Flex Ltd.

Good morning and welcome to our fourth quarter fiscal 2024 earnings call, along with our virtual investor day. I'm David Rubin, Vice President of Investor Relations. Running through this morning's agenda, first I'll take you through our Q4 and fiscal 2024 results. Then our CEO, Revathy Vaithee, will provide an update on our strategy, our progress, and our plans for the next several years. She'll be joined by Michael Hartung, President of our Agility Segment, and Becky Seidlinger, president of our reliability segment, who will take you through some interesting examples showcasing our differentiation in our cloud and automotive businesses. Next, our CFO, Paul Lundstrom, will present on our financial framework and our outlook. Lastly, we'll have some time for Q&A. Please note, all questions need to be submitted through the Q&A chat function at the bottom of the event platform on your screen. You can submit questions any time during the event, and we will answer as many as we can as time allows. Before we start, I need to briefly run through a few housekeeping items. Slides for today's call, as well as a copy of the earnings press release and summary financials, are available on the investor relations section at flex.com. This call is being recorded and will be available for replay on the corporate website. Today's call contains forward-looking statements which are based on our current expectations and assumptions. These statements involve risks and uncertainties that could cause actual results to differ materially. For a full discussion of these risks and uncertainties, please see the cautionary statements in our presentation press release or in the risk factor section in our most recent filings with the SEC. Note this information is subject to change and we undertake no obligation to update these forward-looking statements. And please note, unless otherwise stated, all results provided will be non-GAAP measures and all growth metrics will be on a year-over-year basis. The full non-gap to gap reconciliations can be found in the appendix slides of today's presentation, as well as in the summary financials posted on our investor relations website. Lastly, as stated in our earnings press release, Nextractor was reclassified to discontinued ops. So it is now excluded from our results, including the full fiscal year 2024 results we show today, and therefore not comparable to previous street estimates. Additionally, we recast our prior results through fiscal 2022 to reflect discontinued offs and provide enhanced historical transparency into flex performance. With that, I'll jump into our Q4 results. We had a solid Q4 as we continued to execute well in a dynamic environment. Fourth quarter total revenue was $6.2 billion, down 12%. However, gross profit improved to $532 million with a gross margin coming in at 8.6%, an increase of 160 basis points from the prior year. An operating margin was a record 5.4%, up 120 basis points from the prior year, and up 50 basis points from Q3 on favorable mix and cost action initiatives. Adjusted earnings per share came in at 57 cents for the quarter, increasing 30%. Gap earnings per share came in at 93 cents, the larger than usual difference to non-gap EPS is primarily due to a one-time non-cash tax benefit related to the recording of tax loss carry forwards, which we now believe will be utilized in the future. Additionally, there was a one-time non-cash accrual related to the future tax consequences of distributing earnings from our Chinese subsidiaries up to our parent entity for the use within the organization. Turning to our quarterly segment results, Reliability revenue was $2.9 billion with very strong demand in cloud power solutions and solid demand in auto and medical devices. Operating income came in at $171 million, and operating margin improved again, both sequentially and year-over-year, to 5.8%. In agility, revenue came in at $3.2 billion as we delivered on very strong AI-driven cloud demand. And operating income increased 6% to $181 million, and the team delivered another segment record with a strong 5.6% operating margin. Looking at our full-year results now, and as a reminder, the full-year results you see here reflect flex only for the entire year as we've moved Nextracker to discontinued operations. Revenue for the year was $26.4 billion, down 7% from the prior year. Gross profit totaled $2.1 billion, and gross margin improved to 7.8%, up 70 basis points year over year. Operating income for fiscal year 2024 totaled $1.3 billion, up 3%, with a record annual 4.8% flex operating margin. For the full year, EPS came to $2.15, up 11% despite the revenue headwinds. GAAP EPS came in at $1.98, primarily due to the previously mentioned tax-related non-cash one-time benefits. I'll also point out, we completed our next tax-free spend this last quarter. And as you can see on this slide, we generate substantial value through multiple phases of this transaction. At the bottom of this slide, we provide revenue performance by business unit for the full year. Reliability revenue was $12.5 billion with operating margin finishing. at a record annual rate of 5.3%. Within reliability, automotive revenue was up 6%, primarily driven by new ramps and content growth. Health solutions was up 3% with strong medical device demand muted by an industry slowdown in life sciences and hospital-related CapEx spending. Industrial was down 8% with very strong data center power demand offset by general slowing in industrial CapEx and weaker residential solar. Overall, the strong margin results are coming from continued ramps in higher value programs, the resolution to previous supply chain-related disruptions, and strong execution on cost controls. Agility's segment revenue came in at $13.9 billion, delivering a record annual operating margin of 4.8%. This strong margin reflects our strategy to focus on shifting to profitable business, expanding verticalization and value-added services, as well as strong cost management, given macro-related slowing in certain markets. Within agility, CEC was down 7%, with strong new cloud ramps offset by slowing in other parts of enterprise IT and telco spending. Consumer devices revenue was down 24%, reflective of consumer in-market weakness. And finally, lifestyle revenue was down 17%, also reflective of current consumer spending trends in high-end durable goods. Moving to cash flow. Net inventory came down again this quarter by 6% sequentially and 16% year over year. And we expect continued reductions in inventory in the coming quarters. Q4 net CapEx came in at $77 million and $505 million for the full year, on target at 2% of revenue. Free cash flow in the quarter was very strong, reaching $602 million. And for the full year, free cash flow was $821 million. This is well above our target of $600 million for the year. which originally had assumed a combined flex and next tracker for the full year. In a quarter, we returned 517 million to shareholders through share repurchases. And for the fiscal year, we returned 1.3 billion, which is a record in annual cash returns to our investors. Overall, we continue to execute on our strategy through the cycle. This is reflected in our performance and our ability to deliver strong margin expansion and EPS growth. So that about wraps up our results. for the quarter and for fiscal year 24. Now we will move on to our Virtual Investor Day event. So to kick things off, we'll start with a short video followed by our Chief Executive Officer, Revathy Advaiti.

As the digitization of everything, the need for resilient, regionalized supply chains and calls for sustainability continue to add complexity, companies must manage their products differently. leading brands across automotive, cloud and computing, consumer, healthcare, and industrial markets, Trust Flex is the end-to-end partner of choice to optimize and manage the product lifecycle. Our industry-leading design and engineering services deliver production efficiencies and accelerate time to market while mitigating risk. With a global and regional supplier network and digital tools, Our supply chain services enable greater resiliency and the ability to respond to market dynamics in real time. Our focused portfolio of advanced manufacturing services Vertical integration and advanced technologies help customers to move faster and realize greater differentiation and quality. Through post-production services of forward logistics and value-added fulfillment, we make it easier to configure optimal routes to local markets and meet unique customer needs. Post-sale, maximizing value recovery and meeting sustainability commitments is aided by our reverse logistics and circular economy services, which span returns, repair, refurbishment, asset recovery, recycling, and end of life. At the heart of what we do is our diverse global team. At Flex, we are makers, problem solvers, and leaders with unparalleled passion, proven know-how, and more than 50 years of experience. With deep domain and technical expertise and a full suite of product lifecycle services in every major region, we seamlessly design, source, build, deliver, and manage our customers' products with quality and speed. Flex is the end-to-end partner of choice for leading brands to navigate global and product complexities, gain time-to-market advantages, and increase competitiveness. Together, let's create the extraordinary.

Good morning, and thank you for joining us today for our virtual event. I want to say a few words about our Q4 and Fiscal Year 24 results. I'm very pleased with our performance, given the dynamic environment we experienced this past year. Although year-over-year revenue was down, we still delivered strong margin expansion and EPS growth in both Q4 and in the full year. Our results show that we can navigate effectively through the cycle and deliver increased value to our stakeholders. I am very proud of how our team delivered throughout the year But I also want to thank our customers for their continued trust and partnership. In addition to our Q4 and fiscal year 24 earnings today, we announced that as part of a planned succession, Michael Capellas, our board chairman, has chosen not to stand for re-election at our next annual shareholder meeting in August. Michael has served on Flex's board for 10 years and has been chairman since 2017. He played a key role in building Flex's reputation and driving our success. I want to personally thank Michael for his unwavering commitment and service, and we wish him all the very best. Bill Watkins will succeed Michael as chairman. Bill is a very experienced board member and will provide continuity and board leadership. I would like to welcome Bill to his new role. Now, looking ahead, let's get into the details of what's next. So if you're new to Flex, we are one of the world's largest contract manufacturing and supply chain partners. Through a global footprint of manufacturing, design, and service locations, we serve a broad base of leading brands across diversified markets. From manufacturing electronics to a fully integrated product, we offer solutions to meet our customers' unique needs and help them better manage their entire product lifecycle. We focus on large diverse markets where we have plenty of room to grow, where the macro and the secular trends are in our favor, and where we can differentiate to generate profitable growth. So today we'll discuss how our combination of manufacturing capabilities, our cross-industry expertise, our products and services creates points of differentiation and contributes to our success in key markets. Of course, we'll also discuss our financial framework and how we'll continue to generate shareholder value. Now going on to the next slide, at our last Investor Day in March of 2022, we spoke about macro and secular trends that were fueling demand for higher levels of outsourcing. In turn, this demand is driving growth and margin expansion for Flex and the overall EMS industry. We specifically reviewed three major inflections within the markets we serve that provided additional opportunities for Flex. Since our last investor day, our cloud business grew at about a 40% growth rate. Now that is twice the rate we originally expected. This growth has been fueled by generative AI and our customers recognizing our unique value proposition for the data center. Our next-gen mobility business grew slightly over the expected 50% growth rate, as the vehicles continue to integrate more advanced technology and content regardless of the power trade. Medical device growth was above our 15% expected growth rate, as new digital technologies and smaller form factors are improving patients' lives in areas such as chronic care treatment. Health solutions overall was closer to 6%, due to the temporary macro impact on life sciences and hospital equipment spending. Still, we remain very confident about the long-term opportunity for our health solutions business. Now, stepping back and looking at how we've performed through this cycle since launching our Flex Forward strategy. We delivered mid-single-digit revenue growth. We expanded our adjusted operating margin from 3.7% to 4.8%. And we grew EPS at a 20% growth rate, all this creating significant value for our shareholders. Going on to the next slide as a reminder, digitization, regionalization, and sustainability are some of the high-level trends we discussed in our last meeting. The digitization of everything trend is about brands wanting to create smarter products, of course, by integrating more technology, ultimately offering customers more advanced features. Regionalization, of course, is a topic all by itself. But the short version is that today it's table stakes. Companies have to build resiliency into supply chains and have multiple regional locations to speed their time to market, improve their customer experience, and then of course, even to reduce your greenhouse gas emissions. Now, while there's been a lot of discussion about sustainability, We continue to see growing interest in renewable energy and in improving the visibility and transparency of supply chains. Now we've added technology trends of artificial intelligence, which of course adds further complexity. Consider what effect AI could have on future products and industries. Now we're seeing tremendous change. And of course, it's just the beginning. The important part here is that all of these long-term trends are dramatically increasing complexity at all levels of the value chain. They have led to fundamental changes in the EMS industry, driving the need for more capable global outsourcing partners with the expertise, the breadth, and scale to support evolving products across multiple markets. We are one of the few companies that can actually help customers navigate this increasing complexity, build resiliency, and deliver on improving customer experience on a global scale. And the Flex strategy goes beyond just electronics manufacturing. It's about providing a fully integrated suite of manufacturing services to support our customers' product lifecycle. And we leverage our expertise across the industries we serve to give our customers the benefit of our collective knowledge to achieve a competitive advantage. This strategy means that we are more than just the sum of the parts as we create synergies that generate strong competitive barriers, increase customer affinity, and of course, deliver profitable growth. Now, manufacturing services is our foundation. We're always focused on increasing our capabilities. Of course, we're driving greater efficiencies, and we're ensuring we have the optimal global footprint. On this foundation, we're expanding our services, our vertical integration capabilities to serve more of our customer needs, and we're increasing our addressable market. And then to improve agility and efficiency, we're implementing our flexible automation platform. That you can quickly reconfigure and reuse and deploy across all our programs. And our global network of integrated manufacturing and service locations, of course, increases resiliency and time to market. Now, you put all this together, our initiatives and investments in automation, the capabilities and the systems, they all achieve tremendous productivity gains. And that drives our margins, of course. and helps us prepare for the future. Okay, so one of the themes you will hear about today is our differentiation in power and in compute. We've invested here because we saw fundamental changes in compute and the associated power requirements driven by the long-term technology transitions. What we did was we built extensive cross-industry expertise and we're applying it to create capabilities in products and in multiple end markets, including cloud and automotive. And we're already in the market with Flex designed or co-designed solutions. So for example, Flex is the only EMS player that has a comprehensive data center power product portfolio. It extends all the way from the embedded products, which function at the board and the rack level, to our unique data center critical power offering with our Anord Mardix products. So you will hear more about our differentiation in cloud and in automotive from Michael and Becky in just a minute. We are very bullish on this opportunity. Looking just at data center and automotive, we believe power and compute-based revenue will account for 40% of the total revenue for Flex by fiscal year 29, so in the next five years. We believe the long-term opportunity for Flex is significant. The macro and the secular trends, of course, are in our favor. The markets we serve are large, and there's just plenty of room to grow. Our suite of end-to-end services is creating tremendous customer stickiness, and it's expanding our available market. And then our differentiated products and technologies and our capabilities are all giving us about market growth and targeted end markets. This combination is our winning formula for growth. As we continue to add more value to our customers, we are confident that we'll deliver increased revenue and margin performance for the years to come. So we're going to bring this discussion to life. Our segment presidents are joining us today to walk you through examples of our end-to-end capabilities, our technologies, and products. We'll start with Michael Harta. And he will show how our cloud data center offering and how we're truly differentiated in the marketplace. Michael has over two decades of experience in contract manufacturing and is the president of our agility segment, which includes communications enterprise and cloud, our consumer devices business, and our lifestyle business unit. And then Michael will be followed by Becky Seidlinger, who will show you how the cross-platform expertise in complex compute, and power systems differentiates Flex in the automotive industry. Becky joined us a couple years ago, and she has two decades of experience in industrial manufacturing and is the president of our reliability segment, which, as you know, includes automotive, health solutions, and our industrial business unit. Now I'll turn it over to Michael. Michael Hartog.