when that – if you take that out, so it’s not a 50 basis points ODM PC, it’s a – we have 75 basis points in our model. And so that – I think that’s where your difference is; and then 30 basis points on components; and like I said 10 basis points or 15 basis points on other restructuring charges. In fact all that adds up to about 3.5%.

Operator

And Louis Miscioscia with Collins Stewart, your line is open.

Louis Miscioscia – Collins Stewart

Yes. When we look at the numbers that you’re giving for ex the ODM business for December, what should we think about from a revenue standpoint for March? Should we think of normal down seasonality of 9% to 15%? I know it’s big range there besides and outside of that range, but I’ve tried to pick the tightest one I could from historical numbers.

Mike McNamara

So one thing Louis is when we’ve kind of talked about last year at this call is that we moved from 60% high velocity probably four, five years ago to only 45%. And in fact, our high velocity business we expect to be down probably more like 35% by the end of March. That adjustment or that change from December to March in terms of revenue of 15% which was a historical number for many, many years is probably no long about. So we think about the new structure of the business with being 30% or 35% or 40% high velocity business, we probably expect to see March on normal environment. In fact in that structure of the business we actually expect it to be down like mid-to-high single digits. So I think that’s what you think about in an ongoing basis in terms of the business model we have today. And I think that’s probably what you should anticipate this year.

Louis Miscioscia – Collins Stewart

Okay, great. And I’m not sure, just there is two more quick follow-ups. One is, I heard you say that you’re expecting 10% growth, but I wasn’t sure what you were referring to. And then my last question will just be on, what you’re seeing over in Thailand? If you can give us any update from maybe components that you need to have come again?

Mike McNamara

Yes. I think the only comment I made about growth is we actually would still expect that the market will yield a growth rate of about 10% in those new business segments if you will, those markets, things like industrial, medical and automotive, and those kind of – even though a slower market as a result of doing more and more outsourcing we do hope to be able to grow those 10%. So what that would translate into is FY ’12, FY ’13, being able to grow those kind of markets at that kind of rates seems reasonable even in a reasonably sluggish economy.

And as far as Thailand, we’re still waiting to see. This is – this kind of reminds us all of Japan I’m sure. I think the implications could be significant, we have to watch it. I don’t think we know the answer, I don’t think we’ll see it this quarter, because typically there is enough inventory in the supply chain to go two to three months. The question is, what happens in the March quarter. So this is kind of an unknown for us, but we think it’s a real issue that we need to worry about and work on and work with our customer to try to come out with the outcome. And the things that we worry most about of course are disk drives and the disk drives component supply base.

Operator

And Steve O'Brien with JPMC, your line is open.

Steve O'Brien – JPMC

Hi. Yes, thanks for taking my question. Mike you just alluded to HVS becoming the smaller part of the mix as we get out into March of next year. I mean is that really – is that sort of an improvement in your mix still on the table now with a lower run rate from capital equipment. I mean it would seem like the higher margin business, I mean numbers just tell you took a little step back in terms of percentage of the total in the September quarter. So are you seeing something, hearing something from those customers makes you think there might be some recovery as you get on out to December and March?

Mike McNamara

Well, one thing to remember is, is our Industrial business is nice around numbers, $1 billion, and we’re down about a $100 million quarter-on-quarter, a little bit more. But the change in our capital equipment group is around $1 billion, so we went down like 40%, so call about $100 million and change. So a $100 million in a quarter not really that significant to upset the revenue mix of the whole bundle of Flextronics. It’s significant this quarter, because it carries higher than normal profitability and we did anticipate it being down so much, which we means we stranded resources that created profitability issues even more than the core profitability of the capital equipment group.

So from a revenue standpoint and the mix standpoint, it doesn’t change that much. And quite frankly, the cycles of capital equipment tend to be shorter than they have been in the past. So if we look across the last six or seven or eight years, we actually think that there has been a little bit of a transition in the shorter cycles. We actually expect to coming back soon enough, that’s why we won’t be taking down any kind of fixed cost or anything else to adjust to it. But the rest of the Industrial business, we continue to book very well. We talked about some of the booking rates and the rest of the Industrial business. So we think even with Industrial being a little bit soft even going into the next few quarters, it will probably recover after that. And at the same time, our other Industrial business will probably continue to grow. So I think that overall mix it won’t be hampered much by Industrial.

Steve O'Brien – JPMC

Great. And then if I could maybe follow-up on the wireless infrastructure market right now. It’s – it’ll be part of the integrated network solutions, or even if you want to comment more broadly on the category as a whole. And even with the sequential down guidance, hearing outlooks from other folks in the supply chain that are even more down sequentially and kind of go into the December quarter. Just want to see if you’re customers are discussing carrier CapEx cutbacks, here you’re spending cutbacks and potentials for any kind of recovery. Fee per cuts in December and any kind of recovery into March.

Mike McNamara

Yes, we forecasted it down in December as you just mentioned. So that’s a result of what I’d call a reasonably broad based softening in those marketplaces. So I think that’s true. Will it be down even more than that? I’m not sure, because we have it down sequentially like high single digits I think. So that already on a sequential basis is pretty significantly. Ultimately what our customers tell us is the amount of video rolled across the networks, the amount of carriers that are upgrading into 4G are significant.

One of the things that we’ve prided ourselves on and we’re pleased with is the amount of programs that we’re on for LTE, our next-generation network implementations, we’re very, very strong in terms of how market share of the networking business, where lot of it is on LTE. So I think that portion of it will be a beneficiary going into next year.

So I think it’s soft. But I think we once again would believe that on a year-on-year basis, we’re still going to grow this business. Maybe not quite 10%, maybe 8%, maybe 10% on a year-on-year basis and then going into ’13, we actually think we’ll have a strong book of business because of the amount of optical and LTE that we – that for next-generation systems that we’re already manufactured on so many of our customers. But I think near term, it’s going to be soft. No question.

Operator

And Amitabh Passi with UBS, your line is open.

Amitabh Passi – UBS

Thank you. Paul, my first question was for you. Could you just clarify the commentary on the interest expense assumption for the December quarter? Was it still in that $1.5 million or does it normalize back to the $20 million range?

Paul Read

It’s $15 million to $20 million for the December quarter. We had some unusual – some issues in June – sorry September with the FX, but $15 million to $20 million for December.

Amitabh Passi – UBS

Okay, got it. And then, perhaps just for you, Mike, a bigger picture question. I think one of your European competitors recently filed for bankruptcy. Any incremental change in the industry, are there any customers there that are potentially interesting for you, any business coming your way?

Mike McNamara

The answer is yes. I don’t exactly know quantity of revenue, but without doubt there are multiple locations where we will be a beneficiary of some of that business. So without a question, a lot of that business is going to be redistributed and we are booking some business from those customers in already different countries as a matter of fact. So we definitely we’ll be heading in. And I think we did an announcement about two weeks ago or maybe a week ago about Huawei picking up and doing their business in Hungary, which was a direct outcome of that bankruptcy filing. But there is definitely others coming our way. That’s definitely a good thing for us.

Operator

And Craig Hettenbach with Goldman Sachs, your line is open.

Craig Hettenbach – Goldman Sachs

Yes. Mike if you can – just getting back to the current environment just how interactions with customers changed through the quarter in terms of forecasts, and then also on year-end just given some of the slowdown how you’re looking to manage your own inventory going forward.

Mike McNamara

Yes, I would say, over the course of the quarter, we had kind of just a slowing. It almost seems like every month for the last three months we’ve had just a little notch down in terms of our customer forecast. So I would it’s – it continued to get slower as the quarter we’re on. We hope that activity is done, we’re not sure it is. That could be some more slowness coming forward. But I think if I would characterize the conversation with the customer, it’s just a continued tweaking down of demand. So it’s not alarming. The conversation with the customer are not around. Any kind of alarm or any kind of major adjustment, but it is a slowing economy and we’re without question we’re seeing lower and lower demand as a result of it. And I’ve called that kind of almost across the board kind of comment.

And then the second question is regarding year-end, what do we anticipate? We did an inventory, we did 8.1. And inventory in the September quarter was up a little bit. We actually expect inventory to decrease about $100 million, $200 million going in – going through the December quarter, we expect to be around 7.5 to 7.8 kind of range. And that’s probably something that will be reasonably stable. And a lot of that – and coming off the 8.1 down to 7.5 is not a really an inventory build as we’re going to the slower macro, it’s really more a reflection of the PC ODM, we actually ran an extremely high inventory turns; in fact sometimes over 30 turns. So as we pull that $500 million of business out of our overall numbers, it just takes the inventory turns down a little bit. So even though it goes from 8.1 down to a range of call it 7.5, 7.8, it’s really not an inventory build for us, it’s just a reflection of taking that PC ODM business out. So we expect to not have a real inventory chance as a result of macro economy.

Operator

Amit Daryanani with RBC Capital Markets, your line is open.

Amit Daryanani – RBC Capital Markets

Great, thanks a lot. Good afternoon, guys. Couple of questions. One, I think given a slowing macro environment, are you guys really comfortable that with a expectation that you’ll be able to absorb the extra capacity that comes to you post the PC wind down and if that doesn’t happen, what sort of a absorption track could you have on your margin line going forward?

Mike McNamara

Yes. So we don’t – the margin drag that you’re going to see this quarter, that’s part of the adjustment that we gave you. One of the reasons that we actually worked with the customer to create an accelerated exit because clear that some of those business was going to move all the way out into the March month. We wanted to get this behind us so that we can actually deploy our resource, that we could reset our SG&A levels, and we could move forward with booking business that is on the go-forward instead of managing something on the way out. So we actually work with the customer to create an accelerated exit.

So we think – we had about an 100 – just to quantify we had like roughly a 135 machines that were employed in the PC ODM business. We feel that we have a 120 of those with homes already provided. So the minute that ODM PC goes out, those machines will go to different places in the company where they’re needed. And so we’ve been planning for this, we’ve been looking forward to getting those machines, and that’s one of the reasons that we try to get an early exit. And what’s that doing is, it’s going to free up about $40 million, $50 million of CapEx, so we’d like to put some downward pressure on our CapEx numbers as we go into FY ’13. So we’ve got that extremely well deployed. There will be some inefficiencies associated with this quarter as we transition over of course and we send those machines around the world, but we’re like super pleased that we’ve got – we have like the 120 of the 135 machines already spoken for. So we’ll get a quick adjustment.

Amit Daryanani – RBC Capital Markets

Absolutely helpful. And then if I could just follow-up on component line. It sounds like we’re taking a little bit more of an aggressive step to lower the fixed cost structure. I’m just curious, in March when your units are typically going to be down across the board in the component side, why the conviction you can hit of the 4% margin, I would imagine it will be more percent to June and September when revenues get in your favor.

Mike McNamara

Well, part of the reason right now is, we’re having a lot of restructuring charges. So we don’t really detail it out and you don’t really see it. But part of what you’re seeing – when we see say that they were break even, they were actually much better than that on an operating basis if we were going to call out an OTC associated with it, that may would be a different situation. We actually also anticipate March revenue being higher than the December revenue and I think that’s a result of the not the macro and you’re exactly correct that March is almost always lower. But it’s more the timing of the new program wins and what they’re coming in.

So between the timing of the new program wins, when they’re coming in, and at the same time if we were to look at the operating profits on an after-restructuring business, the core business is running actually a little bit better. So we actually feel that we’ll have some more of that in December. We think that’s done in December by being more aggressive and taking some the fixed cost out and being able to hit our targets, and that’s why we’re still working to – by the end of the FY ’12 – by the end of the March quarter, we’re hoping to run that at a 4% rate. The macro economy could derail it, but the one thing that we will have behind us is we will have a significantly lower fixed cost structure associated with those businesses.

Kevin Kessel

Lisa, we’re at roughly at the end of our hour here, so we can take one more question.

Operator

Okay. Our last question comes from Brian White with Ticonderoga.

Brian White – Ticonderoga

Okay. Just a quick question. The $0.06 impact from the ODM business in the December quarter, what exactly is that?

Paul Read

Hi Brian, it’s Paul. So as we’ve accelerated this exit, most of the production will be done in the October months for example. And while we have losses with regards to the units that we shipped, we also have a period then of inefficiency under absorption through the rest of the quarter. So that some of that.

As Mike said, we’re deploying all of this equipment around the world next month. There is cost of doing that of churning out and send it around the world. We’ve got some supply chain contractual costs that we’re exiting early on, so those agreements that we’re having are costing us some money to do that. When we do that also there is a small amount of E&O charges. There is just a bunch of stuff really that is creating a delta there that are one time in nature that we get behind this, so that we can go to a clean March.

Brian White – Ticonderoga

Okay. Just on the gross margin, some of us got on late, there was another conference call. Gross margins dipping 5.3 to 4.7, what drove that in the quarter?

Paul Read

In the September quarter sequentially?

Brian White – Ticonderoga

Yes.

Paul Read

Yes. While I had said earlier that there was a couple of things really that we hadn’t anticipated that didn’t go our way. The cap equipment revenues were down significantly. They are a higher margin business for us. They accounted for about 20 basis points and we had some restructuring charges that we took that’s accounted for kind of 15 basis points to 20 basis points. So I think that’s the majority of the delta in the gross margin.

Brian White – Ticonderoga

Okay, thank you.

Paul Read

Thanks a lot, Brian.

Kevin Kessel

All right, thank you very much. The reply of the call and the transcript will be available on our website. So this concludes our call.

Operator

That concludes today’s conference. Thank you for participating. You may disconnect your lines at anytime.

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