Flex Ltd. (FLEX) Earnings Call Transcript & Summary

All right. Good afternoon. My name is Paul Chung. I'm the applied tech analyst here at JPMorgan. I'm pleased to have with me Flex CFO, Paul Lundstrom. Welcome, Paul.

Thank you, Paul. Good to be here. Thanks for hosting.

Yes. So to get us started, maybe if you could provide like a brief overview of the firm, maybe evolution of the business.

So Flex is a large contract manufacturing company. We'll probably do, I don't know, north of $30 billion in revenue this year. Contract manufacturing. We can build just about anything, but focused primarily on electronics. We're in 30 countries around the world. We've got 130-plus facilities around the world. Been in this business since EMS started. And I would say the business has evolved a lot over the years. We've -- particularly over the last few years, we've focused the business on a handful of core areas and done our best to attach ourselves to emerging trends that should give us nice top line growth over the next several years, three of which we talked about at our Investor Day about a year ago, 1.5 years ago. We talked about growth in cloud. We talked about growth in the health solutions industry as more health -- I'd say, med tech companies outsource their manufacturing. And another important growth area for us, next-gen mobility which -- think of the increasing electronics content in a vehicle, and also EV.

Great. Thanks for that. So lots of change this year, expand on kind of the Nextracker IPO spin, kind of the rationale behind it, intentions for kind of capital unlock and timing and kind of some of the tools that firms will use.

Yes, a lot of changes this year and very happy to have the IPO behind us. We started talking about that about 2 years ago, actually. And it -- we first talked about it, I think, in late 2020 when another big solar tracker company went public -- or filed their S-1 rather and reviewed -- announced review of strategic alternatives the winter of '21, and it took that long to get this thing out. Unfortunately, we sort of made the announcement into weakening IPO markets, and I think everybody knows, the last 2 years, the IPO markets have essentially been dead. And so we took a first step by selling a small stake to the private equity company, TPG. That was about $500 million, a year ago, January time frame. And then this past February, we were able to get a sizable chunk out into the public markets. So Nextracker is now a publicly traded company. I think our investors and the Nextracker investors are very happy and nice to see that get done. What that means is now we have a meaningful amount of cash on the Flex balance sheet that we will deploy with discipline as you've seen us do over the last several years.

Right. So you did raise a chunk of cash from the initial spin. And then talk about kind of how you're thinking about monetizing that position over time. And then any -- I guess, the remaining part as well and any kind of tax implications we should be thinking about.

Well, maybe first on the tax because that's an easy one. So on the IPO and on the sale to TPG, we pay state tax but not federal. There's a significant number of NOLs that Flex still has and so that there's no federal tax paid, so a fairly tax-efficient way to monetize that. In terms of options going forward, we haven't been super prescriptive on what exactly we intend to do and when, but I'll tell you there are a few different options. We still own 61%. We could conceivably do a follow-on at some point. Right now, we're in the middle of a 6-month lockup. And so there's no announcements on that. If we did do a follow-on, what you can see in the S-1 or the prospectus for Nextracker was we created what's called an Up-C structure which is -- allows us -- provided we don't go below 51%, to tax-free spin the rest to the existing shareholders. And so I think that's been fairly well telegraphed just based on what you can find in that S-1, what our intentions are. But again, no announcement right now.

Okay. Thanks for that. I mean you were pretty patient with the IPO spin, so I assume you'll take a measured kind of stance on how you monetize that over time. Pick the right time.

Yes. I mean we want to the right thing. Yes, we want to do the right thing for investors long term. And I think taking a pause and waiting for the public markets to be constructive was absolutely the right thing to do. The window opened just a crack here this winter, and we just squeezed through it as best we could. And I have to say I'm very happy with the execution on that. I think we threaded the needle.

Yes. I think investors are as well. So let's just jump into the business. Let's start with Agility. You have 3 subsegments there. CEC, Lifestyle and Consumer Devices, where do you -- where are you seeing some relative strength? And then we can kind of dig deeper into each.

Well, maybe just replay a little bit what happened in 2023. So the Agility business overall had strong growth in 2023 driven by 1 of the 3 BUs, the CEC business. CEC stands for communications, enterprise compute -- or cloud, that business was up 30% last year. Our Lifestyle business was up 2%. When I say Lifestyle, think high-end consumer appliances. And then the Consumer Device business was down double digit. If you look at the end markets in both the Consumer Device business -- when I say consumer device, think lower-end, commoditized electronics and also the consumer appliance markets, those were both -- end markets were both down double digit as we went through our fiscal '23. We grew the Lifestyle business because we gained share. And then the CEC business was just going gangbusters, significant growth in comms, enterprise and cloud. Cloud was actually up triple digit for us with nice share gains. So I'm not expecting another 30% year out of CEC. I think it will be more like flat. If you look at those consumer end markets, both the higher-end appliance side and then the more commoditized consumer products businesses, those will both be down again as we move through our fiscal '24 here, which just started in April. So the guidance we gave for the quarter was down mid-single digit to low-double digit, and we expect mostly the same as we move through our fiscal 2024. Maybe a little bit of improvement in the back half driven by 2 things. One, we have known cloud share gains that we're expecting in the second half. And so as we ramp for that, that should give that business a little bit of tailwind. And then the other thing I'll say is -- I'm not sure you're going to see high-end consumer appliance and consumer devices down at the same rate again as we move through '24. That would be 2 years in a row of down double digit. I think at some point, we start to lap the comps and things get a little bit easier. So probably a little bit better for Agility in the second half, but we'll see.

Okay. Can we dig deeper into the cloud trend? So how you're kind of gaining share and how to think about AI compute demand and things like that?

Sure. So cloud has been a great business for us. And whether you're a bull or a bear on the end markets, at the end of the day, if you're picking up share, it's going to help the P&L, and that's what we saw last year. Cloud might have been a little softer, particularly the exit rate for us, but that business more than doubled in 2023 on share gain. Why are we gaining share? Well, it's our capabilities. And we can do everything from bend metal for racks to very sophisticated circuit boards and what you put into the server. We also have -- now this isn't CEC, but we also have data center power. And so our...

Anord Mardix?

Anord Mardix, correct. The acquisition we made in -- let's see, would have been December, January of '21, '22. So we have a lot of capabilities that support those cloud customers and the ability to sort of customize modules and assemble at low cost at high rate, the ability to sort of bespoke service stacks is unique. And I think it's a high value add, and so we've been doing pretty well in that space.

Yes. Talk about the Anord Mardix acquisition. You hadn't done kind of a big acquisition like that in the past, but how the success of it is making you maybe think about how to complement the portfolio across other segments.

Yes. So Anord Mardix is just the end market. It provides power for data centers. They're a very specialty business, a business that my boss, the Flex CEO, Revathi, she was intimately familiar with that end market. She was in that industry when she worked at Eaton running a number of P&Ls. And so that was a nice little advantage for our team in that she could go in and immediately evaluate, do we like this or not. And so I think that was helpful. That was one of those deals that -- we like the space, we like the growth in cloud, all the secular tailwinds that I think everyone, particularly over the long term, continues to be pretty bullish on. We liked the look. It was just a question of the company. And peek under the hood, we liked the financials. We liked the potential returns. We liked the leadership team. They were -- they plan to stay on board, which they have. Liked everything about that deal, and we got it done. Coincidentally, financially, about a $500 million deal. It happened about the same time we got a $500 million for the sale of a stake in Nextracker from TPG. And so what a coincidence. It just happened to work out magically for us.

And decent margins as well.

Yes, really nice margins.

Okay. Let's switch to reliability. So talk about some of the key emerging trends you're seeing in health care, auto and industrial.

Sure. So I just told you that Agility this year will be down mid-single to low-double digits likely for the year. Opposite is true for the Reliability business, which we think will be up mid-single to low-double for the year. All 3 businesses have nice tailwinds right now. And to just maybe peel the onion a little bit, you mentioned Health Solutions. Health Solutions continues to work on a number of ramps. We expect that business to do nicely yet again in 2024. . We continue to see this trend out of med tech device company OEMs into contract manufacturing. We think that's a trend that will continue. Manufacturing is hard, particularly at very high rate, very high quality. FDA requirements adds complexity. And if they can have a high-end manufacturing partner to help them with that, it's almost a no-brainer. And so we like the tailwinds that we see in that particular industry, and we have known ramps which gives us confidence in '24. If I look at automotive, automotive looks quite good. Even if you saw a pullback in global vehicle production, I still think the automotive business would grow because we've attached ourselves to EV. And so if I look at electric vehicles as a percentage of the total vehicle fleet produced, that mix is going to continue to go up. We have content specific to EV. We do not have content or at least electronics specific to internal combustion. So if EV cannibalizes internal combustion, which we think it will, net-net, it's a positive for us. Plus, we have all these other electronics around the vehicle, mirror controls, lighting controls and console and all sorts of stuff. So love the tailwinds that we're seeing right now in EV. And just generally, if I think about high-end electronics in a vehicle, particularly as safety requirements become more standard, little things like a little light that comes up on your -- in your rearview mirrors as another car comes into your blind spot. That used to be something you would find in a Porsche. Now it's in everything, and it's just standard because the safety features are becoming more commonplace. And so that's a net tailwind if you do electronics for the automotive industry, which we do. So I love where we are there. That's another business that will grow in 2024. And then on the industrial side, there's one business in particular in industrial that has nice ramps and that's going to be a meaningful tailwind for the business, that would be renewable energy. We do inverters for a number of customers. A few of them are more public, not to name the name, but you can figure that out pretty quickly.

I think we know the name.

And then we also do EV charging stations. So that renewable space, we think has nice tailwinds. We just talked about EV. EV charging is going to be a tailwind. And then certainly, as solar continues to roll out, I think that's going to be nice for us as well. That renewable energy business, by the way, it doubled last year, more than doubled. And now it's north of $1 billion in revenue. So love where we are there, and we feel pretty confident in the Reliability growth wedge.

Okay. Great. And then just on the competitive environment, talk about how pricing is holding up, where you're seeing some competitive pressures in how the firm is winning deals.

Well, I mean pricing is always going to be competitive. It's a competitive space. I would say I haven't seen any meaningful change over the last few years. We're not a chip company. I think the -- during this component shortage, there were some customers that sort of had pricing power. I wouldn't say that we did, nothing in particular. There's a fairly high degree of transparency for bill material costs for us. And so it's not like we were raising prices through the pandemic or the component shortages. But I wouldn't say pricing has eroded either. It's we're -- I think we're hanging in there. Where we can add value is things like tremendous vertical integration capabilities, that would be one. The other one would be we have the size and scale and the geographic footprint to support production just about anywhere in the world. And what's interesting to me is the last few years. I came into the company in 2020. There was lots of talk about regionalization. And at that point, I would say it was a bit of conjecture. And it came from the trade disputes and then the stops and starts of COVID and it's like, okay, we need to get product manufacturing closer to customers, so there's less supply chain disruption and lots of chatter. But now we're actually seeing it. And so that's -- you say pricing. I'm not sure pricing is -- helps, but what helps to grow our share of wallet or just sales in general with new customer wins is our ability to produce just about anywhere is definitely an advantage.

So definitely, you've been hearing from a lot of clients and feedback about made in America, maybe in North America, including Mexico and things like that, but onshoring, kind of CHIPS Act, lots of tailwinds here. So talk about if you can expand on that whole regionalization theme. And this used to be chatter maybe 2, 3 years ago, but you're actually starting to see customers move. If you want to talk about that.