Kevin Kessel - Vice President, Investor Relations Christopher Collier - Chief Financial Officer Michael McNamara - Chief Executive Officer.

Steven Milunovich - UBS Securities LLC Adam Tindle - Raymond James & Associates, Inc. Amit Daryanani - RBC Capital Markets James Suva - Citigroup Global Markets Inc. Paul Coster - JPMorgan Chase & Co. Steven Fox - Cross Research LLC Mark Delaney - Goldman Sach & Co. Timothy Sweetnam - Goldman Sachs Matthew Sheerin - Stifel Nicolaus and Company.

Good afternoon and welcome to the Flex Third Quarter Fiscal 2018 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, Flex's Vice President of Investor Relations and Corporate Communications. Sir, you may begin..

Thank you, and welcome to the Flex's third quarter fiscal 2018 conference call. We have published the slides for today's discussion. They can be found on the Investor Relations section of our website at Flex.com. Joining me on today's call is our CEO, Mike McNamara, and our CFO, Chris Collier.

Following their remarks, we will open up the call to questions. Before we begin, let me remind everyone that today's call is being webcast and recorded, and contains forward-looking statements which are based on current expectations and assumptions that are subject to risks and uncertainties, and actual results could materially differ.

Such information is subject to change, and we undertake no obligation to update these forward-looking statements. For a discussion of the risks and uncertainties, see our most recent filings with the SEC including our current annual and quarterly reports.

If this call references non-GAAP financial measures for the current period, they can be found in our Appendix slide. Otherwise, they are located on the IR section of our website along with the required reconciliations. Before I turn the call over to Chris, I wanted to pass along and save the date for our 2018 Investor and Analyst Day.

It is schedule for May 10, and will take place in San Francisco. So mark it down on your calendars and expect more details to be emailed by us shortly. With that out of the way, I would like to pass the call over to our CFO, Chris Collier.

Chris?.

Good afternoon and thank you for joining us today. We will start on Slide 2 with our third quarter fiscal 2018 income statement summary. Our third quarter results were broadly in line with all key financial metrics we provided back in October reflecting our continued growth, structural portfolio evolution, and capital return commitment.

Quarterly sales were approximately $6.8 billion, up 10% versus the year-ago and above our guidance range. All four of our business groups met or exceeded their respective sales guidance ranges.

Our third quarter adjusted operating income was $220 million, which was in the middle of our guidance range, and adjusted net income was over $164 million resulting in adjusted earnings per diluted share of $0.31, which was towards the high-end of our guidance range.

Third quarter GAAP net income amounted to $118 million and is lower than our adjusted net income due to $21 million of stock-based compensation expense, $17 million of net intangible amortization, and $7 million from impairment of non-core investments.

These adjustments had $0.09 impact on our adjusted EPS resulting in third quarter GAAP EPS of $0.22. Now turn to Slide 3 for our quarterly financial highlights. This quarter was our fourth consecutive quarter of year-over-year quarterly revenue growth, reflecting the strong demand from our significant bookings and new business wins.

And we have been capturing with our Sketch-to-Scale portfolio shift and our expansion into new businesses in markets. Our third quarter adjusted profit totaled $452 million and our adjusted gross margin was 6.7%.

As highlighted last quarter, we are ramping several new programs through the balance of this year, and this is reflected in a strong revenue growth in our third quarter and evident in our fourth quarter guidance.

These new programs along with the continued development of our long-term strategic partnership with Nike contribute to a new foundational layer of revenue for Flex. Although, in the near-term it depressed our margins due to high levels of investment costs and under-absorbed overhead costs.

Despite the higher investment in cost being carried, our adjusted gross profit dollars grew 4% year-over-year. In our third quarter, our adjusted SG&A expense amounted to $232 million, which was up year-over-year. Although, sequentially as a percentage of our net sales, it declined 20 basis point to 3.4%.

As a reminder, R&D expense is a component of our SG&A, and the increase in SG&A is reflective of incremental design and engineering cost as we further invest in our innovation system through our expansion of our global design footprint and engineering capabilities.

Our quarterly operating income came in at $220 million, which was modestly lower than the prior year and almost entirely attributed to the increased levels of investment required for our new businesses and to support our Sketch-to-Scale vision. Our adjusted operating margin was 3.3%, which is up nearly 30 basis points sequentially.

As we benefit from our strengthening topline, that begin to move away from our heavier investment year profile. Return on invested capital was 17%, remaining well above our cost of capital and reflecting our elevated levels of investment, which pressured our profitability as we continue to position our Company for future growth.

Turn to Slide 4 for our operating performance by business group. As expected, our CEC business returned to our targeted adjusted operating margin range as it hit 2.5%, while it generated $15 million in adjusted operating profit.

We continue to transform our CEC customer portfolio and expand our cloud datacenter capabilities with targeted investments in engineering and reference platforms. These elevated costs coupled with lower overhead absorption due to lower CEC revenue levels as pressured probability year-over-year.

Our CTG business generated $39 million in adjusted operating profit, resulting in an adjusted operating margin of 1.9%, which was just shy of our targeted range of 2% to 4%. Revenue was healthy. The business saw a strong sequential growth in operating profit dollars rising over 26%.

The sequential improvement in operating profits reflected reduced [clients] from our strategic partnership with Nike as this transitioned to a new manufacturing facility during the third quarter aided in driving operational improvements. However, CTG operating margin was pressured as we had lower margin contribution from ramping new programs.

Our IEI business generated a record adjusted operating profit of $61 million, achieving a 4.1% adjusted operating margin, which creates inside our targeted range of 4% to 6% as expected. The business continues to experience strong demand across its diversified markets. And it successfully ramping several large new customers Sketch-to-Scale programs.

We expect to sustain the strong growth trend and IEI capitalizes on a strong design and innovation position in a rapidly digitizing industrial market. Lastly, our HRS business delivered another record quarterly adjusted operating profit, as we generated $101 million, which equated to operating margin to 8.2%.

This business consistently operates healthily inside its target margin range, while it continued to actively invest and expanding its design and engineering capabilities and truly shifting to be a value design and manufacturing partner. Turning to Slide 5, let us review our cash flow and net working capital.

We continue to generate solid operating cash flow, which enables us to operate, invest, and grow our business. This quarter we saw cash flows from operations at $150 million, which marked our 14th consecutive quarter of cash flow from operations over $100 million. Our inventory levels increased over $200 million from a year-ago.

As we recurring higher levels to support our revenue growth in positioning for multiple large program wraps. While operating in a challenging – supply buyer. Our strong inventory management during the period unable enough to fulfill customer demand and achieve inventory returns of 6.7 times, up from 6.4 times a year-ago.

Overall, our networking capital increased roughly $215 million over the prior year to over $1.8 billion and amounted to 6.8% of our net sales. We believe that our current and prospective business mix will result in our net working capital as a percentage of sales to remain within our targeted range of 6% to 8%.

This quarter, our capital expenditures totaled $161 million, exceeding depreciation by over $53 million. As we continue to invest in our platform to expand capability and capacity with higher levels of investment to accelerate automation and Sketch-to-Scale as we’ve evolve our portfolio.

We've consciously increased our capital allocation to invest deeper into our CapEx, as we pre-positioned investments to capture and win more customers in business. We continue to earmarked greater levels of investment to support our expanding IEI and HRS businesses, as well as other new business initiatives.

These technology investments are supporting long underlying product lifecycles, in many instances have reported us to secure this capability, capacity or technology in advance to ramps.

These increased levels of capital expenditure and networking capital have pressured our cash flow generation resulting in our free cash flow being modestly negative $11 million from the quarter. Now for the year, we are currently expecting our free cash flow to be in a range of $250 million.

We continue to fulfill our commitment to consist or return value to our shareholders. This quarter, we repurchased roughly 2 million shares for approximately $35 million. Please turn to Slide 6 to review our capital structure. Our credit metrics remain healthy.

We have no near-term debt maturities until calendar year 2020 and we have over $3 billion in the liquidity. We continue to operate with a balanced capital structure and we have the strength and facility to support our business over the long-term.

Before I turn the call over to Mike, I’d like to emphasize that we continue to take deliberate actions to position and support our portfolio evolution and Sketch-to-Scale strategy, while continuing to softly allocate capital to capture meaningful future profitable growth and to fulfill our 2020 vision. Now I'll turn the call over to Mike..

Thank you, Chris. Our third quarter displayed continued revenue growth acceleration and the advancement of our portfolio evolution. We continue to gain momentum on both fronts fueled by our investments to leverage our unique platform and Sketch-to-Scale strategy. Please turn to Slide 7, our Q3 fiscal 2018 business highlights.

A number of positives in our Q3 performance further illustrate this momentum. This was our fourth straight quarter of accelerating year-over-year of revenue growth. All four of our business groups meet the midpoint of the revenue guidance ranges until units surpassed their high-end targets.

Both HRS and IEI set new records for quarterly revenue with year-over-year growth of 20% and 31% respectively. As a result, fiscal 2018 is solidly on pace to be a strong growth year.

The strengthening revenue aided in improving margin performance, as our adjusted operating margin percentage increased 30 basis points from last quarter, and all four of our business groups posted sequential improvement and three business groups ended up within their target margin range.

Our structural portfolio evolution remained an important theme in Q3. Our HRS and IEI businesses continued to lead the way as both achieved accelerating revenue and operating profit growth. Individually and combined they both set new revenue and adjusted operating profit dollar records.

Together, they totaled 40% of the sales and 65% of our adjusted operating profit dollars for the quarter. Both businesses are also on pace to grow revenue materially above 10% in fiscal 2018, while expanding their Sketch-to-Scale engagements and improving the go-to-market capabilities.

Our momentum is being fueled by continued receptivity from customers that recognize and take advantage of our scale and cross-industry integrated solution. We continue to improve and expand our design capabilities and reference platforms for new products and markets, which are leading to many new customer and business opportunities.

The level of interest for our Sketch-to-Scale solutions remain very high and are a huge differentiated, which was evidenced in CES in Las Vegas this year, where all four of our business groups were well represented and we had record customer interest in our Sketch-to-Scale solutions offerings.

The pace of change in disruption is intends, but we are finding numerous ways to partner with customers and enable their innovation by leveraging our deep vertical focus and expertise into adjacent our complimentary industries with success.

For example, recent autonomous vehicle program led by HRS leverage CEC’s complex engineering knowledge of the data center, which is becoming integrated in the car. Combining that key CEC’s skill set with HRS experience broader motor great manufacturing and supply chain solutions, create a significant marketplace differentiation.

Additionally, we continue to be very excited of our investments and opportunities that leverage the breadth of our platform.

For example, our Y2 Formula joint venture which is focused on transforming the building and construction industry by digitizing the designs through supply chain process, announce major customer wins in China, Germany, and the United States which help to perform meaningful foundation for this business.

Also our momentum continues to successfully expand these customer relationships and rapidly grow revenues. Our investments broadly in manufacturing automation and specifically in our strategic partnership with Nike are also developing and are expected to lead to meaningful long-term value creation.

We continue to be excited about our ability to leverage our platform into new business verticals that will provide for meaningful future growth. Please turn to Slide 8 as we review revenue by business group in details. Our third quarter saw a sequential growth across the board in all four business groups and year-over-year growth in three groups.

Our diversification remains strong and balanced. Our top 10 customer revenue concentration improved to 43% sales from 46% a year ago. Our CEC business was now at 6% year-over-year versus our expectation for 5% to 10% decline. Total revenue kicked up 4% sequentially to $2 billion.

Once legacy and markets remain challenged, it’s design capabilities continue to improve and expand, which is leading to new customers and business opportunities, particularly in cloud data center and converged infrastructure solution which rose over 25% year-over-year.

Additionally, CEC is instrumental in new markets, like autonomous vehicles as mentioned earlier and digital health. For the March quarter, we expect CTG year-over-year revenue reduction to be 5% to 10% driven by reductions in traditional legacy businesses, offsetting the sustained growth and cloud data center and converged products.

CTG had a strong growth quarter as revenue of $2.1 billion was up 11% year-over-year and above the high end of our guidance range of flat to up 10%. As a result of our growth in connected living, audio and mobile products.

A strategic partnership with Nike was further enhanced with a successful move into our new manufacturing facility during the third quarter. This move improved efficiency, it help reduce operating losses in line with expectations. Our objectives are moving this project towards the breakeven level exiting our Q4 remains unchanged.

For the March quarter, we are guiding CTG revenue to be up 5% to 10% year-over-year, benefiting from expansion of new programs and realizing normal seasonality with consumer products.

We remain committed to strategically shaping and influencing CTG’s business mix as we expand our Sketch-to-Scale engagements, capturing higher and technology content, which leads to higher value added revenues and more moderate seasonality in that previous year.

IEI strong growth continued with record revenues of $1.5 billion, up 31% year-over-year and above the expectation about 20% to 30%, led by a successful new program launches and expanding end markets. IEI strong growth across home and lifestyle, energy, capital equipment and continues to experience strong bookings across its diverse offerings.

For the March quarter, we expect we continued to strong IEI revenue growth up 15% to 20% year-over-year, led by new program ramps across all categories. Our solid year-over-year growth has been driven by significant fiscal 2017 bookings and continue to ramp in production.

Our Q4 guidance affirmed that IEI will meaningfully exceed its targeted 10% growth rate for fiscal 2018. HRS revenue grew for 32 straight quarters on a year-over-year basis, this quarter, revenue growth to record $1.2 billion, up 20% year-over-year and at the high end of expectations for 10% to 20% growth at both automotive and medical group.

In our March quarter, we expect HRS's growth to remain strong, with revenue up 10% to 20% year-over-year as we introduce new programs and expand existing programs for both medical and automotive.

Our automotive continues to leave the HRS growth and increasing electronic content and writing connectivity needs allow us to expand our automotive content to car. Our HRS business is providing true value add innovation and is increasingly capturing more design manufacturing engagements, which in turn creates meaningful recurring revenue stream.

Similar to IEI, our Q4 guidance for HRS also applies it will achieve its 10% revenue growth target for this year. Let's turn to our March quarter guidance on Slide 9. As we've consistently mentioned over the last three to four quarters, fiscal 2018 is an important investment year for Flex.

The last investment we anticipate as we move into the final quarterly year with connecting a targeting restructuring plan, our result in a minimum charge at $50 million. The objective our plan is to make Flex at faster more responsive company and one that will continuously adapt to the incredible marketplace opportunities ahead of us.

Most of this optimization will be focused on corporate functions and breaking down systems that reduced our speed and effectiveness it will be complete by fiscal year-end. The world has changed and we have to build a continuously more agile model that is responsive to the future.

At the same time, our investments in the future have never been higher, our revenue is accelerating and our strategy had position us perfectly. We are focused on executing our 2020 vision and fiscal 2019 will have strong growth in revenue, adjusted operating profit and adjusted EPS.

For the March quarter, we expect revenue in the range of $6.1 to $6.5 billion, adjusted operating income expected to be in the range of $200 million to $230 million, adjusted earnings per share guidance as for a range $0.28 to $0.32 per share based on weighted-average shares outstanding of $534 million.

GAAP EPS is expected to be in a range of 10% to 15% as a result of stock-based compensation expense, intangible amortization, and restructuring charges. With that, I’d like to open up the call for Q&A.

Operator?.

[Operator Instructions] Your first question is from Steven Milunovich from UBS..

Thank you. Good afternoon. You've talked a little bit about strong growth in fiscal 2019.

I think you reviewed with the Board your three-year outlook, do you still believe you can do the $1.80 in fiscal 2020, and given that you’re a little behind this year due to the Nike investment? Does that takeaway the potential upside to $2 plus that you talked about at the Analyst Day?.

Yes. Steve, I don’t want to spend really kind of talking about 2020 or even 2019, any kind of details. We laid out a plan at Investor Day, at last Investor Day, which was the same plan we laid out a year earlier. We have a number of initiatives that we’re driving to get to those plans.

2019 is it’s going to be the beginning of that raise as we head towards 2020 plan. And those targets are still the one that we're driving to at this point. So I think the most important thing is we stay focused at delivering, finish it up this year or finish up our investment year.

And really, pivoting our Company into really being our growth year for earnings revenue and operating profit, which we expect in 2019. So I think you're going to start see the beginning of that built, right from that as we start in Q1, and I don’t want to give – affirm that, that’s the number we’re going hit.

It’s just that – those are the targets that we remain very, very focused on..

Steve, maybe I’ll add just to that would be that – you see the company continues to operate with discipline and extreme focus around each of our strategic initiatives, all that encompass our vision has achieved in the 2020 and beyond.

I mean the evolution that is underway, is reflected in many different examples and you're starting to see that evidence itself, in the growth in some of these new businesses as well as us achieving the growth target as well as the margin ranges on many of the big constructed pieces of our portfolio.

So we're going to expand further in greater detail as we always do in May, but I think we're trying to evidence and display a key steps along the journey that we’re on – as we continue to improve our execution and capture more and [highest more of the caller] Flex..

That's great.

Chris, could you talk a bit about the free cash flow? I think it is materially below what most of us expected coming into the year, but maybe talk about that both from a working capital on a CapEx standpoint and where that's going in the near-term? Do you feel like you're going to really kind of get this back in terms of the investments you're making?.

Certainly, I mean if you actually look, we set a guide for the year, to say roughly $250 million. That's down from where we had started out the year, but we're also seeing upsize growth. And to fund that growth, you're seeing us while we’re staying within our targeted range and networking capital.

You’re seeing well over a $200 million of investment into inventory to preposition and support these ramping customer demands. You are also hearing us evidenced in this past quarter, and $161 million of CapEx investment, a lion share of that going to our growth areas in IEI and HRS.

You are seeing us step harder in terms of some of the investments where we’re again, pre-staging technology capacity and capability in light of the book of business that we see in front of us, and that $161 million is probably the highest you’re seeing in the quarterly run rate for four years.

So you're going to see us outstrip our depreciation this year near $70 million plus investment of working capital north of 200. You take the guide that we set, and that’s just a natural math.

But as we go forward, the three levers that we're hyper focused a lot, keep the fundamental structure for our cash flow generation intact, as the earnings contribution, which is meaningfully growing.

Just if you look at the midpoint of our guidance for the second half for our fourth quarter, and you combine that, our second half of fiscal 2018 is up over $50 million and nearly 20% over the first half.

We see that continue to grow into 2019 and 2020, so that's a good cash flow lever, discipline management working capital as we’ve elevated to this level of new revenue stream and then thoughtfully investing in the CapEx of over depreciation. We actually do see that modulating as we enter into 2019 and into 2020.

So those three things combined will help us start displaying a significantly greater cash flow generation that we’re fundamentally structure to deliver..

Thanks..

Your next question is from Adam Tindle from Raymond James..

Okay, thanks and good afternoon. Mike, I just wanted to start with what drove the decision to initiate the restructuring now? Results were inline or better, revenue is growing. It seems like you're on the precipice of some exciting stuff.

So just trying to understand that the timing and is there a particular segment that you're targeting outside of just general corporate? Thanks..

Yes. So just what you said Adam, we're actually having accelerated revenues and have a clear line of sight to have an improving FY 2019. So it’s exactly why we actually want to do it now. So we have a very strong economy and certainly good for the people that we do make any changes that the opportunity for them to get jobs is high.

We're not doing the restructuring out of stress. We're actually doing it out of opportunity, I almost called in offensive restructuring as opposed to defensive restructuring. And as we move into an offensive restructuring, we think about how do we make our company even faster and more agile and take advantage of the marketplace opportunities.

Because, we actually look at the world and think about this whole Connected World that’s happening in the whole age of intelligence, and we look across the amount of ideas and opportunities that are available to us given our platform and our set of capability is extremely high.

And we want to make sure that we have a system that is able to change it quickly that we're not investing in the past, we're investing in the future, and that it really enabled us to really being successful. So I kind of view as a very, very proactive change and it’s done right at a time when we're doing really well in growing revenues.

So I actually kind of like that quite a bit. And as far as is there any particular segment or anything else, the way I think about it is if you listen to our past presentations and Investor Days and such, the thing we focused on is though effectively we have all those deep vertical components.

And in fact that if we can leverage across this deep vertical components in so many different industries and be able to put together cross industries solutions that really create competitive advantage for our customers is really what we're trying to accomplish.

So as we look at the restructuring, we're trying to make sure that we position our Company that we can actually achieve cross-industry solutions easier with less carriers or orders or silos or whatever you want to – whatever kind of Indian want to call it.

So we're moving toward that cross-industry solution for our customers and we think this is going to make us even faster and more agile or it would even better positioned as we come out of this. .

Okay. And just as a follow-up. That's helpful, Mike. Thank you. Chris, you eluded to this a little bit in the prepared remarks, but operating profit dollars have declined on a year-over-year basis for three quarters now, but your guidance implies profit dollars will grow on a year-over-year basis in March.

Can you just talk a little bit about this turning point and how we can think about year-over-year profit dollar growth? Beyond this, it would seem like fiscal 2019 and beyond has a chance to grow at a pretty accelerated rate based on the CAGRs that you've talked about in the past? Thanks..

Certainly, yes I mean if you look, we are just modestly off year-over-year in our Q3 and as you point out the midpoint of our guide for Q4 does set us to be up year-over-year. We see some several distinct levers for meaningful margin and operating profit dollar expansion as we move forward.

We strategically have been moving ourselves to have a greater concentration of growth business in IEI and HRS as well as continuously moving to a richer mix within CTG. I think what you'll see is we're going to be benefiting from some topline growth that's reemerging. Certainly fiscal 2018 is growing.

In each quarter we've been showing and displaying in accelerated level of that year-over-year expansion. So that’s going to provide some earnings leverage there.

And I'd say if you step back, the other strategic initiatives that we've been hyper focused on and very disciplined about where we invest as a company and positioned ourselves has been around driving greater Sketch-to-Scale penetration.

And that's been led by having more meaningful design in engineering and technology content in our offerings, and the result of which will reflect in future revenues of greater margin carry. So in several instances, you're also seeing a shift from creating and ramping and development of these initiatives into a scaling and expanding.

So we're excited about the position. This evolution is difficult. We have to be very thoughtful and discipline as we go, but I think there is a lot of different evidential proof points that show that our trajectory is pretty firm..

Your next question is from Amit Daryanani from RBC Capital Markets..

Thanks for taking my question guys. Two questions for me as well. I guess maybe to start off with. It’s nice to see the IEI segment margin improvement you guys are in December quarter. I am just wondering to the extent you have comfort and confidence this segment can sustain double-digit growth through calendar 2018.

How should we think about the margin expansion? You're good at start to work towards the higher end of the ranges the way HRS for example and trying to get a sense of what maybe takes you from the 4% range that hit you maybe 5%, 5.5%, if you have double-digit growth in that segment?.

Hi, Amit. Thanks. So certainly we've been seeing steady improvement in margin and operating profits for this business. Just step you through from 2015 to 2016 to 2017 to even if you take the midpoint of guide for 2018, you see us moving from 3% to 3.4% to 3.6% and really closing all this year back in the range of 4%-ish.

So you’re seeing steady improvement and that's on the back of some accelerating growth.

We’ve been very thoughtful about how we’ve been positioning that business and in terms of how it goes to market, the investments it’s been doing, [indiscernible] it’s on structure, really focused investments into resources around business development, technical selling efforts, fueling application engineering and so on.

So the business has done a really nice job of posting investments up to really be in advance of this run end of this revenue growth. We've put a range out there 4% to 6%. We have a range for a purpose.

I think the margin that we talk about that will be a function of the mixed event, but certainly as you see us moving forward, you’ll see incremental steps as we go higher. And I think you'll see a company that’s driving very healthy contribution to earnings, while it just stays inside that range and has this nice growth..

Got it. And if I could just follow-up, and apologize if I missed the spot, but could you just maybe talk about the Nike ramp, and in the past you’ve talked about this confidence around achieving breakeven by the March quarter.

Is that essentially still on track and then as you think about calendar 2018, how do you think about revenue and perhaps the margin contribution from the Nike ramp that would be helpful? Thank you..

Yes. We've been expecting this ramp to mature that we hope to cross over into breakeven by the end of the year, that’s still our target. We still have a line of sight to that. We actually thought at calendar year 2019, we get halfway to our margin targets.

I think what we said before, we’d have CTG levels that is – actually continue to be what we can see with calendar year 2020 ramping into or going into more or like HRS kind of margin. So these are the margin profile that we expect that we're driving too that we have a line of sight too, and I think we will achieve.

The thing that’s probably more challenging is just the revenue run rate is clearly a little bit slower than what we would've thought one-year go or two years ago. So there is a lot to actually make the thing work.

We actually have to align with our customer that design processes all the way through to the go-to-market processes as they start to rethink how they go-to-market with our regional manufacturing weapon, and it takes time to really explain those things between the several companies.

So I think margins, we're going to be along the same kind of targets and I think revenue is going to be a little bit slower than what we anticipated. But that being said, I think I refer to as a freight train last quarter and I'm kind of still in that same mode.

I think it's going to take time to start and I just think it's going to build a lot of momentum, and I think this is a decade long kind of initiative process, and that also hasn’t changed in our thinking about that, but I think that's how to frame out the timing and the opportunity..

Perfect. Thank you..

Your next question is from Jim Suva from Citi..

Thanks very much and congratulations on the quarter and results. Mike, you’ve mentioned on your last response there that the Nike revenue run rate is a little bit slower than what you planned, maybe year or two ago.

But I believe last quarter that Chris said that the relationship was expanding or needed more CapEx or something? So can you help us bridge those two views it just taking more time or more expense than needed or how can you have the expansion or the relationship expand put in more and more CapEx yet have slower revenues or at some point it's kind of kind of all equalize I would think?.

Yes, well the expansion is around the difference, we're doing multiple processes, multiple shoes, and multiple initiatives, not only are we building shoes and buying on a regional basis to respond to regional marketplace in terms of just being more responsive, but also in terms of customization is that new program that we put in place and we actually – there is some electronics technology and some of the shoes coming out that were participating in.

So we're clearly getting an expansion in terms of the kind of things that we're looking at for them. But the amount of CapEx is large increasing. CapEx is going to be more a function of the percentage of automation that each process needs and the volume that we’re going to require. So I actually don't anticipate in unusual increase in CapEx.

I think a lot of the CapEx we’ve actually already paid for quite frankly. I think it was down a little bit next year, as we’ve already funded a lot of it. So I think looking at more and more processes, more and more opportunities that buy into Nike, but I think at the same time, I don't think – I don't see a CapEx increases over time..

Yes, Jim, this is Chris. I have to look back to what they have been said last quarter, but I will stand corrected if I had made that. I don't believe we had made a statement around incremental capital allocation or CapEx for this. It’s part and parcel to the overall way we've been framing out and operating that.

So as Mike said, there's nothing expansive other than we’re engaging differently with them on opportunities..

Okay, great. Then my follow-up was and this is probably for Chris. I think in your opening comments you mentioned was in a charge for a impairment or something and I couldn't tell was that referring to a year-ago.

What was that this quarter and if it was this quarter kind of can give you some clarity of color of what that was all about?.

Yes, certainly.

It was a several small non-core investments that are we made those non-strategic investment several years ago, those underlying entities were to say and which they were impaired, we took the modest charge, then we excluded it similarly to how we’ve excluded gains and somewhere exercises as well as when we realized gain on link or even element to last quarter.

So since it's really not a non-core element we’ve excluded it from our framework..

Okay.

Was that a write-off and just now their half year P&L altogether out of your portfolio or they just write-off some impairments we should expect to continue?.

Now they are complete write-off..

Great, thank you. Again congratulations on good results. Thank you..

Thank you..

Your next question is from Paul Coster from JPMorgan..

Yes, thanks. So this is sort of sense on getting the whole bunch program, so ramping that the investment will comes and then at the same time the absorption rates will spike and we’ll see a step function improvement in operating margins at some point.

Is that why the characterize what's about to happen? Or is it such that little faced and there will be more of a grind over the course of next 18 months?.

Yes, so I think we got a structure in place, which is built on the back of increasing revenues, a little bit better portfolio mix continuously better portfolio mix. We're going to have some improvement in SG&A as a result of some of the targeted corporate activities that we talked about to make us quicker and leader.

So I think you've got a number of different structural changes that all of which are going to lead to operating margin improvement. So I don't know that it's going to be a step function because the businesses into big system. We have 200,000 people and it’s a big system, it takes a lot to move margins.

But we don't multiple levers that we’re working, that should come into start, moving and display right at the end of this year that we believe we will drive operating margins and expand them going forward. So – but I think it’s not going to be step function; it’s just going to be [indiscernible]..

Got it. And then a follow-up question. The impression from CS. Is there is a proliferation of Internet enabled devices going out in various industry verticals.

Are you getting to the point now where you're actually capacity in terms of Sketch-to-Scale? Are you turning any business away? Have you got pricing power in the Sketch-to-Scale domain alone?.

Yes. I think if there's a good opportunity, we don't turn it away. We find a way to do it yet. We actually have a big system with manufacturing standpoint we've obviously got 200,000 people and have a huge presence literally everywhere that matters in terms of manufacturing. From a design engineering standpoint, we have close to 3,000 design engineers.

I mean we are pretty broad and very capable that when opportunities up, we are able to put resources out. From a pricing power standpoint, I don't think the right way to think about it is we have like pricing power.

I think the right way to think about it is that as we move – as the world moves into everything is connected and as very often the business model of our customers evolve - of the data and the management of the data and using the data is actually creating business models.

The device itself, we actually did more responsibility for and we add more value, because we can take any device to help moving into our Connected World.

So as you call pricing power, I prefer to think about it a little more that we’re just adding a lot more value to the customer relationship and the customer recognizes that, and I think it's going to yield and it's yielding toward higher margin.

And as you know, our Sketch-to-Scale percentages continue to transition, over the last couple years, it will continue to transition the next few years. So we've got a full pipeline of opportunities that will roll through that. We think it will be positive through a margin standpoint.

So I'm not going to say it’s pricing power, I’m going to say more like we add a lot more value to our customers and our customers are going to recognize it and we're going to make a little more..

Thank you..

You are welcome..

Your next question is from Steven Fox from Cross Research..

Hi, good afternoon. Two questions please.

First off with regard to the investments that you're making now, I was curious is there anything that changed in the marketplace relative to your expectations around secular trends that are picking up that are causing you to invest more or is this more company-by-company specifics where you're having more success and then internally need to invest more.

If you can provide a little color that would be helpful and I had a follow-up..

Yes. So if I think about some of the major secular trend is Age of Intelligence, everything is connect and there's more and more technology in every products, every products is moving more toward the system and actually have to be connected and actually have to capture data in order to meet the needs of the future used case of these products.

So I think that's a secular trend that goes across all industries. I think we identified that very effectively many years ago as we started moving into Sketch-to-Scale and started redefining the industry and the era that we're in at the Age of Intelligence.

One of the other trends that we've been very, very heavily invested in is things around automotive. We always thought, automotive is a place where we should be heavily investing and as you know we've had double-digit growth in that area for like eight years now and even though how long, but many, many years.

So we call that pretty effectively and as you know the amount of potential disruption in the automobile industry is high because there's automation, there is electrification, there is connected, there is mobility, there is a lot of different opportunities within that automobile and it’s huge industry. So we invested very actively here.

So I don't know that – I think we've anticipated the future very well. I think we positioned the company years before even the OEMs did over that much of a transition quite frankly. So I think it’s right on target. What we do now as we think about one of the new choice.

I mentioned things like Y2, where we're actually thinking about how the evolution of the building infrastructure industry will happen in light of an intelligence age.

So we continue to have a lot of data points about how to read the world, and then I think we’re reading pretty effectively in our locations and the amount of different engagements we have, but so many different customers and so many different industries gives us a real edge in order to read that [indiscernible].

So I think we invested effectively and in the right area, so we’ve been pretty happy with that..

Great. That's helpful. And actually some of those comments tying to my second question, because I was curious in the quarter just completed if you could give a little bit more color around HRS, especially auto what contributed to the growth et cetera? Thanks..

Yes. It’s hard to just attribute it to one thing. Once again, we are going to be – have nice double-digit growth. I think if you look at the midpoint of the guidance, we are well over 10%. It’s a very, very broad-based set of products that we're after and we have a tremendous amount of Sketch-to-Scale investment already.

We continue to grow China and actually India more and more for automobile customers in those regions. That’s actually helping and it's actually growing as a percentage.

So I’d say, it’s actually quite broad-based in terms of the backups, in terms the technology that’s going to the automobile, so you don't actually need to start growth, it actually have growth in the automotive business, if you're only focused on the technology of the future, which is where we've been investing and where we try to position.

So it's not just one thing, but it’s a whole set of things.

And the one thing I want to add is we would expect this in a couple of years, maybe even accelerate, because in a couple of years is when the real autonomous got started kicking in and real connected cars are going to start kicking in, and that's when there might even be a step function improvement and opportunity for a company like Flex as we go and apply our cross-industry solution with automotive.

So it might be – I don't expect that in the next year or two, but certainly as we get into 2020's, I actually think that automotive opportunity for Flex is going to accelerate..

Great. That’s very helpful. Thanks so much..

Your next question is from Mark Delaney from Goldman Sachs..

Hi. This is Timothy Sweetnam on for Mark. Congratulations on the good results, and thank you for taking the question. You mentioned the Y2 in Elementum investments in the prepared comments and briefly to previous question. And volume averages about $133 million recorded on the balance sheet reflects the majority stake in Elementum.

Can you talk about the strategic importance of those and what type of financial impact they may have reflects longer-term?.

Yes. Well a lot of it is based on the success of those each individual company. Elementum is a company that's building a database software, supply chain solutions, and it’s ability to be – to book and continue to grow revenue rapidly is going to create significant opportunity for us just in terms of capital appreciation.

So that is the biggest opportunity that you would see out of Elementum, certainly we use Elementum as well, but the big kick for investors is going to be capital appreciation on the back of Elementum.

On Y2, it’s a more interesting construction that we have where its actually a IT software platform for digitizing all the way from design, all the way through slighting execution, so it’s like an IT platform where once again we look for capital appreciation in that, but anything that travels across that IT platform as we work to bring – building a construction industry then to kind of the modern age and really be able to digitize it for the future.

Anything we build across that platform, Flex actually go to sources and builds. So there's a tremendous amount of volume associated with Flex. So I would expect the Y2 investment to yield two different ways, one is just in terms of Flex growth as we source those products, and second in terms of capital appreciation on the Y2 software business itself.

So that kind of – so we think it’s a huge opportunity for us and some that we are incubating in the back year that does have a lot of visibility..

That’s helpful. Thank you. And just a follow-up question, can you talk about the impact to your business from a trade and regulatory perspective, both how the solar tariffs may impact Flex, and then if NAFTA isn’t renewed.

What might it mean for your financials in the short and longer term?.

I’ll really start with the first point on the solar tariffs. Obviously, they just came out and then the key takeaway is that the underlying margin prices will be going up and that will have some impact on the U.S. market.

One of the things that then really exemplary of the leadership team driving our energy business has been there ability to really diversify away from the heavily dominated U.S. presence a couple of years ago to one which you now see the U.S. less than third of our business.

And when we talked about over the last – course of last 18 months, we've done a really good job with diversifying into a multitude of other global locations from Brazil to Mexico to India, Australia.

So we're seeing some really good global penetration and I think that when you think about our positioning there will be only impacting when you have roughly 20% in the U.S. There will be some modest impact. We’re seeing upsize growth and performance globally.

And then as it relates to our tracking solution, the tracking solution actually has an opportunity here at the total cost in project goes higher with these modules that the tracking solution given the real strong efficiencies in the energy harvest that have it can actually create a benefit to those projects orders in terms of greater yield and throughput to a better quicker return on those investments.

So quite frankly there's an opportunity for our tracking our global leading tracking solutions even have greater adoption rate. So that kind of high level, however thinking about that recent announcement on the tariffs and these markets needs to digest that news on the tariffs and we like our position globally..

That’s helpful, thanks.

And then just on the potential impact of NAFTA as well?.

We don't know and that’s going to turn out to be. And however, it turns out I think if there is incremental costs associated with tariffs annuity and any of those cost of one by Flex, those are then we have pass through the customer if it moves revenue from different locations or if things move back to the U.S.

I think we compare to help our customers move it from let’s go to the U.S. So we don't actually anticipate that much of an effect a lot of the tariff as we studied our product base is kind of subject to the world trade oversight as goes to NAFTA. So there is a small percentage left, which is more NAFTA. But customers want to move it.

We’re like beautifully tradition with largest electronics manufacture in United States were in fortune different states now either with designer or manufacturing operations and we would be trilled that we’re able to saw that in U.S. So we set our company to be able to have built for customers all around the world.

But our core business proposition to our customers that they can change around the world. We can actually set with them that's actually our core value proposition why everybody is come out of business in Flex..

That’s very helpful. Thank you..

Operator, I think we have for one final question..

The last question is from Matt Sheerin from Stifel..

Yes, thanks for filling me in.

Just a couple of questions, does one CTG, you talked obviously about the Nike opportunity, but beyond Nike as you look to improve margins and continue to grow the business? What are the other key drivers or catalysts we should be thinking about those obviously is one where you're several quarters into that and I know you should see some margin improvement.

What are the other drivers there, Mike we should be thinking about?.

Yes, you mentioned one – both are the good one, but I think the way to think about CTG as the consumers are inundated with asset of electronic products, and there and everything.

They're anything from connected coffee cup all the way through any kind of mobility solutions to any kind of indications lights are speaker that that will be driven by voice and I don't know if you can just put it on one thing. The theme that we're trying to move towards is connected devices that consumer use that well actually go built.

So there's a couple of big themes like a Nike and both but after that it’s very, very broad cross section of any kind of smart connected device and our objective is that some technology content actually help them become the smart connected to be able to accelerate their ability to get into the marketplace, because we have underlying core process technologies and know-how technologies and building blocks that enable that enable device to be connected.

So I wouldn’t think about it as any one product category, but we would just penetrate a broad cross-section of those things..

Okay. Thank you. And then on the CEC business, the communications and computing business you are in line actually a little bit better than expected, but still down year-over-year. Some of your competitors have seen incremental weakness particularly in optical and other parts of the communications.

Are you seeing some of that too or you seeing some new program wins to offset that?.

Well, I think it's – what we're using to offset is, we're investing pretty actively at building some Sketch-to-Scale solution, so that we can have products and solutions that go into the datacenter. And as Chris mentioned earlier, we've had about a 25% growth – for the year, we will probably have a 25% growth on that kind of product category.

So that's a growth driver within it. So it's not – we are actually trying to create our future as opposed to hope we're going to get some more product wins, and the category still remains a little bit structurally challenged.

And as you know we're targeting this year to be down 5% to 10%, a very good target, but the reality is we expect to be down about 5% to 10%. We're going to end up being in that range somewhere.

And I think it’s structurally challenged and the ability to come up with solution products that actually are the right products for the future is what's important and where we're focused on. So certainly there is some challenges associated with that business, but it has been around for like three years now in my view. So there is so many data there..

Okay. Fair enough. Thanks a lot. End of Q&A.

Great.

So as we wrap up here, Mike I think certainly that you want to say a few things?.

Yes. Thanks Kevin. Just in closing, let me say, we appreciate your interest and support in Flex. And I would like to reiterate the three things that really defined our Q3 and how we think about our Q4 outlook. The first is growth.

Q3 marked a fourth consecutive quarter of year-over-year revenue growth, and our Q4 guidance applied the fifth consecutive quarter as our strategy continues to gain some momentum. The second, portfolio evolution which is firmly on track, this evolution proves its ability and predictability, and reduce a seasonality, and increases margins.

And last, we're investing in our future. Our consistent cash flow generation affords us the ability to strategically invest in our platform. And this enables us to pursue important new markets and create new solutions that will add significant shareholder value over time.

So we're excited about where we are in and looking forward to continue to be able to drive from successful future..

Great, so I wanted to thank everybody for dialing in, and also second reminder May 10 will be the Investor and Analyst Day this year. This concludes the call..

This concludes today's conference call. You may now disconnect..