Flextronics International Ltd. CEO Presents At Goldman Sachs Technology And Internet Conference (Transcript)

Flextronics International Ltd. ( FLEX)

Goldman Sachs Group Inc. Technology and Internet Conference

Feb 15, 2012 01:20 PM ET


Paul Read - CFO


Craig Hettenbach - Goldman Sachs


Craig Hettenbach - Goldman Sachs

Great. Good morning, everyone. I'm Craig Hettenbach. I cover the IT supply chain at Goldman. Very pleased to have with us today, Paul Read, CFO of Flextronics, the second largest EMS company. So, thanks for being here, Paul.

Paul Read

How are you, Craig. Good morning, everybody.

Craig Hettenbach - Goldman Sachs

Great. So starting to kick off just being the second largest EMS company, such a lot of different end markets and just to get your sense of demand trends, inventory, what you're seeing out there, what you're hearing from customers at the start of the year?

Paul Read

Well, not much change to what we had talked about on our call at the end of January. We think the demand is pretty stable. Last year, we did see towards the back end of the year, multiple periods of a down graph, but that's stabilized in the December, January, February timeframe. So, we're very pleased with that. We're in a period right now, March quarter of course, it's a down graph in terms of consumer demand and some of the consumer products. But, the other businesses that we have NC and a stable to growing demand in the other sectors for us. So, that's pretty encouraging.

To break it down a little bit, our INS business actually is seeing some nice growth and did go through a period of December quarter inventory correction essentially with a number of customers, and I think we've come out of that now and we're starting to see some growth here in the March quarter and beyond.

We also had some good new wins in the December quarter. I think we booked about $1 billion of new business in the December quarter and a significant win as part of that with one of our top customers. So, I think we are on all the right programs in that business. And we have great capabilities and so we really are doing very well in that business, and we're very encouraged by that.

The industrial and emerging industries business for us is very exciting. It's growing very fast. It's on pace to keep growing 15% plus. And a large part that growth is coming from some of the clean tech or smart grid area, kiosks, appliances and other sectors like that that we've seen growth in in the emerging markets, and that's something that we've seen over this past fiscal year and the next fiscal year.

We booked approximately $1 billion of new business in the nine months of this first fiscal year, and we're on track to book, probably about $1.3 billion to $1.4 billion of business now for this full fiscal year that ends in March, which is what we did a year ago as well in fiscal 2011. So in fiscal '13 should really hold up for a 15% plus growth year for that business.

The High Reliability business, that's growing very fast as well. That's principally medical, automotive, aerospace and defense. And we booked approximately $300 million of new business in the first nine months, and that business should grow next year approximately 15% plus, so very encouraged by that as well. There is some exciting areas in that for us, particularly in automotive and aerospace and defense that we're penetrating and doing very well.

The other part of the business, the high velocity business, which is essentially the mobile and computing and printing, consumer device kind of area. That's, obviously, in a seasonally down quarter in March quarter, and we said that would be down some 30% to 40%.That seems to be holding. And as you know, have exited the ODM PC business in the December quarter. So, the revenue for that obviously was approximately $1.5 billion fiscal '12, we're obviously not flow through to fiscal 2013. So we'll see some down graph in fiscal '13 of those numbers.

It's a business that we're still obviously investing in, but we're actually seeing somewhat of a reduction in our business in that area, principally through the ODM PC business going away and some of the other mobile, smartphone business that we will deemphasize this year.

So, I think fiscal '13 over '12, the next year, will be a very difficult year in terms of revenue, of course, for that business. But the growth in all the other businesses is very strong and utilizing all the capacity that's left behind by the reduction in the high velocity business. And so, I think it'll balance out very nicely to, for us, what is intended to be 70%-30% mix of low-margin, high-margin business for us.

Craig Hettenbach - Goldman Sachs

Got it. Appreciate the overview by segment there. The comment on the mobile side in terms of deemphasizing against it, is that just the volatility of that business, the margin that longer term you're looking to invest in different areas more than that?

Paul Read

Yes, we like the move to a 70%-30% split of the low-margin, high-margin businesses. As a model then for the company, we'll certainly see improved margins in the 3.5%-plus range, but we'll see also less volatility in our business model, less risk, less variability and we really like that.

And 30% is still a significant part, but this year I think we ended up with a 60%-40% kind of split, next year it'll be more like a 70%-30% split. And at that level, I think, everything works together really nicely and provides attractive growth opportunities for us as a company and good margin profiles and very, very strong free cash flow.

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