Flex's Second Quarter FY 2027 Earnings Conference Call - FLEX LNG LTD

Explicit Guidance:

• Fiscal Year 2027 Total Revenue: Expected between $34.9B and $35.9B (midpoint up 27% YoY).
• Fiscal Year 2027 Segment Revenue:
  • CPI (Cloud & Power Infrastructure): Up 75%–85% YoY (includes EPC Power acquisition).
  • Combined RMS & ITS: Down 8%–11% YoY.
    • RMS: Up mid-single digits to high single digits.
    • ITS: Up low double digits to low teens.
• Fiscal Year 2027 Margins:
  • Adjusted Operating Margin: 7.6%–7.8% (up ~140 bps YoY).
  • CPI Adjusted Operating Margin: 11.5%–11.7% (expanding ~240 bps YoY).
  • Combined RMS & ITS Adjusted Operating Margin: 5.9%–6.1%.
• Fiscal Year 2027 Financials:
  • Adjusted EPS: $4.84–$5.16 (up 52% at midpoint).
  • Adjusted Tax Rate: ~21%.
  • CapEx: $1.5B–$1.6B.
  • Free Cash Flow Conversion: ~40%.
• Fiscal Year 2027 Q3 Guidance:
  • Revenue: $8.87B–$9.17B (midpoint up 28% YoY).
  • Adjusted Operating Income: $685M–$715M.
  • Interest & Other Expense: ~$120M (includes EPC acquisition debt).
  • Adjusted EPS: $1.19–$1.25 (midpoint up 40% YoY).
  • Weighted Average Shares: ~375M.
• FY28 Outlook:
  • CPI Revenue: Targeting ~80% growth (to be updated at Investor Day).
  • CapEx-to-Revenue Ratio (Post-Spin): Reverting to historical levels of 2% or below for Flex (RMS/ITS); FY28 CapEx for Flex will focus on securing capacity for FY28 delivery.

Business-Segment Outlook:

• CPI (Axiom):
  • Power: Expected to grow faster than cloud and cooling; margin expansion driven by volume growth and scaling of 800-volt architecture and solid-state transformer (SST) investments. Power segment margin reached ~16% in Q2.
  • Cloud & Cooling: Growth driven by investments in both areas; cooling remains "nascent" but expanding.
  • Product/Innovation: Introduction of prefabricated AI modules (accelerating AI factory deployment by up to 50%); ramping liquid cooling product lines with testing/deployment expected over the next 6 months.
  • Acquisition Impact: EPC Power (closed Oct 14) adds engineering expertise, complements organic R&D into 800-volt tech/SSTs, and contributes to FY27 accretion despite elevated short-term interest expense.
  • Cloud Business: Focused on high-value custom configuration, rack assembly, and aftermarket services; expanding vertical integration (cutting metal) and service capabilities (e.g., Memphis facility ramp).
• RMS (Regulated Manufacturing Solutions):
  • Driven by industrial end markets (energy infrastructure, warehouse automation, robotics).
  • Robotics: Identified as a high-value market; participating in fixed automation, warehouse automation, co-bots (supplier to Teradyne), and roadmap development for humanoids.
  • Margins: Expect revenue growth and margin expansion for the full year despite sequential Q2 volatility.
• ITS (Integrated Technology Solutions):
  • Driven by communications (advanced networking, satellite, space-to-earth).
  • Market Mix: Growth in communications offsetting weakness in consumer-related markets.
  • Strategy: Leveraging unique portfolio from space to end-user; focusing on complex, regulated environments (e.g., FDA-certified healthcare, automotive).

Market and Competitive Outlook:

• AI Infrastructure: Belief that the future relies on power, cooling, and compute combined; Axiom positioned to lead the next generation of critical digital/electrical infrastructure.
• Competitive Positioning:
  • Power: Market leaders in embedded and critical power; "fantastically positioned" on technology and growth relative to peers.
  • Cloud: Avoiding standard configurations; focusing on high-ROIC custom technical work with strong operating margins.
  • Customer Concentration: Acknowledges high concentration among hyperscalers (driven by $1T+ infrastructure spend) but emphasizes diversification within hyperscalers (power, compute, cooling, racks) and across multiple programs per customer.
• Supply Chain: Component shortages expected to persist for the next few years; guidance includes conservative estimates for availability; Flex capabilities to chase suppliers and manage working capital (inventory net of advances at 60 days).
• Pricing: Mixed pricing favorability observed in Q2; volume leverage and productivity gains expected to drive margin expansion.

Macro / Industry Outlook:

• Economy/Industry Trends: Long-term secular growth drivers identified in healthcare, energy infrastructure, and communications; markets require complexity, reliability, and speed.
• Regulatory/Safety: Electrical transitions (e.g., SSTs) are slow due to regulatory and safety environments; strategy focuses on immediate deployment of digital rectifiers (97% efficiency) while waiting for SST adoption.
• Geographic/Industrial: Trends in "physical AI" and regionalization of supply chains driving robotics and automation demand.

Strategic Initiatives:

• Spinoff (Axiom & Flex):
  • Status: Form 10 filed; expected separation in early FY27.
  • New Leadership: Amy Schwetz (CFO post-spin), Michael Hartung (CEO post-spin for Flex).
  • Identity: "Axiom" name unveiled; distinct purpose for AI infrastructure (Axiom) vs. industrial manufacturing/supply chain (Flex).
  • Event: Innovation Day scheduled for November 10 to detail strategies and long-term plans for both entities.
• M&A:
  • EPC Power: Closed Oct 14; strengthens end-to-end solution portfolio and 800-volt tech capabilities.
  • Financing: Agreement to sell $2B Axiom convertible preferred stock to repay ~$2M of EPC acquisition debt (reducing interest expense).
• Capacity Expansion:
  • CapEx Allocation: 2/3 of FY27 investment focused on securing capacity for FY28; 1/3 for FY27 fulfillment.
  • Infrastructure: Ongoing planning for utility connections and substations to support power requirements for CPI ramps.
  • Facilities: Memphis facility ramping for cloud aftermarket services.

Risks and Headwinds to Outlook:

• Supply Chain: Persistent component shortages and tight supply-demand equation; inventory buildup (39% YoY) required to support higher growth programs.
• Regulatory/Tech Adoption: Slow adoption timeline for Solid State Transformers (SST) due to regulatory/safety hurdles.
• Market Weakness: Consumer-related market weakness partially offsetting communications growth in ITS; lifestyle weakness in RMS.
• Execution Risks: Capacity execution challenges in a tight supply area; one-time cash costs related to spinoff activities impacted Q2 free cash flow.
• Debt: Elevated interest expense in short term due to EPC acquisition debt (mitigated by preferred equity transaction).

Management Tone on the Future:

• Confidence: Highly confident in the strength of both companies post-spin; describes Flex as entering a "next chapter from a position of strength" and Axiom as uniquely positioned to lead the AI infrastructure revolution.
• Strategy: "Not creating two companies searching for their future" but rather "creating two industry leaders."
• Execution: Strong belief in the ability to scale investments, manage capacity, and drive margin expansion through volume leverage and productivity.
• Transition: Expressed confidence in the leadership bench and the ability to execute the spinoff while maintaining growth momentum.

Miscellaneous:

• Axiom Financials: Form 10 provides detailed view of Axiom's strategy, financial profile, and growth opportunities.
• CapEx Specifics: FY27 net CapEx was $240M (3% of revenue); FY27 total expected $1.5B–$1.6B.
• Working Capital: Inventory up 13% sequentially/39% YoY; net working capital days at 60 days.
• Share Count: Q2 guidance based on ~375M weighted average shares outstanding.