Revathi Advaithi: Yes. I’d say — I’ll start with saying that a few years ago, we kind of stated our intention in automotive to really drive our focus on what we call next gen mobility. And our EV platform that I’ve talked about before, which is a combination of our own designs and designs that we work on with our customers, has been very successful in different geographies and also in North America in terms of winning platforms. We talked about large bookings expansion in automotive, which will take kind of two to five years to ramp up and get to maximum volume production. But that is our strategy on automotive. And we can see that in terms of our bookings and our core volume growth, both in automotive. I’d say that the noise that you see today in terms of EV is kind of part of I would say the growing pains that you’re going to see in any end markets that is going through such a hyper growth cycle.
And we see that that’s a good thing. We believe that there’s good growth to be had. We also think there is disruption in the overall supply chain in automotive, which provides a great opportunity for EMS companies like Flex. So you put all that together, I would say my overall view on EVs and in automotive is that it is a good place for Flex to be. And we continue to have really strong growth as a result of that. And we want to be diversified in our automotive EV end markets.
Steven Fox: Great, that’s helpful. Thank you.
Paul Lundstrom: Thanks, Steven.
Operator: Your next question comes from the line of Ruplu Bhattacharya from Bank of America. Your line is now open.
Ruplu Bhattacharya: Hi. Thank you for taking my questions. It looks like on the core business, your expectation for revenues has gone down about 2.6 billion, but the expectation for operating margins is 40 bps better. So I was wondering if you can delve a little bit deeper into both the revenue side and on the margins, specifically on renewables, like how much of your business is tied to residential versus utility scale? And how do you see that progressing over the year? And then on automotive, are you tied more to the North American OEMs or the Europeans? And how do you see that mix changing as the mix gets more towards EVs? And then just on the margins, that 40 bps of improvement, does that come more from Reliability or Agility? And Paul, in the past, you’ve talked about things like components, the lagging at semiconductors being an issue, is that now done? And what is driving that 40 bps, if you can just delve into that margin improvement on lower revenues?
Paul Lundstrom: Well, the good news, Ruplu, is that there will be no more sell-siders that ask questions, because I think you hit a homerun there. But I’m just teasing. So let me start with revenue. I called out a few of the end markets that we’re seeing declines. By the way, by my math, the midpoint about $2.5 billion down. Consumer devices was a piece. We talked a little bit about renewable. We talked about being a little bit more conservative with auto. We talked about comms infrastructure. So I think those are going to be some of the bigger drivers partially offset by continued growth in the areas that Revathi and I have been talking about for a couple of years now. Next gen mobility and auto, cloud, digital health all look pretty good.
So that’s what drove the derate on revenue. You asked about utility versus resi for renewables. First, I’ll just say, and I think we’ve disclosed this before, that the renewables business is now well over $1 billion for Flex. It’s a big piece of the business. There’s some confidentiality around customers. We have made some disclosures that would — in partnership with our customers, so I think you know that. There’s a couple names out there that tend to be more in the residential space. And that’s where we’ve been pinched here a little bit in terms of some forecast changes and a little bit of choppiness, but our long-term view remains very bullish on that whole renewables space, and we do expect it to continue to grow. You asked about automotive, I would say we’re fairly well geographically dispersed.
We’re not overly concentrated in North America. So although the UAW, we are expecting and seeing some impact here in Q3 that doesn’t affect Europe, it doesn’t affect China so much. In terms of margins, so $2.5 billion sales cut with no change to OP. There’s a couple of things that are in our favor on that. One, and this is what I think Steven well pointed out, the margin mix helps. We’re seeing volume reductions in areas where our margin rates tend to be a little bit lower. And so that definitely helps. I would say that’s one. Two, I did mention in the prepared remarks there is going to be some restructuring here in the third quarter, and there’s going to be tailing both in Q3 and Q4 for that. And then, three, Q2 came in a little bit better.
And so that’s dropping through. And so I think those three pieces kind of help us to hold the line on operating profit. And then the last thing that you asked about was recoveries. So if I think about the full year revenue year-on-year for core Flex, recoveries are down meaningfully versus what we thought over the last couple of quarters. I would say that’s very good news for a couple of reasons. One, it’s going to have a beneficial impact on inventory as chip shortage thing. Although there is still tightness in some areas, it’s gotten much, much better. And that helps with cost too, cost pass through included. And so when I think about full year, I think at the midpoint of our guide, high single digit down for the full year, I would guess at this point, maybe half of that comes from changes in pass through.
So it’s not all the revenue headwinds that you’re seeing are core markets, some of that is just inflation pass through, as you knew that we would see when things got a little bit more normal.
Ruplu Bhattacharya: Yes, thanks for all the details. I really appreciate you going into all of that. Just real quick on that quick follow up. Now that you’ve announced the remaining Nextracker transaction, does that change your philosophy around capital return and pace of buybacks? How should we think about that? Thank you. Thanks for all the details.
Paul Lundstrom: No problem. And so we’ve talked about our capital allocation priorities before and I would say, number one, we’re never going to starve the core business. We’re quite bullish on a number of our end markets. And so we’re never going to starve ourselves for things like CapEx or other internal investments. The number two priority, and this is a high, high priority, is share buyback. We continue to believe that there’s a significant disconnect. Hopefully, with the Nextracker separation, people sort of realize the arbitrage there and things sort of rationalize a little bit. I would say probably the distant third at the moment would be M&A. As always, we reserve the right to change our minds. But stock buyback is clearly the expected use of free cash.
