Flex Ltd (FLEX) 2017 Q3 法說會逐字稿

Good afternoon and welcome to the Flex third-quarter FY17 earnings conference call.

Today's call is being recorded.

(Operator Instructions)

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.

Sir, you may begin.

Thank you, and welcome to Flex's conference call to discuss the results of our third-quarter FY17 ended December the 31, 2016.

We have published slides for today's discussion that can be found on the Investor Relations section of our website at Flex.com.

Joining me today is our Chief Executive Officer, Mike McNamara and our Chief Financial Officer, Chris Collier.

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 Securities and Exchange Commission, including our current, Annual, and Quarterly Reports.

If this call references non-GAAP financial measures for the current period they can be found in the appendix slides.

Otherwise, these measures are located on the Investor Relations section of our website along with the required reconciliation to the most comparable GAAP financial measures.

In addition, all commonly referred to acronyms for each of our four business groups along with their definitions are mentioned at the bottom of our disclosure slide.

Lastly, before turning the call over to Chris, I wanted to pass along a save-the-date for our Investor and Analyst Day this year which will take place in New York City in our innovation hub on May 10.

Additional details will be emailed out shortly.

With that I'll pass the call to our Chief Financial Officer, Chris Collier.

Chris.

Thank you for your interest in Flex and for joining us today as we present our results for the third quarter.

Let us begin by turning to slide 2 for our third-quarter income statement highlights.

Our performance this quarter reflects our continued operational execution, portfolio evolution, and our commitment to our Sketch-to-Scale strategy with our Q3 financial performance coming in line with our guidance ranges on all of our key financial metrics.

Our revenue totaled $6.1 billion, which was within our guidance range as three of our four business groups met or exceeded our expectations.

As guided, revenue declined year over year by approximately $650 million, which is entirely reflective of reductions from certain legacy customers and programs as well as our exit from our Lenovo Motorola China operation, a process that we concluded in our June 2016 quarter.

Sequentially, our revenue rose 2% or $106 million led by CTG and HRS growth.

Our third quarter adjusted operating income was $223 million, which was above the midpoint of our guidance range of $205 million to $235 million.

Adjusted net income was $183 million.

Our adjusted earnings per diluted share for the third quarter was $0.34, which was toward the high end of our guidance range of $0.31 to $0.35 while our GAAP EPS is $0.24.

Please turn to slide 3 for our trending quarterly financial highlights.

Our adjusted gross margin of 7.1% expanded almost 40 basis points from the prior year, reflecting the benefit of our continued and successful portfolio evolution.

We are strategically evolving our business portfolio towards a greater concentration of higher margin business by providing greater levels of innovation and engineering services.

This portfolio evolution has driven year-over-year gross margin expansion, despite a languishing demand environment and lower overall revenue.

Our quarterly adjusted operating income came in at $223 million, and our adjusted operating margin rose over 10 basis points year over year to 3.6%.

This operating margin performance is reflective of our focus on continuous improvement as it represents our 13th consecutive quarter of year-over-year improvement for this metric.

We continue to make meaningful investments in our Sketch-to-Scale capabilities as we expand our design and engineering activities.

We expanded our innovation offering with the opening of our Boston Innovation Center this past quarter.

Additionally, we continue to fund and develop focused innovation initiatives and new businesses.

Our strengthening gross margin and disciplined discretionary spending enables Flex to continue to make these invests to support our long-term vision and growth.

Return on invested capital, or ROIC, remains stable and strong at 20% and continues to be well above our cost of capital.

Turning to slide 4, we'll display our operating performance by business group.

Our CEC business generated $62 million in adjusted operating profit and posted a 3% adjusted operating margin, which is at the midpoint of our targeted range of 2.5% to 3.5%.

The sequential growth in both margin and profit dollars was anticipated and reflects the benefit of proactive cost reductions and program repositioning activities undertaken in prior quarters.

Our CTG business produced $59 million in adjusted operating profit, resulting in an adjusted operating margin of 3.2%, which is in our targeted range of 2% to 4%.

CTG continues to benefit from an improving business mix as we continue to provide more meaningful levels of product design and innovation services along with our manufacturing supply chain solutions.

These increased Sketch-to-Scale solutions are enabling us to provide higher levels of value-add with customers and develop deeper, more robust strategic relationships.

Our IEI business generated $40 million in adjusted operating profit and achieved a 3.5% adjusted operating margin.

This quarter it's also important to highlight that the IEI Team sold most of the residual solar panel inventory from the second quarter impairment activity and has eliminated all remaining inventory risk.

As we had stated last quarter, we continue to build a more diversified energy business and have taken great strides this year with the global expansion of our solar tracking solution into 10 different countries.

Unfortunately, utility skill energy projects continue to experience push-outs and delays.

These were more pronounced in a couple of the new international markets, resulting in lower revenue and operating profit than forecasted.

Looking forward, we will continue to make progress with IEI and expect to return to its targeted margin range of 4% to 6% as we exit this fiscal year.

Lastly, our HRS business continues to display strong operational execution as it delivered $83 million in adjusted operating profit, equating to an 8.1% adjusted operating margin.

We continue to make investments to support our current and prospective business as well as successfully ramp multiple new customers and programs in both the auto and medical markets, while still delivering financial results that are well within our targeted range.

Please turn to slide 5 for other income statement comments.

Net interest and other expense for the quarter was $26 million, slightly above our guidance of $25 million, primarily reflecting the modest impact from the elevated interest rates.

We believe that a range of $25 million to $30 million is the appropriate level for our quarterly net interest and other expense going forward and would be reflective of the higher interest rate impact.

Our adjusted income tax expense for the third quarter was approximately $14 million, reflecting an adjusted income tax rate of approximately 7%.

While this was slightly below our 8% to 10% estimated adjusted tax rate range this quarter, we continue to believe that the 8% to 10% range remains appropriate for this fiscal year.

There are several different elements that have an impact when reconciling between our quarterly GAAP and adjusted EPS.

There's a $0.04 impact from the $21 million of stock-based compensation expense and another $0.03 impact from the $17 million of net intangible amortization expense.

Lastly, we recognize $16 million, or $0.03, of cost associated with the targeted restructuring we had announced last quarter.

We expect to incur approximately $15 million of additional costs over the remaining three months of the fiscal year.

Turning to slide 6, let us review our cash flows and net working capital.

Cash flow generation is a hallmark of Flex, and it was exceptionally strong this quarter.

We generated almost $0.5 billion dollars in cash flows from operations in Q3, and over the last 12 months we are have generated over $1.2 billion.

Net working capital decreased $225 million from the prior quarter to roughly $1.6 billion and amounted to 6.6% of our net sales, illustrating excellent working capital management.

Our resulting cash conversion cycle totaled 25 days, which had improved by one day sequentially, primarily due to improved inventory management which reflected nearly a $70 million sequential decline and a reduction of one day of inventory.

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%.

Our capital investment, supporting our planned capability and capacity expansion, and our targeted automation and innovation investments remain in line with our prior guidance.

This quarter our net capital expenditures totaled $106 million which was slightly below our depreciation level of $109 million.

We now see the FY17 CapEx to be roughly $500 million as we continue to make investments in advance of the ramp stages for key strategic programs, such as Nike.

Our resulting free cash flow was very strong in the quarter at over $363 million.

In year to date, we have generated approximately $628 million.

We expect FY17 free cash flow to be in the middle our targeted range of $600 million to $700 million.

During the quarter we extended the maturity date of one of our term-loan agreements from August 2018 to November 2021 and borrowed an incremental $130 million under the term loan.

Our strong, sustainable cash flow generation enables us to consistently return value to our shareholders through repurchasing of our shares.

This quarter we repurchased over 5 million shares, or 1%, of our float for approximately $75 million.

And we remain committed to return over 50% of our fiscal three-year cash flow to our shareholders annually.

Please turn to slide 7 to review our balanced capital structure.

We continue to operate with a strong financial condition with almost $3.4 billion in liquidity, no near term debt maturities and approximately $1.9 billion in cash.

Our credit metrics remain healthy with our debt-to-adjusted EBITDA ratio at 2.3 times.

We remain confident in our ability to execute on our long-term vision and strategy.

Our flexible and balanced capital structure, strong cash flow generation, and improved operational execution allow us to continue to take distinct actions to further strengthen our Sketch-to-Scale supply chain solutions increasing the attractiveness of our long-term business model.

Going forward we will continue to operate with discipline and consistently deliver on our commitments.

Now I will turn the call over to Mike.

Thanks, Chris.

Please turn to slide 8 for our Q3 FY17 business highlights.

Our third quarter reinforced the fact that our key financial trends and Sketch-to-Scale strategy remain on target, and we are continuing to develop catalysts for improvements in the future.

To begin with this is our 13th straight quarter of year-over-year adjusted operating margin expansion.

We delivered a 3.6% adjusted operating margin in the quarter.

Our profitability improvement has been driven by the traction we are developing from our Sketch-to-Scale strategy and our continuous portfolio evolution.

Second, our operating profit dollars in the quarter grew 13% sequentially to $223 million.

We also saw HRS and IEI totaling 50% of operating profits, while contributing 36% of the revenue.

The growth in our combined HRS and IEI businesses create a more balanced portfolio with longer product life cycles, more predictability, and increased earnings stability.

Lastly, this marked the 20th consecutive quarter of meeting or exceeding consensus EPS.

It's clear that our business has been improving its resiliency over the past few years as we continue to build a more predictable earnings stream.

We are pleased with this performance considering the challenging environment for revenue growth.

We've had an increasingly amount of questions about the implications of possible changes in taxes, regulation, and cash repatriation.

While we do not yet know what these changes will be, in general we think the policies being contemplated would be positive for US GDP growth.

We have a very diversified geographic footprint around the world purposefully designed to enable and encourage regional manufacturing.

Our footprint in the US is over six million square feet, and we have exceptional capabilities that span all industries in everything from design and innovation centers to plastics injection molding, tooling, automation, flexible circuits, specialty materials, manufacturing, aftermarket services and distribution.

This capability is spread across 15 states.

Additionally, we have three FDA certified facilities, six medical ISO13485 certified operations, and three automotive certified TS16949 operations with two more in certification.

In the last four years, we have invested well over $300 million in our US operations; and we are pleased to be the largest electronics manufacturer in the country.

We believe we are extremely well positioned to help customers regionalize their supply chains in the years ahead as is required.

We are confident that our Company has the tools, capabilities, and made the right investments to thrive in this new environment.

Another financial trend and metric we are very proud of is our cash flow and free cash flow generation.

We have now generated positive operating cash flow in 19 of our past 20 quarters.

During the quarter we generated nearly a $0.05 billion of cash flow from operations and over $360 million in free cash flow.

This is the tenth straight quarter of positive free cash flow generation.

We remain on track to finish the fiscal year at the midpoint of our free cash flow target, $600 million to $700 million, which equates to a high single digit free cash flow yield that ranks us in the top quartile of the S&P 500.

It is our strong and sustainable cash flow generation that enables us to consistently return value to our shareholders as was evidenced again this quarter as we bought back approximately $75 million worth of stock, or over 5 million shares, which amounted to 1% of our float.

As Chris stated, we remain committed to returning over 50% of free cash flow to investors on an annual basis.

Our Sketch-to-Scale strategy remains on target with clear catalysts ahead for further improvement.

Our customer diversification strategy remains at very attractive levels as this was the fourth straight quarter where we had no customers accounting for 10% or greater of our revenue, and our top-10 customers accounted for 46% of sales.

Our Sketch-to-Scale strategy is helping us drive further diversification and more strategic relationships with customers.

A few new examples of recent Sketch-to-Scale projects we worked on were showcased at the recent Consumer Electronics Show in Las Vegas.

These include the US Olympic blazer with Ralph Lauren; our next generation wireless charger for the handbag industry; AR glasses with Atheer; a wireless ECG patch for monitoring patient health any time, anywhere; a home health hub which is a gateway for patient monitoring data; a smart door lock with August; smart blinds with Pella; and the Ember smart coffee cup being sold at Starbucks.

I only highlight some of these interesting products as it shows the diversity of products in our Sketch-to-Scale platform.

Catalysts for future growth that we are actively investing in include: our growing Nike relationship on the back of reinventing the shoe manufacturing industry and supply chain using automation; our ramping Bose partnership and audio design capabilities; and the announcement of our digital health initiatives this quarter under the leadership of Dr. Cal Patel.

Additionally we announced a new joint venture with RIB Software this past quarter to transform the building and housing industry by digitizing the design through supply chain process.

The construction and building industry is a $9 trillion industry and growing.

We believe RIB has the best 5D building information management, or BIM software, solution available for this market.

And when combined with our platform and leading global supply chain solutions, it creates a formidable partnership.

We believe together we can build a smarter, more connected system using modern software architecture and real time information which can reduce cost by up to 50%, shorten cycle times, improve efficiency, and help complete construction projects on schedule.

We view this joint venture as opening Flex up to another completely new market and one that can be significant over time.

We are pleased to be able to fund these future catalysts of growth and still generate strong free cash flows and increasing margins.

Please turn to slide 9 as we review revenue by business group in detail.

SEC was exactly in line with our expectations for stable revenue as its $2.1 billion of sales were flat sequentially but down 15% year over year.

The year-over-year decline was broadly across all the areas of CEC.

Sequentially in the quarter, CEC saw continued growth with CI3 and improvement in telecom and service storage offset by weakness in networking.

We expect CEC revenue to be around 5% to 10% on a sequential basis as we once again expect to see growth in CI3 being offset by seasonality and declines in the rest of the CEC business.

CTG met our expectation for 10% to 15% sequential growth as revenues rose 11% sequentially.

This quarter reflected the ramping of new products and programs with Bose and others.

Year over year, CTG was down 10%, which was mostly due to our exit with Lenovo Motorola in China.

We are guiding CTG revenue to decrease 20% to 30% sequentially, in line to slightly better than historical season trends for this business group.

IEI fell short of our expectations of stable demand as revenue of $1.14 billion was down 2% sequentially and 6% year over year.

This miss relative to expectations was a result of our energy business and specifically from temporary delays in our solar business to new customers and deployments in emerging markets.

As Chris already mentioned, we managed to mitigate and sell most of the remaining solar panel inventory that resulted from the SunEdison bankruptcy.

As I alluded to last quarter, we remain confident in our strategy of positioning ourselves as a provider of smart and connected energy solutions.

Whether it has been through our industry-leading solar tracking business, or the addition of data analytics through our BrightBox acquisition, we are focused on delivering differentiating, smart, and connected energy solutions.

Despite the loss of SunEdison this year, which was IEI's single largest customer, we expect high single digit, year-over-year growth in energy and greater than 5% year-over-year growth in IEI.

We are forecasting IEI sales to be up 10% to 15% sequentially as temporary delayed energy products get built and we see growth in our capital equipment business.

HRS slightly exceeded revenue expectations of stable for the quarter with a 2% sequential growth, as automotive grew a little more than expected and medical managed to increase slightly.

Revenue came in at just over $1 billion, up slightly year over year.

This extends HRS' streak to 28 consecutive quarters of delivering year-over-year revenue growth.

We expect HRS to be flat to up 5% sequentially, which is a function of automotive growth being offset by declines from a few medical customers.

Now turning to our March quarter guidance on slide 10.

Our expectation for revenue to be in the range of $5.5 billion to $5.9 billion.

The midpoint is a 7% decrease sequentially and a 1% decline year over year.

Our guidance for adjusted operating income is to be in the range of $185 million to $215 million, or $200 million at the midpoint.

This equates to an adjusted EPS guidance range of $0.27 to $0.31 per share on weighted average shares outstanding of 543 million.

The adjusted EPS guidance is expected to be approximately $0.10 per share higher than the quarterly GAAP earnings per share due to net intangible amortization, stock-based compensation, and restructuring charges.

Wrapping up, I want to again take the opportunity to thank the talented and dedicated Flex Team for their efforts to make third quarter a successful one and help us continue to move in a positive direction.

With that, I'd like to open up the call for Q&A.

Operator?

(Operator Instructions)

Your first question is from Amit Daryanani with RBC Capital Markets.

Thanks.

Good afternoon, guys.

I have one question and a follow-up.

When I look at your March quarter guide your sales are down 7% sequentially at the midpoint.

It's much better than I think what you've seen out of Flex the last several years.

Probably just talk about why are we seeing less seasonality in the March quarter, and is that a trend that's sustained as you go forward probably driven by mix I would imagine?

Yes, I think that's exactly right.

I think as we continue to see a little bit less of the volume consumer, pure consumer products from CTG, we're going to see a more stable earnings profile across these quarters.

So I actually think that's something that's going to be more structural as we go into the future, and obviously we like it a lot because it makes a lot more predictability.

And the usage of capital and inventory are much more predictable for us so we can optimize our ROIC a little bit better.

I think this probably ends up being a structural change that we'll see going forward.

Got it.

And then I guess just on Nike, it comes up in every discussion with Flex I think of late.

Can you talk about what do you think the Nike revenue, the margin profile, can look over the next several years.

Especially what do you think at scale that model could look like for you guys?

Because I think a lots of folks think this is in the CTG business where the margins may be 2%, 3% range.

But perhaps you could talk at scale what do you think this model would look like?

We don't see anywhere near a 2% to 3% model.

So we do expect it to be significantly over a CTG average number.

So what we will expect to do is we'll actually see revenue -- we'll expect to see revenue grow pretty literally over the next year.

Actually, I expect revenue to grow pretty linearly over the next three or four years.

I think by the end of this year, or by the end of FY18, we'll see it to be a meaningful part of CTG's business.

By the time we get to FY19 I think we'll see it in a top-10 position on the overall Flex business.

And I think ultimately we would expect this to potentially be a billion dollar business.

And as far as margins, it's our expectation that over the course of that time frame we'll be able to move this into something significantly higher than CTG margins, even more like HRS margins.

Perfect.

Thanks for your time, guys.

The next question is from Steve Milunovich from UBS.

Thank you.

Good afternoon.

I wonder if we could talk a little more about IEI.

First of all, I think last quarter you said you had $50 million worth of trackers you were trying to get rid of by year end.

Did you get rid of all of that?

And you talked about a push-out in terms of some of the solar business with emerging markets, but it sounds like you're going to start placing that next quarter.

So I assume you have contracts for that and you see it beginning to turn around next quarter?

Hi, Steve, this is Chris.

Yes, so just to clarify on your first question, what we highlighted last quarter was that we had some residual solar panel inventory, not trackers, and it was roughly in that range that you had highlighted.

And in my prepared remarks, as well as with Mike, we wanted to make certain that we highlighted the great work this past quarter to actually sell off that inventory and eliminate all remaining inventory risk associated with that.

And with regards to the implications of the business during the quarter, what we were highlighting is this past quarter we saw some utility scale energy projects in some of the international markets that we've been entering into have some push-outs and delays.

And it was more pronounced in a couple locations, and we have line of sight and we've actually already been solving some of those issues.

So as you enter this next quarter, part of what supports the strong sequential growth of 10% to 15% for IEI is on the back of our solar trackers as well as other business going into those utility scale projects as they get deployed this track quarter.

Understood.

And then on Bose, do you still expect that to be a top-10 customer in FY18 and is that ramping at the rate you anticipated?

Bose is a great partner, great relationship.

We continue -- we only have about three months now under our belts with them.

On track with our expectations.

They'll be a top 10-customer next year, and we're going to continue to find ways to expand with them.

Terrific.

Thank you.

The next question is from Mark Delaney from Goldman Sachs.

Yes, good afternoon and thanks very much for taking the questions.

First question is on margins.

I think gross margins were one of the highest, if not the highest, in history in December quarter and EBIT margins also expanded and that was despite higher mix of the consumer group, which is typically a lower margin business.

So I was hoping you could help us understand a little bit more what was able to drive the margin strength within the December quarter.

And then as we look forward in the last couple quarters you talked about some of these restructuring actions and ability to get Bose margins up higher as you move forward.

So if you can just help us think about how much magnitude you can get from margin improvement going forward from some of those other efforts like Bose, full integration and the completion of the restructuring programs, if you could quantify the timing and magnitude there.

Thanks.

Great.

Thanks, Mark.

Yes, so you highlighted something that we were noting in the prepared as well.

7.1 was up 40 basis points year over year and even when you look to the midpoint of our guidance next quarter, it actually goes higher.

This is something that's been the construct as we continue to evolve the portfolio, to engage deeper with some of the Sketch-to-Scale elements of the business and it's across every one of our segments.

If you think about just CTG alone, our focus has been around improving our margin and profitability there, not necessarily focused on growth.

So as we've stated before, we continue to drive the portfolio to a richer mix inside of CTG, which is led by greater Sketch-to-Scale solutions and we're doing it with these new brands you've highlighted, new technologies and new products.

With that line of sight, that's why last year at Investor Day we extended the margin range for that segment.

Just before we talked about -- one of the earlier questions was around the new relationship with Nike.

We also talked about the new relationship with Bose.

Both of these are meaningful contributors as we build out the long-term portfolio and continue to grow the business.

Let alone the mix benefits that you get as we continue to drive the portfolio evolution to greater than 40% to 45% of our business being secured around the industrial and emerging as well as the HRS business that has longer product life cycle, much higher margin profile.

So the combination of all that, we're pleased with the continued progress we're making.

Still more work to do but what you're seeing is that portfolio evolution, the Sketch-to-Scale penetration evidencing itself in these gross margins that afford us the opportunity to make investments into new markets and new businesses, as Mike had talked about in his prepared remarks.

Not only are we working hard to move the portfolio into a more balanced way with more and more HRS and IEI business, but even within the CTG segment we're trying to diversify that business into more technology-oriented products and more products where we have more design content and innovation content.

Because as we add more and more value in that product category with technology and with innovation content, we can actually drive margins up and you're seeing some of that starting to be evidenced in the CTG margin structure.

It did get a little help from December as well, just because of pure volume.

So you'll see it come down a little bit as we go into next quarter just on the back of volume.

But we are structurally moving the CTG portfolio into more technology, more innovation, and we're trying to establish a couple of very nice layers of growth that we believe can sustain a more predictable earnings stream which includes Nike and Bose.

And I will also mention and remind everybody we're actually -- we're not operating profit breakeven on Nike, we're pretty significantly away from it.

And we're absorbing that cost as well in the CTG business.

So we like the way the portfolio evolution within CTG is transitioning.

We'll continue to make the changes in that portfolio transition into a better, more technology-based business and that's the reason we ended up moving our operating profit target range up this last May, as Chris highlighted.

That's helpful.

For a follow-up question, I know you guys have specific opportunities, especially in Nike that drives top line going forward.

But maybe you can just talk a little bit more about the core base business, I know you had a few challenges around energy.

But global PMI data in a number of countries is improving, so I think you guys would start to see some benefits in your bookings trends in areas like industrial and HRS.

Just hoping you could just elaborate a bit more on some of the regional trends you're seeing, and if you are, in fact, in the core base business seeing some improvement in the bookings.

One thing I want to keep in mind on the solar business, we actually expect to be up maybe close to high single digits this year on the solar business and that's with losing the number one customer of IEI, SunEdison.

So we would have had an extraordinary year in solar and in IEI if it had not been with the SunEdison account going upside down.

So we're pleased the way that's evolving and energy is not going to go away and our positioning within energy is very interesting and in a place where we believe we can continue to grow it.

So from the energy standpoint we think we're in pretty good shape.

On the core business, we would -- I see the same thing you see.

I made some comments about the US GDP being positive going forward.

Any time the GDP of the world or of the United States goes up, I would hope that we would be a beneficiary.

It's probably one of the most important drivers of our business because we are so diversified.

Whether we're going to see that flow through into incremental revenue that we're not anticipating going forward, we'd be hopeful and we'll just have to see if that plays out.

Thank you.

The next question is from Adam Tindle from Raymond James.

Okay.

Thank you and good afternoon.

Based on your guidance, it looks like operating income dollar declines on a year-over-year basis have effectively troughed in the December quarter.

So just hoping that you could talk about this trend as far as year-over-year operating income dollar growth and your confidence on operating income dollar growth in FY18.

Certainly.

So even if you just look towards our guidance that we set for the March quarter, you see us really right on the same level as we had last year and that's despite having to still work through some challenges in parts of the business.

What you've seen historically is us having to digest the transition away from our single largest customer, Lenovo Motorola, over the last two years, which has been something that's been a significant headwind that's now behind us.

If you think about what we just talked about at length in some of the earlier questions, it's about building a richer business mix across each and every one of our segments today.

The incremental Sketch-to-Scale and design led efforts are all aspects that are going to help continue to drive a greater earnings growth.

If we have opportunities to see the top line expand, it will even be more of an enhancement to that.

If you think about the way we've structured the long-term model, we have GDP-plus late growth in our model as we lock out to 2020, but you have meaningful operational improvements and operating profit improvements to the tunes of three and four times that growth rate, just in terms of the penetration that we're getting in these larger product life cycle, higher margin businesses.

So you're just seeing that natural evolution play its way out, as been evidenced by now having 13 straight quarters of year-over-year quarterly margin expansion and we'd expect to have growth in this range as we progress to 2020.

Okay.

And maybe building off of that, based on your March guidance and my assumptions for normal seasonality in IEI and HRS, it looks like you will likely be at double-digit revenue growth in FY18 for these two segments.

So maybe just talk about your level of confidence in this, given it's something that you haven't achieved on an organic basis in two years.

Certainly.

Let me just break down one element of that.

Let me just start with HRS.

We have a highly diversified and fast growing business here, and we continue to expand all of the tools that we have with which we can compete.

If you think about we're in over 300 global platforms in automobiles.

We're continuously finding new partners.

Just to think about the content that we have inside of a vehicle, growing from 2008, around $25 in a vehicle, to over $118 today.

We are continuously finding many ways to play and penetrate that space.

If you look at the performance this year, we're going to be up higher single digits off of the 10% you cite but the miss is really in terms of about $120 million of revenue.

So we highlighted in prior quarters some delays with certain programs.

The 10% may not be linear every single year but our vision and confidence is that we're still structurally established to have long-term growth that's intact for HRS.

Mike just talked about the IEI business and we suffered our single largest customer within IEI departing this past year.

You had almost a $0.5 billion business with SunEdison inside of IEI go to zero and despite that, we are going to be growing IEI north of 6% this year.

At the same time, we continue to find new different categories to play, from lifestyles to expanding into other equipment areas as well as having a world-class-leading tracking solution in energy, total energy solution offering.

So we have confidence again inside that space to have meaningful growth.

At our Annual Investor Day is a time when we will always step back and assess the performance that we just came through as well as you how we look forward as we build out our long-term vision.

But where we sit today in both of those businesses, long term structural growth is intact.

I would add just a couple more data points.

You talked about a multiyear look back.

The last three years, industrial and emerging industry we were going to be -- if you go to the midpoint of the range in 2017 for the fourth quarter, we're at about 10% growth.

If you look at HRS over the last three years, we're at about 8% growth.

And in both those cases we're actually at higher growth rate as relates to OP dollars.

If you look at our structural overall, call it FY15, FY16 and FY17 as a Company, we've grown operating profit from 2.9% to 3.2% to 3.4%.

So you can argue you're not hitting 10% this year, being up at north of 6% on the back of losing your number one customer is pretty impressive in my book and will be over 10% operating profit increase in IEI in 2017, despite losing the number one customer.

So it gives you an idea of the robustness of the book of business and the strategies we're employing.

So I think we'll continue to drive our model forward.

We'll continue to drive to try to get to 10% growth in these markets and it's not going to be linear, as Chris said, but over the long term these are the growth rates we're trying to achieve.

And different disruptions are going to happen like SunEdison.

We've operated in a pretty low economy, maybe it will get a little bit better going forward and it will help us out.

It was a good question.

The only other thing you I would add into that because we just unpacked quite a bit for you, but both HRS and IEI have had really strong bookings and what we've seen has been really some push-outs and some delays in both of those businesses, which -- what's different than other businesses, that demand doesn't perish.

That's not perishable demand.

All this, again, puts us into having the confidence we have in operating these businesses to win.

Thanks, guys and best of luck.

The next question is from Steven Fox from Cross Research.

Thanks.

Good afternoon.

So just first question, Mike, you mentioned a bunch of the fashion designs that you displayed at CES, and I did check a lot of those out.

I was just curious, obviously Nike is a huge volume deal for you.

How do you transition some of those ideas, which are fairly unique to the industry, into volumes that mean something when you're such a large Company already?

And do you see some major trend that could lead to that happening in the next year or two?

And then secondly, I just wanted to double check on one thing.

I think you said medical was weak.

I think last quarter you had some inventory issues.

If you could just update us on any leftover inventories from what was a drag a quarter ago.

Thanks.

Steven, that's a great observation and it's not lost on us that fashion's not going to move our needle a whole lot.

A lot of what we do is as we work on these projects, obviously we get paid, but we need projects that is actually going to move our needle and drive significant revenue.

So if you think about some of the things we're doing with fashion in terms of being able to collect data, analyze data, get it into position where our customers can do machine learning whatever on it, huge applicability as a crossover to things like digital health, as a great example.

And digital health we think is something that's going to really explode as the need for chronic disease management is going to continue to increase in the developed countries in particular and even the undeveloped companies are going to be more and more consumers of it.

So there's a great case where we're trying to leverage a lot of those technologies that can play across into whether it's continuous blood glucose monitoring or notifications that you're getting as you're managing these chronic disease and the elderly want to actually stay you in their own home, we think it has a huge applicability and it gives us the underlying -- and what's important to us in demonstrating those technologies is the underlying core technologies about how they're powered, about how they're miniaturized, about how they're reliable, the connectivity modules associated with them.

These are the underlying core technologies that will have applicability into a much bigger market as we go forward.

So we view them as interesting, but I think when you see some of those things you need to think about the underlying core technology IP that we're developing as we make those projects happen.

And with regards to the other aspect you highlighted with regards to an inventory, that inventory issue that we had talked about last quarter was what I had highlighted earlier with Steve and that was related to the residual solar module inventory that was had impaired in our Q2.

And that was something that the team did a great job of selling off and we've completely mitigated our inventory exposure with that as we closed out our quarter.

Oh, okay.

I thought there was some medical inventory issues, but I guess not.

No.

Great.

Thanks for clarifying that and I appreciate the answer on the fashion.

Thanks so much.

You're welcome.

Next question is from Matt Sheerin from Stifel.

Yes, thanks.

Just going back to your comments on HRS and the automotive business where you continue to see growth, I know you're more skewed toward US customers where we're seeing more of a plateau in terms of production growth.

Talk about opportunities to further expand programs with US customers and efforts to expand globally with customers in Europe and Asia.

I think there's two ways to think about it.

One is the US customers and I would think about that differently from US consumption.

And I actually think we're actually quite well balanced.

We're in a number of different programs in Europe and China and in the US and some of these things are pretty diversified.

So our Asia operations as a percent of our total consumption runs about 30%.

It's actually pretty high.

And some of those are as a result of the globalization of the big US and European OEMs, which I actually think we have a pretty balanced footprint with and they're actually looking for globalized companies to be able to supply them on each of the different regions for that business.

We also have customers that are Asian customers.

So I actually think our footprint is very well balanced and I think it's balanced across the US customers, I think it's balanced across the European customers and certainly across regions.

So we feel pretty good about where we are and we're in like 400 different platforms worldwide.

We're in over 400 global platforms today.

We operate 16 global certified auto facilities.

We operate 16 FDA facilities around the globe.

It's a highly diversified global platform that we're operating from.

Okay.

Thanks.

That's helpful.

And Mike, regarding your comments on your ability to accommodate customers that may want to increase manufacturing footprint in North America in the US, you talked about a six million square foot capacity.

How quickly and do you have the capacity available to actually ramp production for customers or would you have to actually build out that infrastructure or put more equipment in place?

No, I'd say we're -- first of all, we have a great footprint, as you can imagine with six million square feet.

I would say we're probably no more than 60% or 70% utilized on that six million square feet.

So I think we can probably bring a significant amount of facility to bear, many but keep in mind, facilities is not just the only answer.

It's all about the equipment and even more importantly about the resources.

What's interesting in the US is that -- I talked about investing $300 million.

We brought on innovation centers in San Francisco, in Boston, in New York, just over the last couple years.

It's the center of our automation on a worldwide basis.

We're now up to 700 automation engineers on a worldwide basis.

We added 650 design engineers over the last year and I'm going to guess 200 of them were in the United States.

So it's not just a factory or a facility, because the facilities we can go rent a facility and bring that up.

But it's not only just the facility space but it's the experience, it's about the talent, it's about leveraging off the existing talent pool that we have in the operation, it's about having the center of our automation here.

And it really -- that's what leverages across being able to ramp securely for customers in a predictable way and in a rapid way.

So it's more than just the six million square feet, just think about that as just being one of the things we have to go to work to go ramp a customer.

Got it, okay.

Thanks very much.

Keep in mind, we've gone to customers now for 20 years telling them hey, guys, you need to move toward manufacturing flexibility and variable manufacturing costs so that as currency change, as taxes change, as your end-markets change, you can actually change along with it and we'll provide the infrastructure for you to go move.

And we move an enormous, probably close to $5 billion a year that we move from point A to point B. And it's an enormous amount of capability just to know how to move and ramp and do things in a secure way, move those supply chains in a secure way.

So I actually think there's a lot to it.

It's more than just the facility space.

But we've got actually have the facility space, we have the know-how, we actually have the process and we have the people.

So it's a super cool and interesting position to be in and we're pretty pleased, and we put $300 million into it over the last four years.

Got it.

Thanks again.

The next question is from Jim Suva from Citi.

Thank you very much.

My question is a little bit regarding the Nike relationship, which Nike has been very vocal and positive speaking about the relationship with Flex.

You mentioned in your prepared comments that it's currently the loss-making situation.

Can you give us an update about the timeline, because we would like to see how losses turn into breakevens, then into gains, how you see that progressing.

And how big is -- any timeline about -- there's so many variables, whether it be shoe size or color or fabric that go into this.

Has anything been changing for the timeline like it's taking a little bit longer, puts and takes a little bit faster, any update on the timeline of how that's going, because it's such a complex yet important relationship.

Thank you.

Thank you, Jim.

Certainly, just as you ended that question, it is a very important relationship and one that we've been strategically partnered to drive their manufacturing revolution.

There's really no change in our expectations since what we lined up last May at our Investor Day.

FY18 for us is going to see meaningful revenue for CTG, meaningful is a couple hundred million dollars.

We continue to roll this thing out and we anticipate it to be a top-10 customer for Flex in FY19.

It's a clear path for us to have a billion dollar revenue business with them long term.

So we've highlighted before all the different activities that we're partnering with them.

We continue to get greater visibility with where we're moving with it.

We continue to look to grow our capacity and capability as the revenue profile grows and we're continuing to expand the product portfolio.

So as it relates to the profitability, we've said all along, this is going to be a multiyear process and we're in an investment cycle right now.

We cross into profits in the last quarter next year in Q4 of FY18 and at our Investor Day coming up in May we're going to be able to provide you a much deeper insight into how this relationship's moving and how we think about it as we build out our long-term vision for Flex.

And Jim, I'm going to add a few comments.

When we started on this journey, we thought about it with our customer like a 10-year journey.

And we're both committed to each other to go really revolutionize how shoes get built and if we can do that thing, give them all kinds of options in terms of regionalization and customization and the other things that will be able to drive their flexibility from a product standpoint and profitability from a margin standpoint.

Just reading between the lines, I hope you're reading between the lines in terms of what Nike makes comments about is the innovations that they're seeing coming outs of our team, that is our team, our guys and their guys are probably above expectation of what they anticipated.

They were hopeful about their own manufacturing revolution.

I think the results that they're seeing are above expectations and we've been a able to build not only results in terms of innovating of how manufacturing is done, but the amount of teamwork we've been able to develop with their guys and collectively finding solutions together is really, really high.

And that's going to be extremely important as we work to integrate the design process all the way in through the manufacturing and automation process.

So that's a lot of what you're hearing from Nike I think.

So I think that's a little bit of something to read between the lines, we're doing really well.

We're going to see other innovations come out of the relationships.

We had some self lacing shoes at the CES that you saw that we're working on together and we're going to see other innovations come out over the course of the years.

But we actually haven't figured out how to -- you talked about you'd really like to see breakeven and profitability and, boy, you don't want to see it as much as I do.

But it just takes time to reinvent.

So we're thinking about this as a 10-year cycle.

And if we can actually get it to run like as we expect, it provides a layer into CTG of continuous revenue and margin expansion at significantly higher than CTG margins.

So it actually is going to help redefine the entire CTG category.

Thank you for the details and we'll see you on May 10th.

Thank you.

You're welcome.

Operator, I see that we're coming to the end of the hour and I know that it's a busy day for a lot of folks with earnings.

We can go ahead and take one last question.

The last question is from Ruplu Battacharya from Bank of America.

Hi.

Thanks for taking my questions.

Hey, Chris, can you just quantify how much of a drag Bose was to CTG margins this quarter and do you think Bose is still a drag, say, in the June quarter?

Hi Ruplu.

We are not going to be specific with regards to those types of elements, talking about profitability with this customer.

I'll just go back to say this is a very strong global leader, great partner of ours.

We've now got about three-plus months under our belt with them.

That performance that we have as we integrate and we drive forward with them is going to just continue to improve.

So just think of it as a ability for us to leverage a really strong special-scale relationship and expand with a new top brand that we're just going to continue to make improvements and grow with them as we move forward.

Great.

And just real quick, Mike, it's been a long time since we've talked about Multek and Flex power.

Are those businesses individually profitable and do you still see them as a necessary part of your portfolio?

They're both -- yes, they're both profitable and we're pleased with performance of both of those.

They're actually growing this year rather nicely and they're a strategic part of our portfolio.

They're not -- you don't have to have them in order to run the rest of the businesses but they're a nice strategic add and we've been able to leverage them very effectively and they contribute nicely from both a revenue standpoint and as well as operating profit margin standpoint.

So we continue to believe they perform well.

Great.

Thanks so much.

I think we're out of time.

So let me just make a couple comments to close.

Once again, thanks again for your interest in Flex.

As a quick recap, Flex and Sketch-to-Scale strategy continues to show great promise this quarter.

13th straight quarter of year-over-year adjusted operating margin growth, we're pretty excited about that.

Free cash flow was exceptionally strong and continues to grow on a sustainable basis.

As this free cash flow that enables a very consistent capital return program to shareholders.

So we remain structurally and strategically positioned to deliver meaningful earnings and margin expansion and with that, I'd like to conclude today's call.

Thank you.

This concludes today's conference call.

You may now disconnect.