Flex Ltd. ($FLEX)

Good afternoon, everyone. Thank you for being here. The next firechat I'm hosting is with Flex, and I have the pleasure of hosting Revathi Advaithi the CEO of the company; Michael Hartung, who's Chief Commercial Officer; and Kevin Krumm, who's CFO. Thank you all for being here at the conference. Thank you for taking the time. A lot of news over the last, what 2 weeks, 3 weeks. I can't remember now, but a lot of things to talk about. And Revathi, starting with you, you've been at Flex for 7 years, a tenure where within which you -- this is now the second spin-off that you're announcing first NEXTracker, now the CPI segment. So tough not to notice a trend and a playbook here. Can you just talk about the rationale and sort of how strategically you're thinking about things?

Yes. I'll just say, Samik, when I started with Flex 7 years ago, -- we thought about the business in terms of opportunities for improvement, one, in terms of mix and portfolio; and two, in terms of productivity to improve kind of the financial returns. . And when we looked at mix and portfolio, it was everything from what we stop doing, what do we spin out, what do we invest in, all of those categories of thinking -- what do we stop doing? You saw a lot of things we stopped doing. We exited many consumer end markets. And what we spin out, we did the NextTracker spin, which turned out to be very successful at $17 billion market cap today. And then what we do more of, we double down into a few areas. -- and said that were a few areas where we felt like we could reinvest more into, which created the whole focus around compute and power for the chip itself, and then we started investing in power, distributed power all the way to utilities. And then we ended up building this portfolio, which is around thermal architecture of the data center itself, but now going all the way to utilities. And we've been working on this for a few years, well before the ChatGPT moment became a thing, and then now that business is sizable in terms of scale. Now the why now question is because we have -- one, we have a sizable business a business that is growing very rapidly that requires a certain capital framework. And we also felt like we weren't deploying enough capital to parts of Flex that we could have been investing in, but we were driving money towards the highest return. So it felt like the moment was perfect to really have 2 management teams focused on 2 businesses with different growth elements altogether, and also have a capital allocation framework that creates 2 very successful businesses. We have a history of doing this well. And we're in a fortunate position to be able to do this now, I would say, in terms of timing for growth. And we're also very excited what remains with Flex and then the opportunities for that, that I couldn't get to over the last 5, 6 years. So I think that's the thesis of why and we know how to do spend. We've done it well. So.

No. Sure. should investors expect this playbook to continue? Like when we look at the SpinCo, which you'll be the CEO of is an opportunity there further down the line. And similarly, for Michael, maybe the question is for the RemainCo as well, you have a diversified portfolio of end markets that you're addressing. Is there an opportunity that you see to continue the playbook?

SpinCo is an easier answer. The playbook is going to be very different. We are creating an industrial company, right, that will be looked at and invested in as an industrial company lens, right? So first is we have built this thermal architecture for data centers end-to-end, but we are also investing all the way into the grid into utilities. . So our focus and our investments are going to be to continue to build into this electrical infrastructure that we've been doing into the cooling infrastructure that we're building on and then really diversify the portfolio into -- further into different parts of the utility spend that's going to come at some point as the compute spend kind of modulate. So the view shouldn't be is there a next spin coming I would say the view should be how do we continue to create a diversified industrial playbook -- and I'll just remind you, with the growth rates we've talked about 70% and 80%, it's going to be a fairly sizable business. It's going to be 1 of the biggest electrical businesses in the industry in the next couple of years. So it will be all about diversification of portfolio that we'll focus on for SpinCo, Kevin?

Yes. From a Flex standpoint, keep in mind, even post spin, Flex will be a $22 billion-plus manufacturing and services platform that will still be operate in a global scale and still be servicing a diversified end markets, right? So we'll have our health care business, our industrial business, automotive, communications and lifestyle. So still a significant company post spin. I'd say the other point is we'll execute the same playbook we've been executing for the past 5, 6, 7 years. And when I think about the playbook that you mentioned earlier, I think about it to 3 different lenses potentially. One of those lenses is through financial rigor. And so this isn't a company that chases revenue. We're a company that really strives to generate high-quality earnings that maximize our cash position. And we want to underpin that with margin improvement. And that margin improvement has also been very methodical. It's come from things like productivity and portfolio mix that you've seen from the company very consistently. The third piece of that, though, is probably the 1 that's most germane to the question that you asked, and that is, we have always deployed capital to the highest opportunities wherever we can get the highest return. And up to this point in time, that has been the data center. And so mission accomplished. We've done that to the degree to which we created this moment in time. And we now have a platform from which to build the company going forward. I'd say 1 of the takeaways from that should be first -- we have a platform that's able to identify those opportunities. We have a management team that's shown a willingness to decide to execute on those opportunities. And we have no shortage of growth markets to pursue that next event should it come to be?

Okay. Great. So maybe starting with SpinCo. Can you talk about the synergies between the power and the compute and cooling segments that you have within that -- when you think about like customers that you're going to, are you seeing synergies in the sales motion already on that front?

Yes. I'd say Samik. We -- like I said, we started investing in this business because we realized that we had a small business that Flex had bought from Ericsson many years ago that built power that powered the chip. We started investing in it. We knew we did compute integration and then we're bringing those together, right? We have a view that computer is going to get power intensive. So let's figure this out and ChatGPT happens and then of course, compute gets power intensive. And -- but the -- I've been in this energy space for, what, 20 years now. I've seen every cycle of data centers and utilities there is to see. Within our end customers, we knew that the way they were developing was IT infrastructure was separate from power infrastructure, from cooling infrastructure. It was very, very diversified within our end customers. And at some point, it would all have to come together. So we started talking to them that way, bringing our teams together and really approaching the customers in terms of let's work on this as an integrated architecture. So for our customers, data center customers, first is we want to be with hyperscalers. We want to be with co-loads. We want to be with new clouds. We want to be with silicon providers. And with all of them, we want to sell all the individual components. We want to sell the mechanical cutting metal. We want to compute integration. We want to sell cooling, CD, or cold plates. We want to sell power modules or custom power. We want to sell switchgear or a fully integrated part -- but at the same time, we want to help them build this thermal architecture that is coming together more and more and more, and we are seeing that getting deployed. So there is synergies in terms of technology development. And there is synergies in terms of speed to market. So if you bring a good old-fashioned industrial company, together with Flex's capability for scale and speed, that's what you get with SpinCo and that's what we're deploying now. And customers really want that.

Maybe on the growth forecast that you're providing now along with the announcement of the spin, 65% to 75% for fiscal '27 80% plus for fiscal '28 -- is that driven by what backlog you have already visibility into? Or maybe just more broadly, what's what are you using to drive your confidence into that acceleration? How much of that is booked already versus business that you have in the pipeline that you need to go out and book .

Yes. So we guided to that because we have good confidence in our ability to deliver against it. We've said that most of that for FY '27 is booked. We said about 90% of that is booked -- and for FY '28, you talked about the growth rate. So it was 65% to 75% growth in FY '27 and 80% plus in FY '28. And as we look into FY '28, we have line of sight to about 70%. So that's awarded programs in programs where we have that demand see-through and we can understand what the customer needs.

Okay. Interesting. -- it's been some time since you, I think, announced last year, this -- the partnership with Amazon is the 1 I'm referring to. How did that influence the outlook that you're providing for the CPI segment -- how does that feed into the confidence that you have?

So I would say the partnership or the warrant arrangement that we have with Amazon. First, when you look at it, it's done what we wanted it to do. It's given great incentives for us to grow with them and for them to grow with us, and it's been mutual and beneficial. And when you look across the segments that we currently operate under, so the 3 segments of which 2 are staying with Flex, they've all benefited from it. And as we go forward, we would expect those businesses to benefit from it, too. Of course, it's incorporated into our guidance for FY '27 and '28 because we expect to continue to work with them in those businesses to accrue the benefits of that.

Okay. Okay. maybe on Power, just for investors, how are you looking at the competitive landscape? And what's the differentiation that Flex brings. I mean I get that demand is quite strong at this point. But as you start to look at where your competitors are placed, how do you differentiate in that market? .

Yes. So if you look at the power space, right, which I know really well, I would say if you look at the traditional kind of electrical players, all the usual names that you know, I'd say the places that we are all placed in the same place is we probably provide switchgear components that go with switchgear, the power pods associated with it, mainly in the distributed power space. And I would say in that, kind of we all are pretty evenly spaced in terms of what we can deploy and deliver. Again, when you're looking for speed of execution and scale of execution, then Flex is good at that. I'd say in the cooling side, everybody has different capabilities or they're buying into different capabilities just like we have cold plates and CDUs we have. So there's multiple players who can deploy that. I would say the thing we have is we do have embedded power, which is where we started the whole business, which traditional electrical players may not have the same same scale and capability in that space today in that we may be competing with a different set of players altogether. And then they're all trying to approach the computer integration space with this idea of this thermal architecture like I talked about, where we have tremendous amount of scale. So if you think about kind of traditional electrical players and where we are, we get to build this electrical infrastructure at a time when the electrical business is seeing the biggest technology shift it's ever seen in its lifetime without the baggage of existing products that could get disrupted in this technology play that's happening. So I would say we come at it from a very unique angle. We have built it from scratch. It's a fairly sizable business. It's growing rapidly. Like I said, we'll be 1 of the largest electrical players here in a few years. And our differentiation is being able to do everything in this thermal architecture envelope, which I would say, very uniquely qualified to do that.

Revathi a lot of the conversation recently with investors has been about the transition to 800-volt tracks. I mean how does that influence again the content that you see from the power segment within the data center? .

Yes. So power is going through tremendous transition coming from power density, power efficiency that the data centers are driving. So you've gone from -- or we had power shelf tows powering the chip itself to now they could be fully integrated 1 megawatt racks. We're going from that to having the conversation about, hey, 400 volt, 800 volt architecture to drive power efficiency, then we are going from that to potentially solid-state transformer conversation which will drive a further pretty significant change in terms of electrical infrastructure. The good news is, I've been doing this for 20 years, and a lot of these conversations haven't matured and now they're maturing because we cannot continue the way we are with the amount of power that computer is going to need without fundamentally changing how power is applied and supplied. And so that means that 400 volt, 800 volt conversations are very mature. We have programs that are getting launched as we speak. And solid-state transformers are also very relevant conversations, and we're all developing products. Many people are -- that will take a little longer to mature as industry migrates to a common solution and standards and evolve and things like that. The only thing I'll say is as everyone gets super excited about the 800-volt conversation, the thing to remember is it's not just let's supply a product and leave it there. Electrical has a lot of safety and regulatory environment. It changes the envelope around it. So a lot of work has to happen not just with the product, but the infrastructure, the training, the labor availability around that. So you have to get ready for that also, which requires some work. But we are quite mature in a lot of these programs that we're thinking -- working on and getting ready to deploy.

Maybe just to help and sort of quantify the trajectory here, we all sort of now track given the environment we are in, what hyperscaler CapEx growth is, right? When you think about power and the growth outlook for power over the medium term, how would you compare that to the CapEx envelope growth? Like is power going to exceed that because of the criticality of power? Or how you're thinking about power growth related to hyperscaler CapEx growth?

Yes. So we've talked about our growth rates earlier on here, where FY '27 for CPI segment, 65% to 75% in that we would expect Power to be a little above that. So you can say 75% or higher next year. And as we go into the following year, we've said that our growth rate, we expect 80%, and we would expect power to be around there. So yes, we expect good growth in power in that 70% plus over the next couple of years.

And then Samik, the question is related to hyperscaler CapEx $750 billion with the 4 hyperscalers getting deployed. If you unpeel that onion within the CapEx getting deployed by each one, you would see that it migrates, right? Sometimes it is very compute-heavy, sometimes it's very power heavy. So it migrates within that envelope. And I expect we will migrate within that maybe a couple of years behind or forward, right? So a lot of investments going on right now just for capacity and computer integration. But there's a lot of CapEx going into developing the 400-volt, 800 volt world architecture, which won't be seen to play until a year or 2 years. So I would say that we'll mirror it but not like-for-like, there will be some time lag plus or minus to that.

Margins in the power business, you've outlined mid-teens when we look at some of your competitors like Delta, they appear to have higher margins. Is that just a function of scale? Or what would it take for the Power business to have higher margins over time?

Yes. I would say today, it's largely a function of, one, the investments that we've put into that business over the last couple of years. And to a certain extent that we'll be investing yet in FY '27. And -- and then it's to a function of scale and continuing to push volume against those investments that we've made. We -- our target is to be at the same levels our industry peer set, and that's our expectation.

Great. Last 1 on Power. I think you've generally sort of outlined to investors the critical power part and embed power part. As you're sort of outlining these growth targets for power -- do you envision critical power in, both to be roughly similar growth rates? Or are there differences between the 2 in terms of either again, from a timing perspective, how they play out.

Kevin?

Yes. I would say, largely, we have the same expectation between both of them from a growth rate standpoint. As Revathi said earlier, demand comes in 1 year, you may see 1 grow faster than the other. But over time, we would expect them both to grow commensurate to each other.

Okay. Okay. Okay. So maybe just to move to some questions on the RemainCo side as well and on the regulated manufacturing solutions and ITS. Maybe Michael, first for you. How would you position that business to investors at 1 point as a stand-alone company in the future. How should we think about that business being positioned? Like if you had to give earnings algorithm of how that investors should think about it? What would be that framework?

Yes. Well, the first thing I would hope is that investors would think about Flex in the future, much like they thought about Flex for the past 5, 6, 7 years. Even post spin, as I mentioned earlier, Flex will still be a $22 billion manufacturing and services platform, operating at global scale, servicing diversified end markets. So still a very substantial company in that regard. -- and the playbook we've mentioned, the playbook that's underpinned with the same financial rigor that we have seen, focus on earnings, focus on cash, focus on margin, focus on portfolio optimization, but I think the real exciting part of the business going forward is that we'll have an opportunity to deploy capital to different growth markets. And those growth markets that we think we have an opportunity to really expand in are all tied to these longer-term secular trends. And so from a health care perspective, if you think about the aging population and the increasing prevalence of chronic disease, our medical devices business, our drug delivery business really well positioned for long-term growth. When you think about industrial, in our industrial business, you've often talked about the geopolitical situation that we're in driving regionalization. And it just so happens that many of those regions aren't ready for regionalization. So they're facing things like labor scarcity and wage inflation as they ramp production, which leads in perfectly to our robotics and our warehouse automation solutions. So again, these long-term trends. Within communications, there's a lot of talk about the consumers' desire for ongoing reliable communications regardless of where they might be on the planet and our satellite communications business is one of our fastest-growing growth markets in the business. I would also point out that in addition to some of those traditional markets, we'll still maintain a significant exposure to the data center. So for instance, when you think about our networking business, that all stays within Flex. So our switch business, our optical business, our network interface cards, that whole secure communications environment remains inside of Flex. We talked a lot about SpinCo and really focusing on our product, product portfolio in power. And we'll continue a contract manufacturing focus and flex on power generation, transmission, distribution, storage, all those things that really make up that energy infrastructure. And then the third piece is all those semiconductors that are needed for compute have to be assembled and tested by the same capital equipment that we also manufacture. So I think there's some exciting opportunities to actually have this clarity around which growth markets will now be the new destination for capital, much like data center has been for the past 5 years or so.

Yes. And most of these growth areas for RemainCo, are these going to be higher margin, so you're looking at the similar playbook as you've implemented with Flex as well.

Absolutely. And the way I would think about it is through 2 different things. One is on the base business. So even the business we have, there's still opportunity to further optimize the base business. What was the middle of the portfolio becomes the bottom of the portfolio over time as we continue to mix up. So still opportunity to improve the base -- we've always said we're going to lean in on high-value markets and deemphasize low-value markets. Each 1 of those growth markets that I mentioned earlier are all higher value markets that should enable that transformation to continue.

And on that front, I mean, you talked about the investments, the focus of investments being in these high-growth areas. How do you think about capital allocation from an M&A perspective, as you sort of prune some of the lower-margin businesses, do you see an opportunity to acquire and build your capabilities in the higher growth areas?

Yes. I think the benefit of the financial rigor that we have in the playbook is that we have options on what to do with the capital that we create. And we'll always prioritize investing in very good, solid growth opportunities as a matter of fact. And then with those types of things, we'll focus on markets that create those high-value market opportunities. So it could be in markets that we already have. But it might be in markets that we don't have -- and if you think about what we've done successfully over the past few years is we acquired and spun NEXTracker. We acquired our power businesses, combine that with existing capabilities and spun that company as well. And so when you think about what's to come, you can think about not only investing in the markets that we have today, but it could be investing in markets that aren't yet part of the portfolio that we could combine in a fashion that you saw here recently. But without that, you would still have to underpin that with. We'll continue to invest in high-value markets and deploy capital accordingly.

So maybe moving to more broader questions that you got from investors about the combined business here. Kevin for you, how is that plan to be allocated between SpinCo and RemainCo that's come up quite a bit with investors. And how are you thinking about maybe Michael, for you, the RemainCo stake in SpinCo?

So I'll talk about capital allocation. as the design of this transaction is for Flex to retain a stake in SpinCo. And what we said is that stake will be up to 20% or not to exceed 20%. What that does is it allows us an elegant way to disentangle the capital structure and allow Flex subsequent to the spin to issue those shares to pay down debt, so debt for equity exchange. After that, you basically have 2 companies with very low debt in their capital structure that will then allow them to use their capital structure to go pursue growth opportunities.

And from a Flex standpoint, I think that just puts the company in a terrific position to have flexibility to do some of the things we talked about earlier, whether that's invest organically in our high-value markets or look at opportunistic M&A. -- or provide shareholder value in some other form. It just provides us with flexibility, but really low debt to do a lot of different things. .

And then on capital investment, you guided to peak spend of $1.4 billion to $1.6 billion in fiscal '27. Maybe just highlight for us what are the focus areas of the build out here in terms of capital investment.

Yes. So if you step back, that guidance is about 2x what we've generally spent as a percent of revenue. So we're usually in that approximately 2-plus percent range. We're now going to be about 5% in FY '27. What we've done there and what we're doing with that capital, that additional CapEx, so the second 2.5%, if you will, is going to be spent to secure power capacity footprint, cooling infrastructure for a business that has been awarded to us. So we're investing commensurate with businesses that's been awarded. We've talked about already earlier in this discussion around -- and you see that in the growth rates that we get for CPI. Looking inside of that then, so the lion's share of the additional CapEx is going to -- it's really focused on the cloud side of our business as well as the embedded power side of our business. Last year, we talked about it. We invested in Critical. This year, these investments are really focused on those 2 businesses inside CPI.

Got it. And what drives your visibility that this is the peak CapEx you're and you can get sort of moderate in CapEx in fiscal '28 especially when we think about supporting the kind of growth that you're outlining in the medium term, how do you get the visibility that this will be the peak CapEx year?

It all boils down to customer programs that have been awarded to us and us understanding what we need to support those programs. So the disclosure and the conversation all came together at the same time. That's why we disclosed the CapEx number and the growth not just in FY '27, but in FY '28 because with those awarded programs, we have line of sight to that demand through FY '28. Any additional revenue beyond that would maybe come with additional CapEx, but we feel pretty good about our existing CapEx investment and the revenue it's going to drive over the next couple of years. .

And Samik, one way to think about it is there's base investment that has to be put in for infrastructure development, like power, like cooling loops that have to be built into buildings and things like that, that we've been doing already, but more of it is needed. And once you get to that, the Kaplantensity for subsequent growth won't be identical, right? So I think that also plays into how we think about it. But time will tell in terms of how much more we do around this. But we feel good based on what we know now that we can manage it within a profile, but it's based on these kinds of assumptions we have made.

Got it. Got it. Okay. And maybe last couple of questions on margins. You highlighted that CPI segment margins declined 100 basis points due to capacity investments you made in fiscal '26. I mean, so from what you're outlining these were primarily focused on power or maybe just out flesh that out a bit, where did you see the most amount of capacity investments? And how do we think about the return of that reverting back to a normal margin post that capacity investment.

Yes. So we said we ended FY '26 at 9.2%. And in that, we invested about 100 basis points in CPI margin. the investments were 1 part critical power infrastructure there and another 1 in the cloud, we are investing in new programs that were coming on, so program ramps, more P&L type of investments. . With the growth we're seeing in FY '27, we've said that we expect to recoup the 100 basis points in FY '27. And as we move beyond FY '27 and FY '28, we do expect CPI to continue to expand margins both on the cloud side, we have expectations that cloud can continue to expand margins. An element of that will be writing services into our existing revenue stream there. And on the power side, we would expect power to continue to expand. We talked about it earlier, there's opportunity as we scale to increase margins. There's also mix inside of the power business. That's going to drive margins as we go forward. And our target is, as we said, sort of industry benchmarks that are out there from a margin standpoint for a power business.

Any thoughts in terms of what longer-term margins for SpinCo would be?

Well, I'd have to say longer term, that depends on what the revenue stream looks like. We've talked about inside of that. We got 2 different profiles of margin. Our cloud business is at margins less than the current average. And we've talked a bit today about power at mid-teens plus expectations. We clearly expect the business to continue to grow top line, and we expect margins to move north. Mix will have an impact on that as you move into the years beyond FY '28. And so I'd leave it at that for now. Some of it will be dependent on what the revenue stream looks like.

I have a couple of questions, but let me check if anyone in the audience has a question. Just wait for the mic.

Can you compare and contrast the power piece of your SpinCo business with Vertiv as it relates to the products and also the margins as you get to the scale in 2 years. .

Yes. So on power, what we have built on our power business is what we call embedded power, which is the power modules and custom power powering the chip itself and then the distributed power, which is all the standard stuff, which is switch gear and power pods and all that going all the way from data center utilities. . I would say if you look at the critical power of the side of the business, very similar to what somebody like Vertiv would do. We all may have different elements of it, like they have UPSs. We don't have UPSs, things like that. I would say the -- if you look at the cooling side of it, they started their business with the Emerson cooling business, right? So floor coolings, those kinds of things. Now going into rack integrated cooling, we bought Jet cool with the idea of doing cold plates and CDUs and rack integrated cooling. So we have approached it in a different way. And then they, of course, don't have the embedded power side of it as deeply as we do. And then the compute side of it, everybody seems to be migrating into because you want to put the whole thermal architecture together these days for customers, and we come at that from a position of strength, right? So the -- on the power side, I would say that will be the simple way to think about the portfolio. From a margin perspective, we're a fairly new electrical business. right? We've just started over the last few years, putting a whole bunch of acquisitions together, scaling up embedded power in a time when a lot of technology shift is happening. So we have a lot of work to do there. The good news is I've been in the Article business for a long time. I've been -- I've seen it through lower than 10% margins to high teens. So I know structurally, that we have all the right elements. We just have to get through the scaling piece to get to the margin requirement that we have. But our view is we'll get to the electrical margins that our peer set is at.

Michael, you used this phrase optimize the base of the business. I didn't know if that was code for there's a healthy amount of untapped revenue inside the existing client base. And if so, is there some unlock that you're progressing on to get to that?

Yes. From our perspective, I'd say, again, diversified portfolio. And so I think about the base business through a spectrum. -- on 1 end of that spectrum, you have things like health care and industrial that are high-value, high-growth opportunities for us. On the other hand of the spectrum, we have our, call it, our consumer-related businesses. that have been soft for a period of time now. And so when you think about the middle, you have things like pieces of our communications business, pieces of our automotive business, but it's this portfolio that has this really broad spectrum. There's still opportunity in that base business to deemphasize some of the lower-value markets like maybe towards the high-volume, low-margin consumer area while still growing in some of those growth markets that I talked about earlier. Those 6 growth markets that I identified earlier are all part of the base business today. So it's not like this aspirational vision that we have to go out and get it. It's -- we're in it, we have a beachhead established and now how fast can we grow it. So that was how I was thinking about the portfolio conversation.

That's clear. I think I appreciate. I'll wrap it up there. Thank you. Thanks for the audience.

Thanks.