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I wanted to point out as well that we will have a USB sticks for everybody here in attendance that will have all the slides that you will see today on them and we’ll hand those out at the conclusion of Paul Read’s presentation.So don’t feel that you have to take copious notes necessarily, you will get everything that you see on the screen to take away with you and for those on the webcast obviously you’ll be able to see all the slides as we go along and all the slides as well will be saved and archived up on our webcast on flextronics.com. So before we begin, again, I wanted to cover the disclosures. This presentation contained statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk and uncertainties which may cause actual results to differ materially from those set forth in this presentation. Such information is subject to change and we undertake no duty or obligation to revise, update or inform you of any changes to forward-looking statements. For disclose -- for a discussion of the risks and uncertainties, you should review our filings with the Securities and Exchange Commission, specifically our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments thereto. This presentation references both GAAP and non-GAAP financial measures that exclude certain amounts that are included in the most directly comparable measures under GAAP, including stock-based compensation, intangible amortization, net of tax effects and settlements of tax contingencies. Non-GAAP financial measures may also be a supplemental measure of financial performance. Please refer to the Investor section of our website, which contains the reconciliation to the most comparable GAAP measures. So before I introduce Mike McNamara to come here on the stage, I just wanted to introduce a brief video that we are going to show you here that we prepared.
[Advertisement]Mike McNamara Good afternoon, everybody. So, I’d like to get started by first saying thank you for being here. I know there is a lot of time that, your time is important. We appreciate that you spent an afternoon with us, and hopefully we can make this very worthwhile for you. The clicker is here. Okay. So let me get started right away. I want to give you a brief executive overview, gives you a good idea of what we are trying to accomplish today. We have pretty extensive global footprint, as many of you know, I’m going to give you some examples of that. A lot of different manufacturing technologies, a lot of different services, and we are going to walk through that as we go through the course of the presentation. Contract Manufacturing and EMS, since supply chain services is structurally a higher growth business than what you’ll see in the GDP and the electronics industry. I’m going to show you little bit about that later on. We have transformed our portfolio very significantly. We’ve actually been in the business transformation. I’m going to show you some trend charts of how that transformation has occurred over the last few years, and hopefully it’s interesting to you see how our company has evolved over the years. Our objective of going through this transformation is to reduce the volatility and increase the operating margins. So, I think, what you’ll see in terms of the transformation and the evidence as a result is very, very compelling for a shareholder. We have a sustainable business model that can generate very strong free cash flow and a 20% return on capital, are very reliably and predictably. And we are in process of expanding our operating margins to 3.5% this year and that’s recognize that we are in a very, very difficult economy and which probably has some continued challenges as we go forward.
And one of the other things I’m going to talk about is some of the ecosystem shifts that actually affect our business and one of the things that we believe is that we are very well prepared as some of those ecosystem shifts occur. So I’ll kind of walk through what I think about the key ecosystem shifts are and hopefully you agree that those are important considerations for the future.So just briefly we have like greater than 100 locations. We have these in like 25 million square feet. We have a couple 100,000 employees. This is a very extensive, very sophisticated footprint. In our services area we have about 25 -- greater than 25 locations and they actually changes pretty regularly. Have a significant amount of employees, very extensive reach, 7 million square feet around the world. And in design engineering, one of the most important resources of Flextronics. We have over 2000 engineers that are dedicated to design. They are dedicated to innovation, creation, working with their customers to invent and in many case cost optimize and other ways. But these are not process engineers, these are not manufacturing support engineers, these are actually trying to make changes to products. And these design engineers are literally aquiducous to our entire system. They are dedicated medical, they are dedicated in automotive, they are dedicated in telecom and networking and in servers, in storage and all these different functions, but the key total is about 2000, very extensive. One of the other place that we have a very extensive footprint is in our manufacturing technologies and we have very significant amount of different kinds of different production technologies, things like printed circuit board and flex circuit, and power technologies, and metal and machining and cable, plastics, advanced displays, all these kind of things are a large bundle of services and capabilities that we have.
Many of which are leading, Multek is one of the preeminent PCB suppliers in the world. Global Services is probably the biggest services organization in the world today. Our Power business now the fourth largest Power business in the world, maybe close to be not inflated the third largest Power business. So within these technologies there is a tremendous amount of power, growth and actually market competitiveness. But the key bundle is probably more that $5 billion of business.Why that’s valuable to you as an investor is that, it is a great way, we have lots of ways to go penetrate customers and we have lots of ways as a result of these different technologies to create competitive advantage, which really becomes what’s most important to us, is the ability to create competitive advantage for our customer, our competitive advantage for Flextronics, which hopefully is translate into a value creation statement for our customer, which then gives us more and more business in the future. But as we think about competing on the marketplace for more and more business across multiple different product segments, these become instrumental in terms of the tools that we use and the set of assets throughout Flextronics that we use to go and -- we go and compete and create value for our customers. But we have a lot of different ways to create this differentiation. One of the other things that’s really important in our business is the extensive relationship with our customers. So I put up here the top 10 customers and I could have put in even more technologies, I put in PCB and power, services, and PCB system integration. I could have added more and more things like cables and machining and other pieces. But it gives you an idea in today’s manufacturing, the world of EMS manufacturing you have to have a very, very broad set of competencies and capabilities to go service the customer.
Our customers are actually looking for more and more these services and as they engage, they tend to engage more and more of these services with us, and this become good for us, because it create stickiness, creates value for our customer, it’s simplifies our supply chain as we think about penetrating and think about how do we optimize the performance of these end-to-end supply chain for customers, we just have more tools and more assets by which we can go create value for the customer, and that’s how we use them to go to market.If you don’t have all these tools it’s create more the challenge. It also shows a number of countries we are in, you can see that, typically it’s tend to be very extensive relationships and other thing that is noted in their, you can see a couple of China companies in our top 10, a couple of European companies. So it is a broad access into all kinds of different companies and cultures that we need to be able to attract with our set of services in order to grow with the business as they grow. But in the historical growth rate, obviously the company has grown very, very rapidly for a very, very long period of time. There is a dip in the revenues as you know is not surprisingly as result of the 2008 recession. But what’s really important about this slide is we’ve demonstrate an ability to scale and operate a very, very sophisticated system. So just the complexity associated with managing all these relationships, managing the different production technologies, managing the size of the business we have. We’ve actually been able to demonstrate that we actually can scale and can operate a very, very powerful system. And what this has done is we’ve actually and as we’ve move through the years in building this system, we’ve actually created probably one of the most sophisticated tax infrastructures in the world, one of the most sophisticated HR systems in the world, most sophisticated IT systems in the world.
So, there as it through this our core infrastructure is already developed. So as we think about layering on our next $10 billion of business. We think about already having the core infrastructure by which to go make that happen, very sophisticated and performance is very well.I talked earlier about that there is a structural growth in EMS that actually over and above the GDP in electronics. And I -- what I try to do is, is do a graph that illustrate this. And what this shows is, is that, the GDP over the last 10 years, the world GDP has grown on average about 3.8% a year. If you look at the electronics industry, because of the continued adoption of more and more electronics in the world, that’s grown about 6% on average over the last 10 years. If you look at EMS business it’s grown about 8.6% over the last few years. And the reason for is a -- so the conclusion is, it’s literally a structurally higher growth business, not electronics or the GDP. So and the potential size of this and there is some reason for this that are very, very important, one is, electronics grows more GDP because the continued adoption of more and more electronics. We grow more and more than electronics because more and more companies outsource every year and additionally, there is new market that we pick on a continuous basis. So which allows us to expand even further and we’ve expanded as you in the mechanicals and power technologies and other things that are broader than just the growth of electronics. But the potential size of what we can do is kind of unlimited and in fact we actually create (inaudible) to a certain standpoint, if we decide to go after for instance the medical industries, five or six years ago, we actually had almost no competence in the medical industry. We had not been through an FDA certification. We didn’t have dedicated quality systems. We didn’t have dedicated manufacturing facilities. We didn’t have a way of operating that actually achieved zero DPM, defects per million for you finance guys.
But what we do, but if you go fast forward that today we’ve been through many, many FDA audits and many different countries we have sophisticated quality systems, in fact sometimes our OEM customers actually have asked that if they can lease our quality system from us, we have all certification, all the dedicated factory, all the know-how, it’s move from a $150 million business in probably 2005 to what’s today about $1.4 billion business.When we brought customers in, medical customers in five years ago, it was a very difficult sell. When we bring medical customer in today they actually recognize that we can actually build it as well as they can. And what that does is opens up an avenue for them to give us more business, but if we didn’t have the confidence five years ago they want to open that up and we can do that, industry after, industry after, industry, things like renewable energy is a focus area for us. One of the people you saw in the video was our, it was Jeannine Sargent, he is the President of our Renewable Energy Groups. So here is a whole new product category with different product technologies that we have now opened up as a way for us to go penetrate and as we build more and more confidence in it, our ability to do more and more those projects will increase. So we actually have a way that continue to scale and expand this business in excess of GDP and in excess of electronics. The other thing is larger outsourcing deals are continuing. And what I mean by large outsourcing deals is one of the things that we did last year as we continue to pick up factories for customers and help them rationalize their business.
We don’t take the liabilities with those factories but we should take out in the task of improving their supply chain and re-rationalizing the entire supply chain for our customers.And just last year, the factories we picked up were close to $1 billion. So these opportunities continue to be out there. We continue to be extremely well positioned to take advantage of those businesses and the reason for that is we’ve just done it so much so often. We have this huge scale. We have more opportunities to be successful, more assets to deploy in creating our supply chain that is better. We have a more likely -- we have more likely avenue for excess because of our ability to absorb these businesses, we probably picked up 50 or 60 or 70 factories over the last 10 years. We had outsourcing deals come to us in excess of $1 billion multiple times and then the complete rationalization of these supply chain that no one else in the industry has been able to do this. So this has companies think about continuously rationalizing their supply chains and optimizing the supply chain. This is continuing. That’s what creates even further growth. Then one last thing I might add is the economics for outsourcing are compelling. They were compelling when HP first did it 20 years ago when they were looking for a labor arbitrage and they’re compelling today. So as these new industries have more and more electronics, they then have more and more challenges as they go international and need to build a multiple occasions around the world. And as that demand changes, they need to have a flexible footprint. In the economics around contract manufacturing that existed when HP was doing a labor arbitrage 20 years ago, still exist today. When companies from the automotive industry or the companies from the energy industry or companies from the medical industry see what their opportunities are of using contract manufacturers. So this becomes a very, very important piece of how we can continue to drive business. But it’s actually genuinely structurally higher and we’re probably keeping structurally higher growth rate business for the next foreseeable future actually. Read the rest of this transcript for free on seekingalpha.com