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Flextronics International, Ltd. (NASDAQ:FLEX)

2012 Bank of America Merrill Lynch Technology Conference

May 9, 2012 5:45 PM ET

Executives

Wamsi Mohan – Bank of America Merrill Lynch

Mike McNamara – CEO

Paul Read – CFO

Wamsi Mohan

Good afternoon everyone. Thank you for joining us here today at the Bank of America Merrill Lynch Technology Conference. For those of you who’ve not met, I’m Wamsi Mohan. I am the Technology Supply Chain Analyst here at Bank of America Merrill Lynch. We’re delighted to have Flextronics here with us today. It’s a massive company which has touch points into every geographic region, every products that you can think of, did about just of shy of $30 billion in sales last year.

It is going through significant changes within its portfolio. We actually upgraded FLEX right after their earnings, where we felt like the fundamentals were really changing for the company. And we’re delighted to welcome Flextronics here. We have the CEO, Mike McNamara and CFO, Paul Read both of us joining us. So thank you very much for joining us here today. The format is going to be a fireside chat. I’ll start off with some questions and then we’ll also open it up to the audience. So with that, thank you very much for joining us.

Mike McNamara

Good. Thanks for having us today. Yes, I appreciate it.

Paul Read

Thank you.

Wamsi Mohan

So, Mike, maybe just sort of very high level to start off, I mean you’ve seen many, many cycles in the EMS industry, where do you think we are in sort of a mini cycle? It feels as though looking at trends, things are not falling off a cliff but at the same time not a whole lot of revenue growth that we can see in the very near-term as the scoreboard is sort of weaker guidance here. So it feels as though we’re close to a bottom hopefully we pickup in terms of revenue growth. Is this sort of a mini cycle where we are sort of posting near the trough and hoping that things get better?

Mike McNamara

Yes, I don’t know, if I would call it a mini trough. I think the industry in general, the electronics industry in general what I think about it being everything bud apple, has just being kind of coasting along. I don’t know that it’s being go through a trough really, I just think it’s been a very slow, somewhat steady environment for some period of time.

So we haven’t really seen going down, we haven’t really seen the trough. We just have seen kind of slow and not to exciting. And maybe that’s just a reflection of the general marketplace. The U.S. has been little bit stronger but Europe is a little bit weaker, China got a little bit slower, maybe it’s a picking up a little bit, Brazil is certainly slower than it was a while, last year and the year before. But maybe if you take in all of the bundle it’s just a slow growth kind of business and that’s what it feels like to me.

Wamsi Mohan

When you work through the course of the rest of the year, I know you alluded to in your call that next quarter obviously there are some challenges with respect to HVS but from then you expect to see about normal sequential growth. So what gives you the confidence, how much of that is dependent on macro sort of coming back a recovery or versus the line of sight that you have into your wins into the pipeline of projects that you’ve build over the last year or so?

Mike McNamara

Yes, we actually thought that seasonal – we would actually grow a little bit better than normal seasonal growth September, December towards the backend maybe even into the March quarter. It’s a combination of couple of things. One is it’s a trough quarter for us in the June quarter in terms of revenue and that’s not necessarily because the markets a trough quarter, it’s more because we’re doing that conversion in terms of our trying to get to a balanced portfolio of about 30% high velocity and about 70% non-high velocity, which we think is the optimal portfolio.

So I think as we go forward, we see some seasonal pickups, normal seasonality. We see without anticipating a significant amount of recovery in those numbers. So we’re actually expecting more slow kind of continued steady, kind of sturdy kind of growth. At the same time we have some of new wins. So without doubt, I think the electronics marketplace continues to – or electronics manufacturing services business continues to have more and more outsourcing on a continual basis.

So we’re still seeing some product categories where the amount of outsourcing keeps increasing even though the underlying core business may not be very robust. So it’s a combination of all of those things.

Wamsi Mohan

Well when you look over the course of many years, I mean it seems like some of these non-traditional areas would be a big driver for growth, and they really if you look at computing, if you look at service storage, networking all these have been highly outsourced at this point but when you look industrial, medical, defense, I mean these have been opportunities, there continue to be large opportunities. How do you see your mix of that business evolving over the next few years? It seems as though maybe things are coming to a pain point in these industries where and you have budget cuts in defense which force people to potentially outsource more medical going through a significant revamp. Just industry regulations seems to be driving opportunities more and more towards your favor and in favor of outsourcing. So should we be expecting the mix to actually materially change over the next, call it three, four, five year timeframe and what does mean for the sustainability and volatility of margins?

Mike McNamara

I think you hit the down head on a few of those, medical and defense and aerospace, whenever there is dislocations in those industries, it’s usually an opportunity for us. And what’s creating uncertainty in the medical environment in terms of what Obamacare might do, what it might not do with the consolidation of the hospital, all this is creating an environment where people are looking for ways to improve margin and drive down costs and that’s valuable for us.

Defense is the same thing. There might be less defense budget, so you’d kind of naturally think there is less business to go around but it’s actually the reverse because they still want to buy as many things as they can and just go on and pay less more and that’s actually good for us because the defense contractors will look for ways to offload some of that business.

So similar things and then the industrial businesses which are really a mix of more classical online technology kind of business, call it a John Deere tractor whenever there is just more and more electronic content in those products and they are looking for ways to outsource. And additionally they look for ways when a lot of these companies need to internationalize their business or globalize their business, they are looking for accesses to good experienced source of manufacturing in a lot of different regions to access the marketplace.

So all those bode well for us. So we kind of think of the – and then there is some clean tech and kind of new technology kind of industries that are just brand new industries that are opportunities for us. So if you take all those into a bundle, we think those that whole class of businesses could probably grow substantively maybe 10% to 15% for the next three or five years. So there is structural change going on with those industries. There is content changes within the products in those industries and there is just continued more and more globalization. All of this which is valuable for us.

Like you said the telecom, the datacom, lots of computing. A lot of that’s already been outsourced for quite sometime and those will probably grow at slower level. There might be certain parts of computing that will grow fast, things like service and storage. Well networking, networking service storage that bundle that is being sold in the cloud computing is a little bit different content and will probably go double-digits in many years. But if you look it as a bundle its probably pretty single-digit, mid-single digit kind of number.

So we’ll probably end up being slower growth in those kind of businesses. Alternatively we have a great market position in those things. Our I&S businesses runs roughly like a $11 billion and that’s a significant size of scale. And as we look forward, we’re actually bullish about it because we actually have a very strong service storage networking. So the businesses at the same time we also have a lot of our telecom businesses while they might be flat, alternatively we’re actually on most of the next generation LTE kind of products.

So as some of that 2G and 3G falloff, we’ll actually be able to replace it with the LTE. It still doesn’t mean huge growth but I mean our core business of 2.5 and 3G won’t be affected. So it’s kind of a long answer but there is a lot of trends at work here but I think there are some industries, they are going to able to deliver 10% to 15% growth in and can grow even without market share gains. And I think the other industries that are very well outsourced and unless you have a very, very strong position in terms of capability you won’t be able – it will be harder to survive because there is going to be case where you’ll need market share gains to have a good growth rate.

Wamsi Mohan

Kind of speaking about the market share gains, I mean, do you anticipate that that will be your driver for you in the higher liability solutions or when you look at medical where you have reasonably strong position in the industry. Do you actually anticipate that you will see both market growth and market share gains? Is that something that you are witnessing now or do you think that the market is just going to be as large enough as growing at a rate that can support multiple players to grow at a reasonable pace?

Mike McNamara

Yes, I guess it has a different answer for every industry, and medical I won’t see a lot of dislocation or changes in market share, because it’s very hard to move that business. Once it gets awarded its probably pretty stable and that’s one of the values and the benefits of that business is once you get awarded you might have five, seven to 10 years with somewhat like an annuity kind of business .So it carries a higher margin profile and also carries characteristics of an annuity kind of business, very attractive business.

So more likely there, you know there is going to be a market expansion. More and more people want to outsource. Recently in the last year we’ve actually taken over a factory in one of our medical customers which is kind of still like the old days as telecom datacom and we’ll see more of that going forward. So I think in medical it’s going to be more market share curve. It will be more expansion of the market, which is also good because as you get expansion of the market instead of being the market share gains hopefully the margin profile remains intact.

So but in other industries like in telecom datacom, it’s going to be more of a market share game and the strongest are going to survive better than the rest.

Wamsi Mohan

It’s really interesting to hear you talk about picking up assets and medical that reminds us back of 10 years ago and there was this big boom in computing where people have that, the same sort of dynamic way out, but what were the drivers, I mean the drivers seem very different this time around. So can you talk about what some of the drivers were that drove that particular medical customer to consider doing this? What were some of the things that they were worried about initially and what were the things that they overcame given you could demonstrate your capabilities to get that sort of asset under your belt?

Mike McNamara

Well one of the drivers of – I’ll start with the telecom first, what are the drivers of the telecom, back then was stress [ph]. Companies – if you look at Ericsson, the Alcatel-Lucent, Nortel, they were all traded in less than $3 at one point after the 2001 crash. There is a lot of drive for liquidity in a lot of very anxious drive to move to different regions and outsource a lot. And there was also some outsourcing about even prior to the 2001 recession.

So there was one set of characteristics which were all more economic driving to variable cost models improving the balance sheets and they kind of had one set of economics. It’s leaving the medical doing that today is it’s quite a different set of characteristics. Five years ago or six years ago, our business in medical was about a $150 million. Today its $1.4 million – $4.4 billion and that’s pure medical, that’s not things like instrumentation and other kind of things. It’s purely medical products.

As a result of that, we’ve been through multiple FDA certifications. We have a team of almost 300 design engineers in medical, that where we’re designing products and co-designing with our customers. We’ve been through our quality system, we’ve actually had customers ask us if they can lease our quality system promos because they actually viewed it to be actually better than their quality system and that’s a unique a quality system for the quality industry. So what happened today is well five years ago these medical companies will go to take a look and say is outsourcing an option and the answer would be no. There wasn’t enough confidence in the industry. There wasn’t enough FDA experience, there wasn’t a strong enough quality system.

And if they go out and they look today, I think most of them would say that our systems are as good as their systems. And the fact that we can scale them maybe do it for a lower cost maybe help rationalize their supply chain and their footprint all becomes attractive. It turns into variable manufacturing. And then they can now think about variable manufacturing costs, rationalize the foot print, access to new markets and improving their balance sheet spike by having us take over and run their operations.

So now the characteristics of the telecom industry kick in, but not as viable. Well five or six years ago they probably won’t viable. So this creates an acceleration of – it’s almost like you’re creating your market as a result of building your confidence. And its most of the same thing that we did in telecom industry in the 90s, when we first started outsourcing, we didn’t have robust quality systems in as Flextronics led the way by getting two Malcolm Baldrige Awards in the early 90s which actually propelled them to – and had very sophisticated MRP systems and it actually propelled them to have manufacturing systems and process that, that were then better then the OEMs.

And it created a new, a huge way of outsourcing in the 90s as a result of enabling just creating that confidence. So we’re seeing the same thing in medicals just different characteristics you have to be successful.

Wamsi Mohan

It seems those words can be self fulfilling almost competitive network effect where if you are someone who has a medical OEM, have outsource then can lower the – all the benefits that come with that, you’re relatively better position with the rest of the competition and sort of forces the competition, all sort of go through this in cycle.

Mike McNamara

And all we’re doing is going through the exact same cycle of telecom only 15 years later. And at the end of the day outsourcing in EMS continues to grow in excess of the electronics industry growth rate. The electronics industry growth rate is stronger and faster than GDP, electronics is higher and then the EMS is higher again because there is more and more adoption of the EMS. So what I personally convince that is the economics associated with outsourcing and the efficiency you get by moving towards variable manufacturing overhead and the efficiency you get by us taking 10 different customers put them in one factory and diversifying that, that manufacturing investment risk and real genuine advantage.

And it’s why EMS and outsourcing will probably continue to expand more rapidly than the electronics total growth rate for the foreseeable future, because I think it’s inevitable that it’s just a better more tested mathematical, it’s just real economics to it.

Wamsi Mohan

Okay.

Mike McNamara

And I think the medical industry is now figuring that out I think more and more industrial companies will figure that out. I think the automotive companies will figure that out more and certainly telecom and computing has already figured that out.

I don’t think any one of those guys want to go the other direction.

Wamsi Mohan

No, definitely not. So that brings an interesting question around margins because we’re seeing margins have been slower multiple cycles but it’s being – these cycles are being driven primarily by computing exposure. As this computing exposure sort of becomes smaller and smaller, you’d expect that the variability of this margins also goes down overtime. So how do you look at margins going sort of peak to peak? What is the sustainability of these margins. I mean you really [ph] closed the year 3.5% goal. Frankly, you have embedded restructuring charges that are masking your underlying improvement which over the next few quarters reason what we are going to come off and then you will see your 3.5% without the positive benefit of components. So it’s a really interesting dynamic where maybe a year or two ago, there was the question of how fast would components grow and become those more relevance to the components business becoming a larger part of the mix. Now it seems that just the big shot that you’re going through in the base business between HVS and non-HVS, you are already tracking very clear to the 3.5%. So as we think about the 3.5% operating margin number. Is that a new starting point, would you capitalize that as a mid cycle feet margin how should we think of that?

Paul Read

The portfolio mix drives a certain margin for that. We had a certain mix over the last two years and we have a very different mix going forward and for structure its setup to achieve that 3.5% kind of number. We have still got some ways to get there in another few quarters here but the predictability of it – the sustainability of it is vastly improved by the mix that we have. So we’re very much looking forward to that plus components like you said.

3.5% generates 25% return on capital, great free cash flow yields kind of 8% to 10% free cash flow yields and sizable free cash flow. So it’s a very sustainable and very attractive kind of financial model to have. We can do more than that, probably can but we’ll always want to be investing in the business and not just focusing on margins but focusing on growing EPS and quality of earnings and cash flow. And so while today it’s the prime driver for us to get to that border mark then and go constantly work to improve it, and we think there are opportunities to continue to improve it. We’re also wanted to be investing in the businesses that we can sustain the top line growth which is very important. It’s one thing to have great margins but you really got to have that top line growth as well.

Wamsi Mohan

Thanks Paul. So when you look at ROIC as a metric to measure yourself, I mean are you indifferent about the way you get to ROIC from a margin versus asset velocity perspective? How do you think about the tradeoff? What is optimal for you now given the state mix shift that we’re seeing in your portfolio?

Mike McNamara

One of the things that it’s really important is to think about risk adjusted ROIC. And one of the things with high velocity business is that should you can get to a certain ROIC with much lower margins, and the good example is our PC ODM business. We ran that at actually negative, no working capital. What’s different about – but what you do is you have a little you have little product lifecycle. So typically in that high velocity business doesn’t be more consumer in nature, they tend to be more rapid product lifecycles. That sustainability that the predictability and the continuity of that margin stream is challenged because you have setup costs, you have shutdown costs maybe you launch the product but it doesn’t take off in the market. You’re more likely to have a distribution channel inventory adjustments in those kind of products.

Now you contrast that to the way we described, medical or one of the other ones which is almost like an annuity last six, seven years, eight years potentially. So even though they might be the same 20% return on capital when you look at it. If you really look at the risk adjusted return on capital, those low margins or those higher margin, longer product lifecycle that products have that fluctuations are actually a better quality ROIC which is like Paul was saying about the quality of earnings. So as we move this mix all 25% of return on capital is not equal.

Wamsi Mohan

Right.

Mike McNamara

It has one more risk to it and some is more like an annuity. And as we move to balance the portfolio to 70% we’re way more likely to have longer product lifecycles, more sustainability, less fluctuations as we move through March quarters, less likely to get channel and inventory adjustments and all of which adds up to a more predictable stream months of earnings which we find is – which is our objective in terms of moving our portfolio and I think it’s certainly an investors objective to have a substantially more predictability.

Wamsi Mohan

When you look at the cycles that have happened in the past, and think about how the margin profiles have evolved through those, it feels as though those cycles had a high degree of variability to those within the margins itself. So when we look at the 3.5% and Paul you alluded to the fact that you can do better than 3.5% but given your current portfolio mix, what sort of assuming that you don’t get a big euro implosion of some sort, I mean what sort of base level of margins are we looking at which we shouldn’t sort of dip below, borrowing big revenue pickups?

Paul Read

Yes, I think if you look forward as to when we’ve finished some of these restructuring things with components and HVS, 3.5% becomes that bar for us. And that’s where we build out business models off going forward on that mix. So absent of anything we don’t know and some sort of macro collapse that that’s what the heads for us this year which is very encouraging and just around the corner for us. So I think it’s just structurally set up different. If you go back a year ago, we had the same question. We had big ramp with ODM PC, we had components kind of firing on all cylinders and also some other things.

It was just, as Mike said, it was just from a risk adjusted perspective, it was just a little bit more risk in that model and there is in the one today. We don’t have customers greater than 10%, our top 10 are like 40 some percent this year. So not a huge concentration in customers. So very diversified business and a great mix of 70/30. Its 70% of our business is close to $20 billion of low volume high mix business, that’s really compelling and the lot of customers that are less than $100 million in revenue in the business that we do with them.

So it’s so well diversified that, therefore it has a lot more cushion in the downside and has a lot more upside in terms of when the macros and everything come back and the border [ph] level rises for people. So that’s another factor that’s actually very compelling about having not just the pure mix but the diversification within the mix. And then being the leaders in these industries, really go into markets is a very strong proposition for the supply base at the customers that we go to.

Wamsi Mohan

I think just given the share size of Flextronics, people often lose site of the fact like you do a lot of high mix low volume stuff. So is there a way you can quantify in terms of lot sizes perhaps in your different end-markets, what sort of ranges of lot sizes we’re talking about?

Mike McNamara

So our lower lot size would be like 1.25. So the answer is we can’t quantify that. We have more customers than anybody in the world. More locations than anybody in the world. More low volume, high mix than anybody in the world. More medical, more industrial, more automotive and more miscellaneous products than anybody. We look at our low volume, it’s funny. We look at some of the earnings [ph] reports and they say the company access the leader in low volume high mix and it’s like how can that be when they are like $2 billion.

And we’re like $20 billion of low volume high mix and you know we get questions like how you got to make the transition to low volume high mix and it’s like well we already do, I think last year we did $17.5 billion in terms of low volume high mix, I mean how do we make this transition to what? To be the market leader. It’s kind of – so there is kind of like the lot of numbers kind of messes with people’s brains a little bit. So we have this massive footprint of what’s low volume things. I mean our minimum lot size I mean our published minimum in our company is we don’t have a minimum.

So we don’t have – we don’t tell customers if they are $20 million or less. We don’t take you. We don’t say $10 million or less. We don’t say $5 million or less. In fact we don’t say $1 million and less because we have $1 million customers all over our company. So it’s just people and their brains have gotten into that we do with the high volume company and we do a lot of high volume and we do a lot less now, but in the meantime our low volume has gone through the roof.

Another interesting statistic is in 2007, we did roughly $7 billion in low volume, high mix. Past year we did $17 billion. This year, we’ll do close to $20 billion. And we’re just like looking at this thing going really, I mean we have the most sophisticated tax structure of any other companies, most sophisticated manufacturing systems of any other companies, most sophisticated MRP system implementation of any other companies, the most products, the most different product technologies of anybody in the business. And we actually earn that right of all those comments even without a high volume business even if you don’t count it. So it’s kind of a funny thing.

Paul Read

Yes, I think my perspective on that I think is I think people have just lost sight of over the years just having been used to one high volume business – if you’re looking at the revenue scale, sort of making the implosive conclusions that there is a lot of high velocity products in there and then looking at the public margin profile which has been massed over multiple years for a multiple reasons arriving at that strong conclusion as you find that.

Mike McNamara

But even if you were like at 70% high volume and only 30% I mean, as a $30 billion company, nice strong numbers, just $10 billion of low volume high mix, even if we were like mostly high volume, we’d still be the low volume high mix game.

Paul Read

You scale out the new phase [ph].

Mike McNamara

So the scale kind of messes everybody up and people don’t understand we’ve got this underlying core business that’s just doing great and very sustainable and longer product lifecycles and more diversity. And so there is this misconception out there and part of that is we’re taking to manage with that misconception buying our own shares until people figure out that there is underlying core businesses actually very powerful, very strong and its actually that when the number one largest in virtually every single one of those categories with the exception of defense what we’re working on fixing that.

We’re buying back our stock. We bought back 18% of our stock over the last year and half – and so as long as we see that underlying value that’s in there, we’re going to take advantage of it and some point some of them, everybody is going to figure that out so...

Wamsi Mohan

Yes, you guys have done a great job with share buybacks for the last few years, I know it’s being definitely created value for shareholders. The pace of the transition away from the PC ODM business and frankly some of the handset business is fairly incredible. The share pace off to drop off of revenue is, I mean I think consensus revenues will probably at least flat. I think everyone moved down a couple of billion dollars over here after you guys reported, but EPS growth is coming this year for sure given your mix. What are some of the challenges in terms of going to such a big undertaking of changing the mix so rapidly. It appears to be as we look at externally, it is a very rapid change and we’re talking about the massive amounts of revenue that are going away. So how do you navigate that? What are the plans that you have in place and just as a follow-up, next quarter we saw a big drop-off in high velocity, this quarter we’re going to see another big drop off next quarter, how do you feel about sort of the subsequent quarters? Is that sort of – has that customer reached the level of stability you already accounted in your comments in the call so I think everything appreciated that?

Mike McNamara

Yes, I mean the one thing about repeat the exact [ph] elements, the mobile high mix portion, there is no really change. We’ve been focusing on it for years. We’ve gone from $7 billion five years ago to $17 billion last year. We’ll probably add a couple of billion this year. So that – it’s been a normal transition and normal change, something that’s worked well in our control and our skill set and not a whole lot we have to do. The PC ODM was a transition of about $2 billion, in fact, it was more like $4 billion at its highest run rate.

Paul Read

Run rate, yes.

Mike McNamara

All $4 billion was in one factory in one location in China. So we have – we have 100 factories around the world. So that’s all in one factory – we just had to build less there and what we had to do is take $50 million of equipment that is commonly used throughout our entire system and redeploy it and considering we buy $400 million of equipment every year, that took only took a couple of months as we redeployed that equipment.

So if you look about that first step, wasn’t much to it. I mean it was just one factory, took it down, redeploy common equipment and move on. The second step is its more – one of our biggest mobile phone customers that has taken down, that will be a little bit more complicated. And that’s where I’m going to be completed but its only one customer that we’re really making a transition on. So the rest of our consumer customers are very much intact. So we’ll end up taking the big mobile phone customer down and it’s currently running in like four factories and we will probably have to take maybe three factories down.

Now every one of those three factories is in an existing campus location. So we have a factory in Hungary and we probably have a million square feet and where you’re losing $200 million that we won’t use any more. And in Brazil we have about one million square feet and there is going to be 100,000 square feet. We’ll probably even keep building in Brazil. In Mexico we have a campus of, I don’t know, two million square feet and we will take down 300,000 square feet. So all within existing big campuses that we’ll then repurpose because we’re booking $2 billion a year in this other kind of business.

So if you think about it, it’s not that much of a transition. It’s really PC ODM which we just stopped doing all in one factory and it’s just less mobile phone business that already runs in existing factory. So we won’t shutter any factories, we’ll just may have some people and move some product out again. So it’s especially not that much of a transition. We actually don’t have to change our strategy, our organizational structure, our headcounts, our investment profiles, I mean it’s actually a pretty simple transition.

Wamsi Mohan

Thank you for all that color. That’s actually very helpful. When you look at your footprint today I mean massive global footprint, lots of scale. Anything around the footprint that you think you want optimize around where some of the dynamics there that you think investors should be aware of?

Mike McNamara

Well we’re actually balanced pretty nicely. If we think about the future, and you think about some of the dynamics that are going on the world, one of the things without a question is that the costs in China are going up substantially and there is certainly a trend towards every government in the world wanting people to manufacture on their shores. So without doubt, I think that’s a condition that’s going to continue and grow because everybody is trying to get their employment out.

As that condition occurs, we actually like our footprint because we’re still diversified on a worldwide basis once you – we’re the second largest in China, but once you get outside of China we actually have the largest footprint in the world. So as that – we think there will be more and more dislocation of business from China into other regions, not a lot just a little bit but as costs go up a little bit more, Mexico becomes a little bit more attractive. And as costs go up a little bit more maybe there is a some automation, maybe you can get a product or two back in the United States, maybe and that makes sense, little bit more sense to build an Indian setup building and China shipping into India.

So as that migration occurs, our footprint is actually the broadest geographic footprint in the world today. So we consider that an advantage. So we think that’s one trend. We think our footprint is kind of in the right place. There is one more power factory that we’re looking to take out. We always regularly kind of add a factory, close a factory, move a factory around, that’s kind of business as usual but in terms of any major dislocation of business, we really just – we really don’t have it. And even any movements out of China are going to be slight.

I mean they will move and move around but the costs in China going from two thousand twenty cents an hour to two thousand and sixty cents an hour, I mean it’s not the end of the world especially when you’re like entire component supply base is right there in China. So there will be movements and there will be changes. There will be more regional manufacturing. We are very well positioned for the regional manufacturing but there is no major dislocation that are occurring. So we think business as usual.

Wamsi Mohan

Okay. Any questions here in the audience?

Unidentified Analyst

My question was just quickly on the buyback, 18% of the flow in 18 months is very impressive. And I am just curious if you’re programmatic or opportunistic with your buybacks, and if you are opportunistic, what sort of framework do you use valuation or otherwise to determine how aggressive you are in the market? Thanks.

Paul Read

Yes we’re like you said we bought back about 18%. We have authorization up to 10% a year, that 10% expires at the end of July. We have about another 20 million shares available to repurchase between now and that period. You’ve seen us really being opportunistic more than programmatic. And we look at the valuation, so a lot of companies compared to, you know other industries, competitors and whilst we’ve gone through the portfolio transition, we’ve had lower margin performance than we would have wanted but it’s been a transition time for us.

And so we’ve seen the valuations kind of being pretty low. And therefore it’s been very attractive and has proven to be very accretive for us in terms of the buyback. So we pay a lot of attention to it and I think it’s worked out quite well, but – and at these price ranges that we’ve been buying at, I think we have an average price of just about $6.30 or something like that over the last 18 months. It’s turned out to be quite a good play.

Unidentified Analyst

Hi, could you just update us on demand trends by region, especially what you’re seeing in the Europe? And I think on the last earnings call you talked about your capital equipment business doing better, what you attribute that to? Is that end demand really coming back, or is that just a temporary uptick in what you’re seeing?

Mike McNamara

Yes, I’ll take the kind of the easier question first which is capital equipment. It tends to be very, very cyclical. They tend to – the semiconductor companies tend to add up lot of equipment and then they go to a pause. So it kind of goes up and down and a friend of mine and that’s the CEO of one of the semiconductor cap equipment guy said it to me back, he said this is 18th cycle I’ve been through. He is actually – and he is not as old as I am. So it’s just kind of characteristics of the business. We probably had a little bit more downturn.

We had a good downturn. It was too full, it was the semiconductor equipment, but it was also we were doing a lot of filler manufacturing equipment. And what’s coming back for us right now pretty reasonably heavily which I think is just the end of that cycle and it’s just kind of rebuilding some capacity. The semiconductor has come back but the solar has not because as most people know the solar capacity for solar module assembly is well in excess of what the expected installation is going to be for this year. So not all of its come back. The semiconductor has come back but the kind of the solar equipment has not come back.

As far as your other question about demand around the world, sometimes that’s really difficult for us to know exactly. We tend to have so far very strong numbers with our automotive group in Europe, which we do have very good visibility on, but a lot of that is not necessarily European demand. Its export driven where we tend to have a position in a lot of premium cars and lot of those premium car manufacturers are selling heavily into non-European places, China and those kind of places. So it’s really not European demand but it’s certainly European customers.

We hear telecom is quite soft in Europe. We hear telecom is pretty decent in the United States, pretty good in the United States and then it’s kind of off and on in some of the other parts of the world. So I think Brazil feels like it’s a little bit softer in terms of (inaudible) than it’s been in the last of couple of years. But to be perfectly honest with you, it’s difficult for us to really now where exactly these products are going. Very often the customers take responsibility for the freight out. We’ll move them to a center in Hong Kong and then they take distribution from there. We don’t exactly where they are going and even while we service a European premium car manufacturer right there in Germany, lot of times that car is going to China, it’s not going really going to Europe. So it’s difficult for us to sell, but it certainly feels just like which you hear in the Wall Street Journal that the Europe is weakening and the U.S. is pretty solid and pretty predictable and then the rest of the world is kind of off and on, but okay.

Wamsi Mohan

Paul, I want to ask you about component margins fairly with the exit of the Vista Point business, now it feels as though there is some restructuring that needs to happen in FlexPower, but outside of that, Multek meets your revenue pickup potentially, but as you look over the course of the next few quarters, I mean is there an opportunity that we’re now going to see an accelerated sort of pace at which given the exit of Vista Point of being a drag on the components margins and with the restructuring in FlexPower to be complete, that you can get to 4% op margins for the course of some point in ‘12?

Paul Read

Yes, power is basically operationally profitable, it just had some restructuring it’s been eating for a couple of quarters and we’ll finish that off in September. So we’re pretty positive about power being having a great performance here in December, March kind of timeframe. It’s a great business for us. I think we’ve really tended into something that brings a lot of value across some of the pricing for us. So it’s a big business probably a billion dollars and should make 5% kind of profit numbers. And so I think that’s on the right track. Multek, we’ve made a lot of investments, probably around $100 million in the last 18 months in some new technology that’s driving a lot of smartphone and tablets, satisfying that smartphone tablet demand. And we’re starting to see the bookings from the leading companies in those spaces.

And we think that we’ll be filling up that capacity probably in the December quarter as well. And so Multek will reach kind of that performance level right about that time. So I think the two have come together kind of the backend of the year, the second half of the year and a 4% target is one thing that we want to crossover and go beyond as soon as we can. So that’s far more predictable than absent of maybe some real demand problems that may come up, but that would affect the rest of the business as well, but nothing that we see particular to those two performance businesses.

Wamsi Mohan

All right, thank you. I think we’re just about all the time. So really appreciate all of you joining us today and thank you very, very much for joining us. We really appreciate your presence here.

Mike McNamara

Thank you very much. And thanks to everybody out there.

Paul Read

Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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Source: Flextronics International Management Presents at 2012 Bank of America Merrill Lynch Technology Conference (Transcript)
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