Good afternoon and welcome to the Flex fourth quarter FY16 earnings conference call. Today's call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. 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 fourth quarter and FY16 ended March 31, 2016. We have published the slides for today's discussion that can be found on the Investor Relations section of our website. 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, these measures are located on the Investor Relations section of our website along with the required reconciliation to the most comparable GAAP financial measures. Before I hand the call over to Chris, I want to briefly mention two things. The first is that our Investor and Analyst Day is rapidly approaching. We're hosting it on May 12, in Silicon Valley on the campus of our Customer Innovations Center. For more information and registration details, please check out our website. The second is that throughout today's call, Chris and Mike's remarks will use acronyms to reference our four business groups rather than their full formal names to better streamline our dialogue. These acronyms are CTG, which stands for Consumer Technology Group; HRS, or High Reliability Solutions; IEI or Industrial and Emerging Industries; and INS, which is Integrated Network Solutions. With that, I will pass the call to our CFO, Chris Collier. Chris?

Thank you, Kevin, and good afternoon to everyone. We appreciate you joining our fourth quarter and fiscal 2016 earnings call. Our fourth quarter income statement highlights begin on Slide 3. Our financial performance for the fourth quarter and fiscal 2016 illustrates our improving trend of execution and the evolution of our sketch-to-scale value proposition. Our quarterly sales were $5.8 billion, hitting the mid-point of our guidance range as our HRS, IEI and CTG businesses each met or exceeded our expectations, while our INS business missed. On a year-over-year basis, our quarterly revenue declined 179 million or 3%, almost entirely driven by the anticipated decline in sales from our largest customer, Lenovo Motorola. Consolidated Flex revenue rose almost 5% on a year-over-year basis, excluding this customer impact. Of particular note, our HRS group, which comprises our automotive and medical businesses, achieved its 25th consecutive quarter of year-over-year revenue growth by expanding more than 12%. Our profitability is reflecting a richer mix of business and improving execution as our fourth quarter adjusted operating income totaled 200 million, which was above the midpoint of our guidance range. On a year-over-year basis, this reflected a strong 13% increase, which is a great accomplishment given the soft macro environment. Our adjusted net income was 161 million, increasing 2% year-over-year. GAAP operating income and net income totaled 118 million and 61 million respectively, reflecting year-over-year declines primarily driven by a bad debt charge recognized this quarter as a result of the bankruptcy filing by SunEdison. Our adjusted earnings per diluted share for our fourth quarter was $0.29, which was above the midpoint of our guidance range. This represents a 7% year-over-year improvement and set a new record for our Q4 EPS. Turning to Slide 4, you will see our quarterly financial highlights. Over the past couple…

Thanks, Chris. At the beginning of this year, we stated we would deliver a continually better portfolio of businesses that would have longer product life cycles, higher margins and more predictable earnings. We have shifted our portfolio in IEI and HRS business segments from 31% to 35%, improved gross margin from 5.9% to 6.6%, improved operating margin from 2.9% to 3.2%. As a result, we generated fiscal 2016 earnings per share of $1.14, a new record. We delivered these results in spite of a soft macro economy. All year long, we strategically evolved our portfolio, which has led to even more geographical, segment and customer diversification. Fiscal 2016 also saw us broadening our capabilities through several strategic acquisitions, most notably MCi and NEXTracker. These are now well integrated into our solutions offering. Please turn to Slide 9 for our fiscal 2016 business highlights. Chris covered how we performed on a sequential basis for the quarter, so instead, I would like to focus us on our overall fiscal year. Despite the revenue challenges we faced during fiscal 2016, we grew gross profit dollars by 4%, operating profit dollars by 5% and earnings per share by 6%. We were successful in evolving our portfolio towards a richer mix of businesses as HRS and IEI's revenue rose to 8.6 billion, up 7% from last year, and over 21% from two years ago. This portfolio shift has further strengthened the earnings contribution coming from our HRS and IEI businesses as operating profit dollars rose 26% from last year and the group now contributes 51% of total Flex operating profits. Overall diversification continues to improve with no 10% customers in the quarter and our top 10 customers accounting for only 46% of sales, which is equal to the lowest level ever for a March quarter.…

[Operator Instructions] Your first question comes from Jim Suva with Citi. Your line is open.

Thank you and congratulations to your team at Flex. Strategically longer-term, can you help us assess your priorities for use of cash as recently there's been a couple industry dynamic changes? Most notably, one of your competitors, Sanmina, has been acquiring customer assets. Some of the smaller EMS companies have been focused on design and healthcare and design of others. And also, with your customer of Lenovo Motorola cell phones, that customer has now -- it sounds like you have been winding down in China, yet you spent more in CapEx this year than originally planned. And I assume that that plant you're going to need to repurpose. So how should we think about CapEx going forward? You did mention a couple of acquisitions. Is that more higher priority now or how should we think about the dynamics? Thank you

As far as the strategy around the use of cash, it actually won't change very much. We continue to remain committed to a 50% return, no less than a 50% return, to our shareholders. And in terms of use of that capital, we do expect CapEx to be roughly similar to depreciation levels going forward. There's going to be -- sometimes in these newer programs in automotive and medical there tends to be a little bit more CapEx than what I would call, the more traditional INS kind of EMS SMT operations business. So sometimes there is a little bit more capital and that capital is a little bit more delayed in terms of hitting revenue. And as far as M&A, I don't anticipate changing very much. We are focused at M&A that's going to deliver free cash flow as we do those deals so that we can do M&A and side-by-side also be able to maintain our commitment of 50% return to our shareholders. And at the same time, every time we do an M&A, we're going to tilt it -- not every time but on average, we are going to tilt it towards the portfolio shift that we are trying to make, which typically drives higher margins, longer product life cycle and hopefully, higher macro growth rates associated with it. So, I don't see it changing that much. This last year, we did about $900 million of acquisitions. That's untypical and its way above average. So as opportunities present themselves and we think that there are opportunities that can be accretive and particularly accretive at free cash flow, we will obviously take advantage of it. But even in doing the 900 million in acquisitions last year, we still did free cash flow of 649 million and spent $420 million of shares, which is roughly 66%, as we mentioned. So I think the overall segment is working really well. The capital allocation is very balanced and I think you will see a lot of the same theme resonating through our actions this coming year.

And Jim, this is Chris. I would just expand on a couple pieces here. We're going to be giving you a real good update on our strategic vision at our Investor Day, but just to clarify one piece. In terms of CapEx, we've had a very disciplined approach and one where we've actually invested over 1.3 billion over the last three years. This year as I alluded to in the prepared remarks, we actually purposely invested in advance of depreciation levels and exceeded it by around 70 million. I'll correct one piece that Mike said that we'll also dig deeper on in another couple weeks. We would anticipate a very similar type of approach this coming year. We are very focused on putting in place sufficient capacity and capability to support our growing automotive, medical and energy businesses. And as I highlighted in the prepared remarks, over 50% of our CapEx this past year went to those businesses. And in a great example of where that goes to use could be even when you think about the state of the art medical facility that we put in place in Tijuana that we brought on this past year with the rate announced in September. That's 500,000 square feet facility with 120,000 square feet of Class 7, Class 8 cleanrooms, high automation. So we're making investments where we need to help position ourselves to capture and win more customers and business as we go forward. So you're seeing some elevated levels of CapEx now purposely put in place to support and grow our business in the future. We'll expand a bit more on that at Investor Day.

Your next comes from Steve Milunovich with UBS. Your line is open.

Good afternoon. Last quarter, you indicated that macro had weakened a little bit particularly in the US. Was curious if you think the economic situation is better or worse than last quarter and what the linearity in the quarter was?

I think linearity was pretty typical and we actually have a reasonable linear quarter on average. So I would say that's very normal and nothing really to read into it. As far as the macro, we've been mentioning that the macro's been soft, particularly that we see it in the industrials, for quite some period of time. We've probably been talking about it for at least three quarters. We continue to see the same kind of softness. We consider it to be a reasonably weak market and we don't see the market getting stronger, but we see it somewhat stable. We don't see a significant downside. We just see it very slow and very weak. And we took a lot of the brunt of that weakness over the course of this last year in our industrial business.

I was wondering if I could also ask about your move more to sketch-to-scale and design roughly what percentage of your products do you feel you are adding design value-added with. We met recently with one of your industrial executives and I think in his group he said it was 25%. I don't think that's the Company average, but I was curious where you are?

Steve, I think I would just wait until Analyst Day. We're going to end up giving you a little bit more detail around sketch-to-scale and we're planning on giving you some detail around sketch-to-scale within each of the different business groups so that you actually see how each one of them is going to evolve as we embrace that concept and strategy as a Company. So I would just say, it continues to go up. We're very pleased with the progress we are making. We're going to be a little bit more detailed in a couple weeks and I would just wait for that.

Your next question comes from Brian Alexander with Raymond James. Your line is open.

Okay, thank you very much. Chris, the guidance for operating income for the June quarter is down about 5% sequentially with revenue down about 1%. Implies operating margins will be down somewhere around 14 basis points if I use the midpoint of your ranges. I'm just curious, where are you expecting to see the negative leverage at the business segment level? Especially given that the segment mix should put upward pressure on margins in the June quarter? And then I have a follow-up?

Certainly, thanks for the question, Brian. I will calibrate it two different ways. First, if you also look at it from a year-over-year basis, midpoint of guidance, it'll put us at our eleventh straight quarter of year-over-year margin expansion. Midpoint puts us at revenue of up 2%, but almost 20% in terms of operating profit and up around 17% in terms of EPS at that midpoint. Certainly, you are seeing an erosion and your math was pretty good, erosion of the margin down from the 3.5%, down roughly that 15 basis points or 16 basis points. If you think about it, in the prepared remarks, we highlighted that we're in the final legs here of managing down the business levels out of our China operation, which has pushed a headwind on us. And this current quarter has a little bit residual. So if you go back in time to when we quantified and tried to quarantine the risk attributes for that business for us, it was roughly $0.02 to $0.03 and then we took that down this past year to $0.01 to $0.02, you see that play its way out in this last quarter here. If you think about eliminating that headwind, absorbing a little pain with regards to some operating margin leverage pressure from that, as well as a result of the downward revenues in the quarter, coupled with some position investments, you kind of get to that 190 million midpoint 3.3%, 3.4% type of margin. Not a concern to us. There's nothing fundamentally different in any of the businesses. And again, I'd take you to thinking about how we have a consistent approach to continuously gain expansion in both margin and profit dollars as we move forward.

And Brian, I would just add a little bit to that and say we always anticipated some of these China pressures. We gave you some numbers on shutdown costs and that even when the transaction occurred almost 2 years ago. This is now playing out. The only change I would add in addition to Chris's comments is we actually expect no charges of any kind associated with this. So these are all absorbed into our earnings. We think the risk profile of the revenue associated with Lenovo Motorola as a result of Lenovo taking over it, has now gone and we think it's business as usual. So we think any kind of hangover associated with this that's been previously discussed about, we feel is completely gone at this point.

And along those lines, it looks like for your guidance, you are actually tightening the ranges. Revenue used to be a $600 million range and now it's 400 million. Operating income is going from 40 million to 30 million. EPS range used to be $0.06, now it's $0.04. So, am I reading too much into that or is that related to a greater level of visibility and greater confidence that you have in execution perhaps in part due to the improved mix that you have talked about?

I think you said it well. As we shift this portfolio into a more predictable range of business, ones that have longer product life cycles, we're going to get more and more stability and predictability out of both revenue and out of earnings. And we think we continue to get closer to that very nice level of stability. We mentioned in the prepared remarks that the combination of the businesses were up. Over 50% now of our operating profit is coming out of what we consider to be a more stable group of businesses. So, you are seeing us reflect that by taking the range and moving it from a 600 into 400, that's probably something you're going to see going forward and it's more a feature of the portfolio shift that we have been undergoing.

Your next question comes from Amit Daryanani with RBC Capital Markets. Your line is open.

Thanks a lot. I have a question and a follow-up as well. Just to start with, could you just talk about the SunEdison relationship? Is the $61 million charge you're taking the entirety of the relationship you have with them? Or is there something else that we have to see through? As it relates to that, the NEXTracker deal, I believe they had a fair amount of SunEdison exposure. There's an $85 million piece of that deal, the transaction [indiscernible] that was contingent on a certain performance target. Should we presume that that doesn't get paid out at this point?

Hello, Amit. So, the situation with SunEdison, they filed Chapter 11 bankruptcy back a couple of weeks ago. The charge we took, which was $61 million in Q4, was associated with all our outstanding SunEdison receivables. We have been derisking our relationship with SunEdison over the past several quarters, and so, if you're looking for a broader type of risk exposure, we've quarantined it and put it in place there. As it relates to NEXTracker, I will let you know that business has been performing exactly as planned, exactly as anticipated from inception. It's been shifting into a very diverse offering, diversity across customers, diversity across regions. So, it's performing very well. And in fact, if you look back to Mike's prepared remarks, we talked about how energy remains a $1 billion plus business with significant growth for us. So there's many different ways we're playing within energy and even despite a former large customer of ours having diminished demand in the future here, we're seeing a lot of opportunities to continue to grow and operate in this space.

Perfect, and if I could just follow-up on the CTG segment? Could you just talk about what percent of that revenue of CTG segment today is smartphone broadly versus everything else? And do you think you have reached a point of stability at least as you go beyond the June quarter, within the smartphone piece of that bucket as well?

So within the smartphone piece is going always have a little more volatility. It runs on shorter product life cycles. We talked about ramping India up in the operations, so with that, it's going to carry some uncertainty because it's a new place for the customer to operate in. The Brazil marketplace is struggling from an economic standpoint. So, I would say it still going to carry a certain amount of volatility with it but as an overall total, it's probably going to run somewhere around quarter to third or even less than of the CTG. And then, as you think about that in terms of the overall Flex, like we talked about, it's well below a 10%. And we have already taken adjustments, so to speak, with China coming out. The Brazil economy has been weak for the last year. We feel like we have already adjusted down to the new norm, if you will, in the Brazil economy. And we view India as pure upside. So, those are the good parts of it. I think it's always going to carry a little bit of volatility with it, but think about it being quarter to third or so of the overall CTG business.

And I would only add that we are going to spend more deeply with Mike Dennison at our Investor Day. But if you think about the trajectory here, Q1 will mark the bottom for CTG in terms of its revenue. And we are focused again on a richer mix and as that develops, we continue to see improving margins in that space. So we'll expand further with you in another 10 days, but think of it that way.

Perfect. Look forward to May 12.

Your next question comes from Paul Coster with JPMorgan. Your line is open.

Yes, thanks for taking my questions, a couple of quick questions here. First, there's two segments here where the operating margins are locked in at the lower end of your target range. I'm just wondering to what extent it's outside of your control and just a function of demand and the product cycles at your customers versus your intended product mix? And if you can lift yourself off the bottom of that range, how long does it take for you to move up the value chain and do so?

If I pull those two pieces -- let me take IEI first. It's now at 4%. We have the range at 4% to 6%. Last year in FY'15, we ran that at 3.0%. For the total year, we ran at about 3.4%. So we moved from 3.0% to 3.4% this FY'15 to FY'16. The last two quarters, remained at about 4.0%. So it's on an upward trajectory and we would actually expect that upward trajectory to continue through the course of the year. So we believe this is a business unit where we can move more to the middle of the goal post over the coming quarters or year. As far as the INS, I think it's going to be really challenging to move into the middle of the goal post in that business. I think it's more likely that we stay at the lower end and it's been running that way for several years now. Last year, we actually ran at 2.8%. This year, we ran at 3.0%, so we actually made some progress. But I don't anticipate I think the competitive pressures and the changes in the industry are sufficient enough that it will be very difficult to move that to the middle of the goal post. So I expect that to actually stay at the low end.

Thank you and a quick follow up, which is obviously, you have contained the credit exposure to SunEdison. But their disappearing from the scene takes away a pretty significant customer. I'm just wondering in backfilling, you have talked of many opportunities. You can either go to alternative developers or you can go to some of the end customers yourself directly. You seem to be getting pretty sophisticated. I'm wondering if a direct channel is the preferred route?

We're going to end up with a very broad set of customers, both for NEXTracker and for solar modules and we will obviously, evolve into storage, we have a big inverter business. So, we actually play in a lot of different places. But without doubt, actually people buying the trackers from us directly, rather than going through a SunEdison, may be a wave of the future and a way to move products. As we think about the energy customers now moving into selling energy as opposed to really that excited about building hardware. I think we will see actually I don't think we will see, we are seeing an evolution of that customer base. We're seeing a very significant acceleration of deals into multiple geographies. We're seeing a large accelerations into different kind of customers. And we will see a different type of customer for that kind of business. And that's exactly why we have been able to take what we consider to be a pretty significant customer in our energy business and actually, slow down for a quarter and then accelerate. We now view this business even on the back of that larger customer having their difficulties, we actually see that as being the fastest growing segment by far in industrial group going into this next year. So we're really pleased with how this is transitioning. We're not happy about SunEdison going away because they were a great customer, but we are certainly excited about the leadership team we put in place and the go forward opportunities. They are exceptional.

Your next question is from Matt Sheerin with Stifel. Your line is open.

Yes, thank you. Related to your guidance for INS being flat or stable quarter-on-quarter, is that a sign that end demand from your customers is finally stabilized? Or, will you see further weakness offset by some of these new program wins that have been rolling in?

I think the reality of that business is that it's a -- it has typically had negative growth within hardware. And with the evolution that we are seeing in the industry, it's going to be hard to buck what we see as a 0% to minus 5% growth rate. We've always tried to have an aspirational goals, as we called it, of flat revenue on a year-on-year basis. We haven't been able to achieve that aspirational goal, but we have achieved running at the industry average. And like I said, margins actually came up this last year. So I think we're going to see a continuation of that business being challenged in terms of a top line revenue for all of our customers pretty much across the board as we evolve into data centers in the cloud. And I think that's something that's a multiyear transition that we're going to have to absorb and deal with and we will do our best to keep our margins higher while we likely move towards participating similar to what the industry is, to what our customers are, which is probably a 0% to minus 5% number.

Okay, as it relates to the cloud and obviously taking share from your legacy customers, are there opportunities there in the cloud in terms of things you can do on the white box server side? Or is it just too competitive and commoditized?

The answer is, absolutely, we have started a business group a couple years ago called Ci3, which is targeted at this whole converged space, at the changes that are required to be competitive in the data center world. The white box server is kind of a tough market. It probably has lower margins than we would like. But I think putting together a fully integrated systems, providing interesting ways to integrate those systems and provide solutions to the customers, I think it's going to evolve over the coming years. And we're actively working to participate in what we view as a reasonably good growth market, which is the cloud based converged marketplace. Our division called Ci3 is targeted to go after that and you'll see us continue to make investments in that area as we work to reposition the portfolio into those kind of solutions.

Your next question comes from Steve Fox with Cross Research. Your line is open.

First question, just in terms of some of the investments you highlighted during the quarter. How are you deciding when to make these investments and how far ahead of revenues and returns on investments are you thinking about them? And is this something that is more of a regular quarterly event or is it something that in the past quarter was a little bit greater than usual? And then I had a follow-up.

We look at these kind of things continuously. If you just think about the discussion we've just had over the last 15 minutes, we are involved with a lot of different places in the supply chain as a result of having an extraordinarily diversified portfolio. But if I think about how do we look at them? I think there's really two different kinds of acquisitions. I think one is what we consider to be lower cost technology driven businesses that add capability that once we put into our large system, we can leverage off it. And those are the kind of places that we are trying to go where we can move into a little bit more technology advanced position with the acquisition, leverage our big system and try to drive revenue that way. So on average, we are looking for knowledge. I mentioned two medical acquisitions that we did this last year. They're very -- they're just 10 million small amounts of dollars, but add a lot of capability and a lot of access into technology. There's a second class of acquisitions, which I will put NEXTracker and MCi into, where we are trying to where there may be a more substantial revenue element. If those acquisitions don't drive free cash flow then we're not going to consider them. So they have to be accretive and they have to be free cash flow accretive because we don't want to do any acquisitions that take us off the 50% return to shareholders. And in particular, when we do those bigger acquisitions, we'll look for the big macro-economic trends to layer into. We think some of those things are things like energy, technically and with technical solutions around energy, is a good market. When you look at the solar business, it's going to grow double-digits for the next 10 years. We've been heavily focused around medical. Why medical? You have got an emerging market that's developing, that's bringing middle class consumers into the marketplace as well as in the developed worlds, you have an aging population. So you have these really good trends. And then in automotive, you can have a zero growth rate in automotive in terms of the number of vehicles, but the whole transition into autonomous vehicles and mobility and how will it change will all be -- will drive growth for the next 10 years from a technology standpoint. So we're going to stay focused at doing the big acquisitions where we play into a good macro and simultaneously we make sure that it has the right free cash flow characteristic so we don't get in the way of our 50% return to shareholder commitment.

The only thing I would add to that would be, as we highlighted, in 2016, over 50% of the CapEx investments that we put forth went into automotive, medical, energy capability and capacity. And underpinning those is those key technology investments are very sustainable. They are not easily disrupted and they are also supported by very long underlying product life cycles. So you are seeing some variability quarter-to-quarter in terms of overspending depreciation. It's about prepositioning around where we see targets for growth and putting those in place where we have defined customer ramps and programs that we'll be fulfilling for a long period of time.

Great, that's very helpful. And then just as a quick follow-up, understanding the margins you just gave by business segment, but under the covers of those, were there two or three specific drivers that you would point to in terms of helping your mix in the quarter that stood out?

For this past quarter, we came out at 3.5%, 50 basis points year-over-year, profit up $23 million year-over-year. I think it was across the board. You ended up having each and every one of our segments now at or above their target margin range. The only thing I would put my eye towards the HRS, where it has now been three quarters where it's been above that range. Very healthy execution across a wide variety of ramps. So I think that contribution there probably elevated the overall mix a little bit better.

Your next question comes from Herve Francois with B. Riley. Your line is open.

Great, thanks very much. I was hoping if you can help out just on as you continue this mix towards HRS in your high-margin areas, what kind of impact do you see over the next several quarters, even over the next year or so in regards to your working capital commitment cash conversion cycles and things like that? You've done it seems like a good job managing that so far, But that continues to improve. And you talk about the longer product life cycles out of medical and energy and auto, what kind of stresses if any, do you see that on your ROIC and cash conversion cycle?

Thank you for that question. We definitely continue to evolve the portfolio. And in that mix shift as in my prepared remarks I stated, we do not see us needing to move off of our range which has been stated and sustained for many quarters now of 6% to 8% net working capital as a percentage of our sales. So regardless of the mix shift, we have been mix shifting this mix quite significantly over the several years staying within that type of range. So I think that you should be able to anticipate modeling yourself staying within those parameters.

Got it. Thank you very much.

Operator, I think we have time now for one final question.

Your last question comes from Sherri Scribner with Deutsche Bank. Your line is open.

Hello, thanks for taking the question. It's Adrienne Colby for Sherri. I was wondering, as medical continues to grow and become a more important part of the business, can you remind us what the big seasonal drivers are? I think your guidance for the March quarter called for some seasonal impact so I'm just wondering if the March quarter is typically the slowest for that business?

The seasonal impacts on medical are actually pretty muted. And in fact, I won't even think too much about them really being a driver and being in the decision process. I think you should see a reasonably balanced level of revenue across the year. So I think it's diversified enough. I think we have enough blend between diagnostics and hospital equipment and consumer use devices. We have so many different things that I think it's going to, it may have some cycles, but it's going to be very muted.

Okay, we want to thank everybody for joining us on our call today. We look forward to seeing many of you in two weeks at our Investor Day. This concludes our conference call.

This concludes today's conference call. You may now disconnect.