Flex Ltd. (FLEX) Earnings Call Transcript & Summary

Okay. Great. Thank you, everybody, for joining us. My name is Mark Delaney, and I have the pleasure of covering Flex for Goldman Sachs. Very pleased to have with us today Michael Hartung, the President and Chief Commercial Officer of Flex as well as the planned CEO of RemainCo flex, Kevin Krumm, CFO of the combined company and the planned CFO of the SpinCo and Chris Butler, who is the President of critical and embedded power of Flex, but we'll be the Chief Technology and Strategy Officer of SpinCo. Thank you all for joining.

Good to be here. Thank you.

Mike, I want to start with you, and congrats on your pending appointment as CEO of Remainco Flex. Maybe you can start with some of your key priorities as you take on that role. .

Yes, sure. So I think as everybody in the room probably knows, we've announced a spin. We expect that spend to be executed just after the first of the year. And so when I think about priorities, I think about them in phases. So you've got this pre-spin priority list and then post spin prior risk. -- pre-spin, we're really focused on 2 things: getting the execution of the spin correct and timely. And then two, maintaining the momentum that we've created over the past, call it, 2 quarters in the RemainCo business. So -- if you think back, we have 2 quarters now of double-digit growth on both the RMS business and the ITS business. We've also expanded margins over that time frame from 5% to 5.7%. And we're getting the growth in the areas in which we intend. We talked about high-value markets. Last time we probably talk about all of those things today. So maintaining that momentum so that when the spin is executed, we're not starting at the finish line, we're like running right through the starting line. Now post spin, there are some different things. And I like to talk about priorities from the perspective of our playbook. And the playbook is what we've been executing for the past 7 years. That's what we'll execute going forward in Flex, and it's what brought us at this moment in time of the spin, where in the past 3 years, we've had an opportunity to create 2 new companies and set 2 companies up for success. And we hope to repeat that over and over and over again in Flex going forward. From a playbook standpoint, I think about 3 different areas. One is financial rigor, another is around productivity improvements, and the third area is around portfolio optimization. From a financial rigor standpoint, I would expect much of the same that you've seen over the past 7 years. We'll continue to deploy capital to the areas of highest return. ROIC will be the governing metric and deciding where we put that capital. We'll focus more on earnings growth and margin expansion. We won't be chasing top line growth for top line growth's sake, but the same rigor that you've come to know us for over the past call it, 7 years. Productivity in our industry, when you run a network of over 85 different factories in 35 or so different countries driving efficiency in the factory is really the paramount importance. And so we'll expect that to be the baseline going forward of continuing that productivity improvement. But I think what's new and exciting is this ability to unlock more value by combining our automation solutions with AI. And we really see an opportunity to not just unlock more but to accelerate savings from those efforts. And then thirdly, I'd say, portfolio optimization. We think about our portfolio from a low-value market and a high-value market perspective. Low-value markets have no surprise. These tend to be markets that aren't really growing or where we're not able to differentiate in a way that we can earn a higher margin that supports our plan going forward. And on the other hand, you have high-value markets. And these are markets that tend to be tied to long-term secular growth trends. enables us to grow in the neighborhood of double digits. It also enabled us to earn a higher than average margin because we're solving for different types of complexity. It could be technology complexity, scale, regulatory complexity, so all those things really drive us to continue to balance that portfolio over time. So priorities, prespend, post-spin, but certainly, the idea is to create momentum and maintain that postpaid.

You hit on a lot of things there. Anything in particular that you think will differentiate Remainco flex compared to other EMS providers?

Yes. I think about differentiation in a lot of different levels. every opportunity that comes our way, we have to find a way to differentiate between whomever that competition might be in whatever market. And when you run a diversified portfolio, the competition that you have varies by market and by customer. I'd say there's a couple of things that are universally true. The first is that we operate a unique suite of products and services. So we're 1 of the few companies that has engineering that's connected to manufacturing but also a capability to vertically integrate that manufacturing with things like injection molded plastics, sheet metal fabrication, our own component product line and core works. Vertical integration is 1 key differentiator in many ways. And then after we manufacture the product, we don't stop. We have an aftermarket business that's already operating at scale, where we have 1 part of our business that is around fulfillment where we can deliver products at the right time, at the right location, whether that's another business or even a home address. And we also have an ability to bring those products back in our sector economy suite of services for repair, refurbishment, recycling, anything that gets those products back from the market, so marketplace itself. So the suite of services, I think, is 1 area. Also, the playbook and then when you think about the muscles that we've developed in the company over the past 7 years, we've developed a capability to identify valuable assets that are consistent with our strategy, integrate those assets into the company. More importantly, combine those assets with existing capabilities to create something of greater value than we acquired. And now we have 2 examples over the past 3 years where we've been able to do that, and we expect to be able to do that in the future as well.

Okay. You hit on top line and some ways already. But Kevin, maybe I could go to you on this one. Any framing around the revenue growth that investors should expect for Remain Coflex over the longer term? .

I would say what we've talked about in those businesses, obviously, there's a lot of momentum today. We'll go through more details at our upcoming Investor Day. But as we look at those businesses, Michael talked about the high-value businesses or the businesses that are positioned against the high-value end markets, we would expect those to perform well in that sort of mid-single-digit plus as we go forward. But there's going to be trade-offs that we're going to continue to make as we continue to deemphasize areas of the portfolio that we wouldn't expect that type of growth. So we'll -- more to come at our upcoming Investor Day. But we're looking for those businesses to continue to perform as they largely have over the last few years. .

We'll stay tuned for November. Looking forward to it. Well, let's dig into some of those key end markets. We can maybe start on the regulated segment. I think last year, RMS revenue grew 5%. This year, I think the company guided revenue in RMS to grow mid- to high-single digits. What's driving that kind of growth? .

Yes. The most exciting part of that is we're getting the growth from the areas that we planned. And so we've done an extensive job of defining those markets that we've called high-value markets, and many of those markets fall in the RMS side of the business. So what are those? I'd say, first, start with health care. So today, there's 2 markets inside of health care that we consider a high-value growth market. One is around connected medical devices, another is around drug delivery systems. And if you think about our medical devices business, we're already 1 of the largest manufacturers of continuous glucose monitors, and we expect that to continue into the future. From a drug delivery standpoint, a few months ago, we announced a win with Novo Nordisk. So that will be our ramping business inside of drug delivery. And both of those segments are tied to these longer-term secular trends. In this case, things like an increase in our aging population and increase in the prevalence of chronic disease. All of these things are not episodic. There's things that we see driving growth for a long time into the future. Also in RMS, you have our industrial business. One part of that business is our energy infrastructure business. This is a business that we spun the power product portfolio into SpinCo, but we're maintaining all the contract manufacturing business inside of Flex. And so whether it's power generation, transmission, distribution, storage, all of that contract manufacturing work stays inside of Flex. Those areas will be positively influenced by the trends in the data center. Another area in industrial is around robotics. And so when we think about robotics, it's a broad spectrum, ranging from, call it, warehouse automation on the 1 end, all the way to fully autonomous humanoid on the other. We expect that given the increase in complexity in supply chain that regionalization will continue to be a trend. And many of those regions aren't ready to ramp production. So they're on the lookout for productivity improvements, wage inflation, labor scarcity. These types of applications will have a long-term role in regionalization. When you think about the automotive business, we don't think about that as a high-value market, but we think about that as a stable end market where we have an opportunity to grow in areas like compute that is tied to the software-defined vehicle and areas like power where we do DC-DC converters and onboard chart.

You mentioned robotics. It's been 1 of the key themes at the conference so far this week around physical AI. I'd be interested if you can share more around how big that might be for Flex at this point in terms of what percentage of RMS revenue or total company revenue that may make up now? .

Yes. It's an interesting concept for us because I think we placed 3 different roles in the area of robotics. Customer supplier and an innovator. And so from a customer standpoint, we actually buy robotic from some of our customers. We announced recently a partnership with Teradyne, where not only we use their cobots in a manufacturing environment, we also manufacture those cobots for broader distribution in addition to doing all of our capital equipment business, so a customer perspective. I'd say from a supplier standpoint, we also have developed and manufacture internally our own standardized automation platform. And so we have developed a module-based platform where we've automated -- what were previously manual processes, 13 different manual processes now can be automated across the network with our own automation platform. And then we talk about being an innovator. And the great news is when you're a customer supplier, you get access to a lot of different things in the marketplace. And I was in our Asia factories 2 weeks ago, and you got to see a lot of these things firsthand. And what you see are a combination of things. On the 1 hand, you have these stationary automation solutions that are plugged into a production line and they're fairly fixed in that configuration. You also, though, see these fleets of autonomous vehicles going out through the factory to deliver products into different pull parts from warehouses, et cetera. And then you see a lot of the work being done on humanoid where we're actively working to come up with the latest solutions to support that growth. Interestingly enough, what we're finding is in our automotive business, our capability around compute, and motion actuation plays very well into the human nit business. Now I'm not getting over our skis here on human. I don't think we'll deploy humanized in our factory at scale in the next few years. But I do see this hybrid approach emerging -- and it's one that leverages some things that we already have with some things that we're developing. So envision an autonomous vehicle on the bottom instead of the legs of a humanoid then it gets married, let's call it, the upper body of the human -- and now you have a situation where you have a reliable autonomous vehicle, guiding something with more dexterity to increase the application of that humanoid application. And so I think you'll probably see something more in the middle and hybrid before you'll see full blown.

What sort of time frame for that kind of an application should investors expect? .

So we already do automation solutions and already do autonomous vehicles. We already have in our labs, the combination of the hybrid approach. I would say within the next year or 2, you'll see that on our production floor. -- full-blown humanoid, I would put it, 2-plus years out, Bill..

Got it. Okay. But with wheels, that's I think more stationary basis. Yes. Okay. You have a few announced robotics partnerships that are Teradyne is public, the talked about the warrants with Amazon, how those are a little bit more broad-based. I mean as you think about humanoid or just general purpose, robots more generally? I mean, are there key partnerships that are underpinning some of that work you're speaking to?

Yes, I think it depends on which role we're playing in the conversation, customer, supplier -- we have announced a partnership with Teradyne as a customer and a supplier. We've announced a supplier relationship with Amazon. We have standardized platforms inside the factory that we've also partnered with to develop more and new technologies. But I would say that right now, largely that market is based around warehouse automation and fixed stationary automation with a plan to get to more mobile application in the near future.

Okay. Recognize you put a lot of rules here. But any sizing from a revenue perspective, how much robotics makes up?

Yes, we haven't disclosed what that is. We're looking at ways to do that from Investor Day in November as we try to give more granularity and the order of magnitude of our high-value markets and the role in the portfolio .

I guess just -- I mean you mentioned kind of various ways you're using it around these automation modules and maybe different types of robotics going forward. Any kind of way to frame how much of your processes are automated today and where they may go over time?

We do track penetration rates. I think there's a distinction to be made here is that some processes you have just aren't available for automation today. And so you look at a subset of what those are. And we have a really high penetration rate when it comes to the automation piece itself. While we're in the early stages of our integrating AI with those standardized platforms. So that's a really exciting part because as I mentioned earlier, we're known for grinding out productivity each and every year in our factories. And that baseline will continue, this idea of integrating AI with the automation solutions that we've standardized and deployed is really the opportunity to unlock more value.

Okay. And then any kind of specific partnerships where you can share some of your data with different like technology makers not much to share yet. What we plan on doing at Investor Day is give insights into what internally developed manufacturing automation platforms look like in the applications that we have Okay. Maybe talk on health care, you mentioned it as 1 of the key areas of the RMS segment. talk a bit more around your outlook for health care, maybe relative to the segment overall? And as maybe GLPs can perhaps be a driver for Flex?

When you think about the portfolio that we offer and you marry that with this concept that we'll deploy capital to the areas of highest return. Health care for certain post-spin will be a leading destination for capital. So you'll see us continue to invest and the markets that we have and explore markets that we'd like to penetrate. Right now, I would think about health care as being that steady driver of growth and margin appreciation. -- it's kind of the call and the storm, so to speak. And it plays a really important role in this portfolio for a couple of reasons. One, high regulated. And so our customers rely on us in this -- really this environment of uncertainty. -- to help them create flexibility in their supply chains through a regulated footprint. I'd also say that they're relying on us more and more to help them innovate because they're used to an environment where they can look over a long-term horizon. -- call it, 7 to 10 years and with high confidence make predictable investments that they know they'll get a return on. This is a market that is being disrupted more than ever before, especially on the equipment side. And so again, I like to think that the more complex the supply chain gets, the better position we are to help our customers because of those flexibility requirement. .

Okay. I wanted to talk also on the auto part of the business within RMs. I think you just described it as a relatively stable business. If I'm not mistaken, last Investor Day, that was 1 of the key growth areas that the company had details. So what's changed on the auto front. .

Yes. I think if you roll the tape back a little bit, right? We had certainly some optimism around the automotive business. I think like many companies we're surprised by the level of disruption and volatility, disruption from Chinese markets, disruption from the macro situation that negatively influenced the automotive industry -- and so for the past, I'd say, almost 2 years, we've been talking about the volatility of that business. Last quarter, we started talking about the stability of that business. So we've reset at a lower, more stable level. And this is the level from which we'll start to grow in the areas that we intend. And there's really 2 areas that we're focused on. The 1 area is around our compute platform. We talk a lot about buying habits of the consumer today. automotive customers used to buy based on horsepower. Now they buy based on user experience. And so the software-defined vehicle is the future of automotive. And as a result, software has become the secret sauce of automotive makers. Now we're uniquely positioned because a lot of the Tier 1s bet that they wanted a combined hardware and software solution, and they really just want the hardware. So we're able to standardize the hardware platform that they can marry with their software solution and they could go to market without the same friction as maybe some other suppliers might have. Also, when you think about the Power business, we're still optimistic that power that hybrid EVs are going to continue to grow as a percentage of the total. And our power business is well positioned for that, whether it be onboard charging or DC to DC power conversion, those are areas that we think will grow over time as well.

Okay. In the interest of time, maybe we can move on to the Integrated Technology segment. That's also going up pretty quickly. Kevin, can you remind us that the outlook for revenue growth in the IT segment for the year?

So we've guided to a revenue number. I might need Michelself here. The good news is that we raised our guidance we started off the year, and I think people were wondering why we didn't guide higher -- and we're sitting at the beginning of the year to want to see how some things playing out in the marketplace. I'm glad that we did. And this last earnings, we raised our guidance from -- we raised our guidance to high-single digits to low-double digits. And that's really coming on the backs of our communications business because the lifestyle business is soft, as expected, it's been soft for, I want to say, a couple of years now. We don't see a catalyst for that to change anytime soon. So that growth that you're seeing is coming from the communications business, and it's coming from that spectrum that is that advanced networking application, high-speed switches, optical year network interface technologies and now set. .

Yes. I imagine, I mean the whole segment grew in high single to low double digits. Networking is growing well above that, right, to bring the corporate to that the segment to that level. I mean how sustainable do you think that networking outlook is? .

Well, I think it's sustainable as the data center demand is sustainable, right? And so we believe in that demand. I believe in it so much that we spun the data center business because we see long-term growth fundamentals that exist in that business. The same fundamentals that exist for SpinCo will exist for Flex post-spin as well.

Yes. Love to talk on data center demand and Michael welcome your views or Kevin, if you want to chime in. But also, Chris, will be very interested in your perspective here. Because I mean, there's not so much discussion around the data center market, maybe some new policy restrictions from certain state governments trying to restrict where data centers have been built, getting the capital to finance some of these projects, but also tight compute and supply demand more generally. So maybe just help us understand what Fox has been seeing around data center demand. .

Yes. I mean it's interesting. We've had NIMB come up a couple of times today. But honestly, I mean, we don't really see that impacting the business and even in the short -- certainly not in the short term, but I think there's a lot of misunderstanding going on in the general public right now. And look, the reality is that everybody continues to use AI. I mean my 81-year-old mother uses AI today, and you start seeing more and more adoption of these tools. You're going to have to be able to process that compute. So I don't think we're going to see demand curtail in the data center space, even with some of these back pressures, it may just shift around a little bit. Because the fundamental reason why you're seeing this increase, you're taking chips that you operate at 150 lots are now going to 3,000 lots. It's a 20-fold increase in power. It's going to mean there isn't an estimate growth estimate out there that isn't below 2 to 3x the amount of power consumption, right, in the data center fleet here in the U.S. So I think there's going to be long-term growth behind it. You see customers making those investments we're making those investments in capacity to make sure that we can meet those demands.