Kevin Kessel - Vice President of Investor Relations Christopher Collier - Chief Financial Officer Michael McNamara - Chief Executive Officer, Director

Amit Daryanani - RBC Capital Markets Steven Milunovich - UBS Mark Delaney - Goldman Sachs & Co. Adam Tindall - Raymond James Steven Fox - Cross Research Matthew Sheerin - Stifel, Nicolaus and Company Jim Suva - Citi Ruplu Bhattacharya - Bank of America Merrill Lynch

Good afternoon, and welcome to the Flex Third Quarter Fiscal Year 2017 Earnings Conference Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. At this time, for opening remarks and instructions, I'd 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 third quarter of fiscal 2017 ended December 31, 2016. We have published slides for today's discussion that can be found on the Investor Relations section of our website at flex.com. 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 for the current period, they can be found in our appendix slide, otherwise these measures are located on the Investor Relations section of our website along with the required reconciliation to the most comparable GAAP financial measures. In addition, all commonly referred to acronyms for each of our four business groups along with their definitions are mentioned at the bottom of our disclosure slide. And lastly before turning the call over to Chris, I wanted to pass along and save the date for our Investor and Analyst Day this year which will take place in New York City in our Innovation Hub on May 10. Additional details will be e-mailed out shortly. With that, I'll pass the call to our Chief Financial Officer, Chris Collier. Chris?

Thank you for your interest in Flex and for joining us today as we present our results for the third quarter. Let’s us begin by turning to Slide 2 for our third quarter income statement highlights. Our performance this quarter reflects our continued operational execution, portfolio evolution and our commitment to our Sketch-to-Scale strategy with our Q3 financial performance coming in line with our guidance ranges on all of our key financial metrics. Our revenue totaled $6.1 billion, which was within our guidance range as three of our four business groups met or exceeded our expectations. As guided, revenue declined year-over-year by approximately $650 million, which is entirely reflective of reductions from certain legacy customers and programs, as well as our exit from our Lenovo, Motorola China operation a process that we concluded in our June 2016 quarter. Sequentially, our revenue rose 2% or $106 million led by CTG and HRS growth. Our third quarter adjusted operating income was $223 million, which was above the midpoint of our guidance range of $205 million to $235 million. Adjusted net income was $183 million. Our adjusted earnings per diluted share for the third quarter was $0.34, which was towards the high-end of our guidance range of $0.31 to $0.35, while our GAAP EPS is $0.24. Please turn to Slide 3 for our trending quarterly financial highlights. Our adjusted gross margin of 7.1% expanded almost 40 basis points from the prior year reflecting the benefits of our continued and successful portfolio evolution. We are strategically evolving our business portfolio towards a greater concentration on higher margin business by providing greater levels of innovation and engineering services. This portfolio evolution has driven year-over-year gross margin expansion, despite a languishing demand environment and lower overall revenue. Our quarterly adjusted operating income came in at $223 million and our adjusted operating margin rose over 10 basis points year-over-year to 3.6%. This operating margin performance is reflective of our focus on continuous improvement as it represents our 13 consecutive quarter of year-over-year improvement for this metric. We continue to make meaningful investments in our Sketch-to-Scale capabilities as we expand our design and engineering activities. We expanded our innovation offering by the opening of our Boston Innovation Center this past quarter. Additionally, we continue to fund and develop focused innovation initiatives and new businesses. Our strengthening gross margin and disciplined discretionary spending enables Flex to continue to make these investments to support our long-term vision and growth. Return on invested capital or ROIC remains stable and strong at 20% and continues to be well above our cost of capital. Turning to Slide 12, we will display our operating performance by business group. Our CEC business generated $62 million in adjusted operating profit and posted a 3% adjusted operating margin, which is at the midpoint of our target range of 2.5% to 3.5%. The sequential growth in both margin and profit dollars was anticipated and reflects the benefits of proactive cost reductions and program repositioning activities undertaken in prior quarters. Our CTG business produced $59 million in adjusted operating profit, resulting in an adjusted operating margin of 3.2%, which is within our targeted range of 2% to 4%. CTG continues to benefit from an improving business mix, as we continue to provide more meaningful levels of product design and innovation services along with our manufacturing supply chain solutions. These increase Sketch-to-Scale solutions are enabling us to provide higher levels of value add with customers and develop deeper more robust strategic relationships. Our IEI business generated $40 million in adjusted operating profit and achieved a 3.5% adjusted operating margin. This quarter it's also important to highlight that the IEI team sold most of the residual solar panel inventory from the second quarter impairment activity, and has eliminated, all remaining inventory risk. As we would stated last quarter, we continue to build a more diversified energy business and have taken great strides this year, but the global expansion of our solar tracking solution into 10 different countries. Unfortunately utility skill, energy projects continue to experience push outs and delays. These are more pronounced in a couple of the new international markets resulting in lower revenue and operating profit than forecasted. Looking forward, we will continue to make progress with IEI and expect to return to its targeted margin range of 46% as we exited this fiscal year. Lastly, our HRS business continues to display strong operational execution as it delivered $83 million in adjusted operating profit, equating to an 8.1% adjusted operating margin. We continue to make investments to support our current and prospective business as well as successfully ramp multiple new customers and programs in both the auto and medical markets, while still delivering financial results that are well within our targeted range. Please turn to Slide 5 for other income statement comments. Net interest and other expense for the quarter was $26 million, slightly above our guidance of $25 million, primarily reflecting the modest impact from the elevated interest rates. We believe that a range of $25 million to $30 million as the appropriate level for our quarterly net interest in other expenses going forward, and would be reflective of the higher interest rate impact. Our adjusted income tax expense for the third quarter was approximately $14 million, reflecting an adjusted income tax rate of approximately 7%. While this was slightly below or 8% to 10% estimated adjusted tax rate range this quarter, we continue to believe that the 8% to 10% range remains appropriate for this fiscal year. There are several different elements that have an impact when reconciling between our quarterly GAAP and adjusted EPS. There is a $0.04 impact from the $41 million of stock-based compensation expense. And another $0.03 impact from the $17 million of net intangible amortization expense. And lastly, we recognize $16 million or $0.03 of costs associated with the targeted restructuring we had announced last quarter. We expect to return approximately $15 million of additional costs for the remaining three months of the fiscal year. Turning to Slide 6, let us review our cash flows and net working capital. Cash flow generation in a hallmark of Flex and was exceptionally strong this quarter. We generated almost a $0.5 billion in cash flows from operations in Q3, and over the last 12 months, we have generated over $1.2 billion. Net working capital decreased $225 million from the prior quarter to roughly $1.6 billion and amounted to 6.6% of our net sales illustrating excellent working capital management. Our resulting cash conversion cycle totaled 25 days, which had improved by 1-day sequentially, primarily due to improved inventory management which reflected nearly $70 million sequential decline and a reduction of 1-day of inventory. We believe that our current and prospective business mix will result in our net working capital as a percentage of sales to remain within our targeted range of 6% to 8%. Our capital investments supporting our plan capability and capacity expansion in our targeted automation and innovation investments remain in line with our prior guidance. This quarter, our net capital expenditures totaled $106 million, which was slightly below our depreciation level of $109 million. We now see the fiscal 2017 CapEx to be roughly $500 million as we continue to make investments in advance of the ramp stages for key strategic programs, such as NIKE. Our resulting free cash flow was very strong in the quarter at over $363 million. In year-to-date, we have generated approximately $628 million. We expect fiscal 2017 free cash flow to be in the middle of our targeted range of $600 million to $700 million. During the quarter, we extended the maturity date of one of our term loan agreements from August 2018 to November 2021 and borrowed an incremental $130 million under the term loan. Our strong sustainable cash flow generation enables us to consistently return values to our shareholders through repurchasing of our shares. This quarter we repurchased over 5 million shares or 1% of our flow for approximately $75 million, and we remain committed to return over 50% of our fiscal three-year cash flow to our shareholders annually. Please turn to Slide 7 to review our balanced capital structure. We continue to operate with a strong financial condition with almost $3.4 billion in liquidity. No near-term debt maturities and approximately $1.9 billion in cash. Our credit metrics remain healthy with our debt to adjusted EBITDA ratio at 2.3 times. We remain confident in our ability to execute on our long-term vision and strategy. Our flexible and balanced capital structure, strong cash flow generation and improved operational execution allow us to continue to take distinct actions to further strengthen our Sketch-to-Scale supply chain solutions, increasing the attractiveness of our long-term business model. Going forward, we will continue to operate with discipline and consistently deliver on our commitments. Now, I will turn the call over to Mike.

Thanks, Chris. Please turn to Slide 8 for our Q3 fiscal 2017 business highlights. Our third quarter reinforces the fact that our key financial trends and Sketch-to-Scale strategy remain on target and we are continuing to build catalyst for improvements in the future. To begin with, this is our 13 straight quarter of year-over-year adjusted operating margin expansion. We delivered a 3.6% adjusted operating margin in the quarter. Our profitability improvement has been driven by the traction we are developing from our Sketch-to-Scale strategy and our continuous portfolio evolution. Second, our operating profit dollars in the quarter grew 13% sequentially to $223 million. We also saw HRS and IEI totally 50% of operating profits, while contributing 36% of revenue. The growth that are combined HRS and IEI businesses create a more balanced portfolio with longer product life cycles, more predictability and increased earning stability. Lastly, this market 20 consecutive quarter of meeting or exceeding consensus EPS. It's clear that our business has been improving its resiliency over the past few years. As we continue to build a more predictable earnings stream. We are pleased with this performance considering the challenging environment for revenue growth. We've had an increasingly amount of questions about the implications of possible changes and taxes regulation and cash repatriation. While we do not yet know what these changes will be. In generally we think the policies being contemplated would be positive for U.S. GDP growth. We have very diversified geographic footprint around the world. Purposely designed to enable encourage regional manufacturing. Our footprint the U.S. is over 6 million square feet. But we have exceptional capabilities that span all industries in everything from design and innovation centers to plastics injection molding, tooling, automation, flexible circuits, specialty materials, manufacturing, aftermarket services and distribution. This capability is spread across 15 states. Additionally we have three FDA certified faculties, six medical, ISO13485 certified operations and three automotive certified TS16949 operations with two more in certification. In the last four years we have invested well over $300 million in the U.S. operations, but we are pleased to be the largest electronics manufacturing the country. We believe we are extremely well-positioned to help customers regionalize their supply chain in the years ahead at is required. We are confident that our company as a tool capabilities and made the right investments to thrive in this new environment. Another financial trend and metric we're very proud of in our cash flow and free cash flow generation. We have now generated positive operating cash flow in 19 of our past 20 quarters. During the quarter we generated nearly $0.5 billion cash flow from operations in over $360 million in free cash flow. This is a tenth straight quarter a positive free cash flow generation. We remain on track to finish the fiscal year at the midpoint of our free cash flow target. $600 million to $700 million which equates to a high single-digit free cash yield that ranks us in the top quartile the S&P 500. It is our strong sustainable cash flow generation that enables us to consistently return value to our shareholders which was evidence again this quarter as we bought back approximately $75 million worth of stock or over 5 million shares which amounted to 1% of our float. As Chris stated we remain committed to returning over 50% of free cash flow to investors on an annual basis. Our Sketch-to-Scale strategy remains on target with clear catalysts ahead for further improvement. Our customer diversification strategy remains on very attractive levels. As this was the fourth straight quarter where we had no customers accounting for 10% or greater of our revenue. And our top 10 customers accounted for 46% of sales. Our Sketch-to-Scale strategy is helping us drive further diversification in more strategic relationships with customers. A few new example of recent Sketch-to-Scale projects we worked on were showcased at the recent Consumer Electronics Show in Las Vegas. These include the U.S. Olympic blazer with Ralph Lauren, our next generation of wireless charger for the handbag industry, AR glasses with Atheer, a wireless ECG patch for monitoring patient health anytime anywhere. A home health hub which is a gateway for patients monitoring data. A smart door lock with August, the smart blinds with Pella and the Ember smart coffee cup being sold at Starbucks. I only highlight some of these interesting products as it shows of the diversity of products in our Sketch-to-Scale platform. Catalyst for future growth that we are actively investing in include our growing NIKE relationship on the back of reinventing the shoe manufacturing industry and supply chain using automation. Our ramping both partnership and audio design capabilities and the announcement of our digital health initiatives this quarter under the leadership of Dr. Cal Patel. Additionally we announced a new joint venture with RIB software this past quarter to transform the building and housing industry by digitizing the design through supply chain process. The construction and building industry as $9 trillion industry and growing. We believe RIB has the best 5D building information management or BIM software solution available for this market. And when combined with our platform a leading global supply chain solutions it creates a formidable partnership. We believe together we can help build a smarter more connected system, using modern software architecture and real time information, which can reduce cost by up to 50%, shorten cycle times improve efficiency and help complete construction projects on schedule. We view this joint venture as opening Flex up to another completely new market and one that could be significant over time. We are pleased to be able to fund these future catalysts of growth and still generate strong free cash flows and increasing margins. Please turn to Slide 9 as review revenue by business group in detail. SEC was exactly in line with our expectations for stable revenue, as of $2.1 billion in sales were flat sequentially, but down 15% year-over-year. The year-over-year decline was broadly across all the areas of CEC. Sequentially in the quarter CEC saw continued growth with CI3 and improvement in telecom and server storage offset by weakness in networking. We expect to see revenue to beyond 5% to 10% on a sequential basis as we once again expect to see growth in CEC being offset by seasonality and decline in the rest of the CEC business. CTG met our expectation for 10% to 15% sequential growth as revenues rose 11% sequentially. This quarter reflected the ramping up new products and programs with Bose and others. Year-over-year CTG was down 10% which was mostly due to our exit with Lenovo Motorola in China. We are guiding CTG revenue to decrease 20% to 30% sequentially in line to slightly better than historical season trends for this business group. IEI fell short of our expectations of stable demand as revenue of $1.14 billion was down 3% sequentially and 6% year-over-year. This miss relative to expectations was a result of our energy business and specifically from temporary delays in our solar business to new customers and deployment in emerging markets. As Chris already mentioned, we managed to mitigate and sell most of the remaining solar panel inventory that resulted from the SunEdison bankruptcy. As I alluded to last quarter, we remain confident in our strategy of positioning ourselves as a provider of smart connected energy solution whether it has been through our industry leading solar tracking business, where the addition of data analytics through our BrightBox acquisition. We are focused on differentiating smart and connected energy solutions. Despite the loss of SunEdison this year, which was IEI’s single largest customer, we expect high single-digit year-over-year growth in energy greater than 5% year-over-year growth in IEI. We are forecasting IEI sales to be up 10% to 15% sequentially, as a temporary delayed energy products get built and we see growth in our capital equipment business. HRS slightly exceeded revenue expectations of stable for the quarter with a 2% sequential growth as automotive grew a little more than expected and medical managed to increase slightly revenue came in I just over a $1 billion, up slightly year-over-year. This extends HRS’s streak to 28 consecutive quarters of delivering year-over-year revenue growth. We expect HRS to be flat to up 5% sequentially, which is a function of automotive growth being offset by the decline from pure medical customers. Now turning to our March quarter guidance on Slide 10, our expectations for revenue to be in the range of $5.5 billion to $5.9 billion, the midpoint is in the 7% decrease sequentially and a 1% decline year-over-year. Our guidance are adjusted operating income is to be in the range of $185 million to $215 million or $200 million of the midpoint. This equates to an adjusted EPS guidance range of $0.27 to $0.31 per share and weighted average shares outstanding up $543 million. The adjusted EPS guidance is expected to be approximately $0.10 per share higher than the quarterly GAAP earnings per share due to net intangible amortization stock-based compensation and restructuring charges. Wrapping up, I want to again take the opportunity to thank the talented and dedicated Flex team for their efforts with a third quarter successful one and help us continue to moving a positive direction. With that, I’d like to open up the call for Q&A. Operator?

[Operator Instructions] Your first question is from Amit Daryanani with RBC Capital Markets.

Thanks a lot. Good afternoon, guys. I have one question and a follow-up, when I look to March quarter guide, your sales was down about 7% sequentially the midpoint, it's much better than I think what you are seeing out of Flex for the last several years, could you probably just talk about why we see less seasonality in the March quarter and is that a trend that sustain as you go forward probably driven by mix I would imagine?

Yes. I think that's exactly right, and I think as we continue to see a little bit less of the volume, consumer – pure consumer kind of products from CTG, we're going to see a more stable earnings profile across these quarters. So I actually think that's something that's going to be more structural as we go into the future, and obviously we like it a lot, it makes us a lot more predictability in the usage of capital and inventory are much more predictable for us, so we can optimize our ROIC little bit better. So I think this probably ends up being a structural change that we'll see going forward.

Got it. And then I guess just on NIKE, it comes up in every discussion with Flex. Can you just talk about what you think the NIKE revenue, the margin profile can look over the next several years, especially what you do at scale that model could look like for you guys. So I feel a lot of folks think this is in the CTG business, so the margins maybe 2%, 3%, that kind of range, perhaps you could talk at scale what do is model would look like?

Yes. So we don't see anywhere near 2% to 3% model, so we do expect it to be significantly over CTG average number. So what we will expect to do is we'll actually see revenue, we'll expect to see revenue growth pretty linearly over the next year. Actually, I expect revenue to grow pretty linearly over the next three or four years. And I think by the end of this year or by the end of FY 2018, we will see it to be kind of a meaningful part of CTG’s business. By the time we get to FY 2019, I think we'll see it in a top 10 position on the overall Flex business. And I think ultimately, we would expect this to potentially be $1 billion business. And as far as margins, it’s our expectation that over the course of that time frame, we will be able to move this into something significantly higher than CTG margins even more like HRS margins.

Okay perfect. Thanks a lot for your time guys.

The next question is from Steve Milunovich from UBS.

Thank you. Good afternoon. I wonder if you could talk a little more about IEI, first of all I think last quarter you said you had about $50 million worth of trackers you were trying to get rid off by year end, did you get rid of all that. And you talked about a push out in terms of some of those solar business with emerging markets, but it sounds like you're going to start placing that next quarter, so I assume you have contracts for that and you see it beginning to turn around next quarter?

Hi, Steve. This is Chris. Yes, so just to clarify, on your first question what we highlighted last quarter was that we had some residual solar panel inventory not trackers and it was roughly in that range that you had highlighted and in my prepared remarks as well as with Mike we wanted to make certain of that we highlighted the great work this past quarter to actually sell off that inventory and eliminate all remaining inventory risk associated with that. And with regards to the implications of the business during the quarter, what we were highlighting is this past quarter we saw some utility scale energy projects and some of the international markets that we've been entering into have some push outs and delays. And it’s more pronounced in a couple of occasions and we have line of sight and we've actually already been solving some of those issues. So as you enter this next quarter part of what supports the strong sequential growth of 10% to 15% for IEI is on the back of our solar trackers as well as other business going into those utility scale projects as they get deployed this trend quarter.

Understood. And then on Bose do you still expect that to be a top 10 customer in fiscal 2018 and is that ramping at the rate you anticipated?

Yes. Bose is a great partner, great relationship, continue we only have about three months now under our belts with them. On track with our expectations, they'll be a top 10 customer next year and I'm going to continue to find ways to expand with them.

Terrific. Thank you.

The next question is from Mark Delaney from Goldman Sachs.

Yes, good afternoon and thanks very much for taking the questions. My first question is on margins, I think gross margins were one of the highest if not the highest in history in December quarter and EBIT margins also expanded and that was despite the higher mix of the consumer group which is typically a lower margin business. So I was hoping you could help us understand a little bit more what was able to drive the margin strength within the December quarter. And then as we look forward in the last couple of quarters you talked about some of these restructuring actions and ability to get Bose margins up higher as you move forward. So can you just help us think about how much magnitude you can get from margin improvement going forward from some of those other efforts like Bose, full integration and the completion of the restructuring programs, if you could quantify the timing and the magnitude there? Thanks.

Great. Thanks Mark. So you highlighted something that we were noting in the prepared as well, 7.1 was up 40 basis points year-over-year and even when you look to the midpoint of our guidance next quarter it actually goes higher. This is something that’s been the construct as we continue to evolve the portfolio to engage deeper with some of the Sketch-to-Scale elements of the business and it's across every one of our segments. If you think about just CTG alone, our focus has been around improving our margin and profitability there not necessarily around focused on growth. So as we've stated before, we continue to drive the portfolio to a richer mix inside CTG which is led by greater Sketch-to-Scale solutions and we're doing it with these new brands that you’ve highlighted, new technologies and new products. And with that line of sight, that's why last year at an Investor Day we extended the margin range for that segment. Just before we talked about one of the earlier questions was around new relationship with NIKE. We also announced – talked about the new relationship with Bose. Both of these are meaningful contributors as we build out the long-term portfolio and continue to grow the business, that will own the mix benefits that you get as we continue to drive the portfolio evolution to greater than 40% to 45% of our business being secured around the industrial and emerging, as well as the HRS business that have a longer product life cycle and much higher margin profile. So it’s a combination of all that, we're pleased with the continued progress we're making, still more work to do, but what you're seeing is that portfolio evolution, the Sketch-to-Scale penetration evidencing itself in these gross margins that afford us the opportunity to make investments into new markets and new businesses as Mike had talked about in his prepared remarks.

I’ll just add Mark, not only are we working hard to move the portfolio into a more balanced way with more and more HRS and IEI business, but even within the CTG segment we're trying to diversify that business into more technology oriented products in more products where we have more design content and innovation content. Because as we add more and more value in that product category with technology and with innovation content, we can actually drive margins up and you’re seeing some of that starting to be evidenced in the CTG margin structure, it did get a little help from December as well just because of pure volume. So you’ll see it come down a little bit as we go into our next quarter just on the back of volume, but we are structurally moving the CTG portfolio into more technology, more innovation and we are trying to establish a couple of very nice layers of growth that we believe can sustain a more predictable earnings stream which includes NIKE and Bose. And I will also mention and remind everybody, we're actually – we're not operating profit breakeven on NIKE, we’re pretty significantly away from it and we’re absorbing that cost as well in the CTG business. So we like the way that portfolio evolution within CTG is transitioning. We'll continue to make the changes in that portfolio transition into a better more technology based business and that's the reason we ended up moving our range – our operating profit target range up this last May as Chris highlighted.

That’s helpful. Follow-up question, I know you guys have some specific opportunities especially in NIKE that drives topline going forward, but maybe if you can talk a little bit more on the core base business. I know you had few challenges around energy, but global PMI data in a number of countries is improving. So I think you guys would start to see some benefits in your bookings trends in areas like industrial and HRS. And just hoping you could just elaborate a bit more on some of the regional trend you're seeing and if you are in fact in the core base business seeing some improvement in the bookings?

Yes, one thing I want to keep in mind of the Solar business. We actually expect to be up maybe cost the high single-digits this year on the solar business and that's with Lucent, the number one customer of IEI is SunEdison. So we would have had an extraordinary year and Solar and IEI if it had not been with the SunEdison account going upside down. So we're pleased the way that's evolving and energy is not going to go away and our position within energy is very interesting at in a place where we believe we continue to grow with. So from the energy standpoint where we think we're pretty good shape. And the Core business we would – I see the same thing you see I mean I made some comments about the U.S. GDP being a positive going forward. Anytime the GDP of the world or of the United States goes up. I would hope that we would be a beneficiary. It’s probably one of the most important drivers of our business because we are also diversified. So now we're going to see that flow through into incremental revenue that we're not anticipating going forward. We'd be hopeful and we'll just have to see if that plays out.

Thank you.

The next question is from Adam Tindall from Raymond James.

Okay, thank you and good afternoon. Based on your guidance, it looks like operating income dollar declines on year-over-year basis has effectively troughed in the December quarter. So just hoping that you could talk about this trend as far as year-over-year operating income dollar growth and your confidence on operating income dollar growth in the fiscal 2018?

Certainly, so even if you just look towards our guidance that we set for the March quarter, you see us really right on the same level as we had last year and that despite having to still work through some challenges in parts of the business. What you've seen historically is us having to digest the transition away from our single largest customer Lenovo Motorola over the last two years, which has been something that's very significant headwinds that's now behind us. If you think about what we just talked about at length in some of the earlier questions, it’s about building a richer business mix across each and every one of our segments today. The incremental Sketch-to-Scale and design led efforts. Our all aspects that are going to help to continue to drive a greater earnings growth, if we have opportunities to see the top line expand even be more of an enhancement into that. So if you think about the way this structure of the long-term model, we have GDP plus way growth in our model as we look out to 2020. But you have a meaningful operational improvements and operating profit improvements to the terms of three and four times that growth rate just in terms of the penetration there we're getting in the longer product life cycle higher margin businesses. So you're seeing that natural evolution play way out with an evidence by now having 13 straight quarters of year-over-year quarterly margin expansion and we'd expect to have growth in this range as we progress to 2020.

Okay. And maybe building off of that based on your March guidance and my assumptions for normal seasonality in IEI and HRS. It looks like you will likely be at double-digit revenue growth in the fiscal 2018 for these two segments. So maybe just talk about your level of confidence in this given it's something that you haven't achieved on an organic basis in two years?

Certainly, let me just breakdown one element of that maybe we can start with HRS. We have a highly diversified in a fast growing business here and we continue to expand all the tools that we have with which we can compete. If you think about we're in over 300 global platforms and automobiles we're continuously finding new partners just think about the content that we have inside of a vehicle, growing from 2008 around $25 million in a vehicle to over $118 today. We are continually finding many ways to play and penetrate that space. If you look at the performance this year, we're going to be up higher single-digits off of the 10% you cite. But the mess is really in terms of about $120 million of revenue. So we highlighted in the prior quarter, some delays were certain programs. The 10% may not be linear every single year, but our vision and confidence is that we're still structurally established have long-term growth that's intact for HRS. Mike just talked about the IEI business and we suffered our single largest customers in IEI departing this past year. You had almost a $0.5 billion business with SunEdison inside of IEI go to zero. And despite that we're going to be growing IEI north of 6% this year. At the same time, we continue to find new different categories to play from lifestyles to spending in other equipment areas, as well as having a world class leading tracking solution in energy, total energy solution offering. So we have confidence again inside that space to have meaningful growth. At our Annual Investor Day is a time when we will always step back and assess the performance that we just came through as well as how we look forward as we build out our long-term vision, but where we sit today in both of those businesses, long-term structural growth is intact.

I would add just a couple more data points because you talked about a multi-year look back. The last three years industrial and emerging industry – if you go to the midpoint of the range in 2017 for the fourth quarter, we’re at about 10% growth. If you look at HRS over the last three years, we're at about 8% growth. And in both those cases, we are actually at a higher growth rate as it relates to OP dollars. So if you look at our structural overall call it FY 2015, 2016 and 2017 as a Company, we've got an operating profit from 2.9 to 3.2 to 3.4. So what you can argue, you are not in 10% this year being up at north of 6% on the back or losing your number one customers pretty impressive in my book then it will be over 10% operating profit increase in IEI in 2017 despite losing the number one customer. So it gives you an idea of the robustness of the book of business and the strategies we're implying. So I think we'll continue to drive our model forward. We'll continue to drive to try to get to 10% growth in these markets and it's not going to be linear as Chris said. But over the long-term these are the growth rates we're trying to achieve. And different disruptions are going to happen like SunEdison and we've operated in a pretty low economy and maybe it will get little bit better going forward and it will help us out.

Adam that was a good question, the only other thing I’d add into that because we just unpacked quite a bit for you, but both HRS and IEI have had really strong bookings and what we've seen has been really some push outs and some delays in both of those businesses, which what's different than other businesses that demand doesn't perish. That's not perishable demand. So all this again puts us into having the confidence we have in operating these businesses to win.

Thanks guys, and best of luck.

Thanks.

The next question is from Steven Fox from Cross Research.

Thanks. Good afternoon. So just first question, Mike you mentioned a bunch of the fashion designs that you've displayed at CES. I did check a lot of those out and I was just curious, obviously NIKE has a huge volume deal for you. How do you transition some of those ideas, which are fairly unique to the industry into volumes that mean something when you're such a large Company already and do you see some major trend that could lead to that happening in the next year or two? And then secondly, I just wanted to double check on one thing. I think you said medical was kind of weak and I think last quarter you had some inventory issues, and if you could just update us on any kind of sort of left over inventories from what was a drag a quarter ago? Thanks.

Yes, hey Steve that’s a great observation and it's not lost on us that fashion is not going to move our needle whole lot. A lot of what we do is as we work on these projects, obviously we’ve paid, but we need projects that can actually move our needle and drive significant revenue. So if you think about some of the things we're doing with fashion in terms of being able to collect data, analyze data, get it into a position where our customers can do machine learning whatever on it. Huge applicability as a crossover to things like digital health as a great example and digital health we think it's something that's going to really explode as the need for chronic disease management is going to continue to increase in the developed countries in particular and even the undeveloped countries are going to be more and more consumers of it. So there's a great case where we're trying to leverage those, a lot of those technologies that can play across into whether its continuous blood glucose monitoring or notifications that you are getting as you're managing these chronic disease and the elderly want to actually stay in their own home. We think it has a huge applicability and it gives us the underlying – and what's important to us in demonstrating those technologies is the underlying core technologies about how they're powered, about how they're miniaturized, about how they're reliable, the connectivity modules associated with them. These are the underlying core technologies that will have applicability into a much bigger market as we go forward. So we kind of view him as an interesting, but I think when you see some of those kind of things, you need to think about the underlying core technology, IP that we're developing as we make those projects happen.

In with regards to the other aspects you highlight, with regards to an inventory that inventory issue that we had talked about last quarter was what I highlighted earlier with Stephen and that that was related to the residual solar module inventory that we had impaired in our Q2 and that was something that the team did a great job of selling off and we completely mitigated our inventory exposure with that as we closed up our quarter.

Okay. I thought there was some medical inventory issues I guess. All right. Okay great, thanks for clarifying that and I appreciate the answer on the fashion. Thanks so much.

Yes, you’re welcome.

The next question is from Matt Sheerin from Stifel.

Yes, thanks. Just going back to your comments on HRS and the automotive business where you continue to see growth. I know more skewed toward the U.S. customers what were seeing more of a plateau in terms of production growth. Talk about opportunities to further expand programs with U.S. customers and efforts to expand globally with customers in Europe and Asia?

I think there's two ways to think about, one is the U.S. customers and I would think about that differently from U.S. consumption. And I actually think we're actually quite well about we're in a number of different programs in Europe and China and in the U.S. and some of these things are pretty diversified. So our Asia operations as a percent of our total consumption runs about 30%. It's actually pretty high and some of those are as a result of the globalization of the big U.S. and European OEMs which I actually we have a pretty balanced footprint with. And they're actually looking for globalize companies to be able to supply them on each of the different regions for that business. We also have customers that are Asian customers. So I actually think our footprint is very well balanced. And I think it's a balanced across the U.S. customers. I think it's balanced across the European customers and certainly across regions. So we feel pretty good about where we are and we’re in like 400 different platforms worldwide.

We're in over 400 global platforms today. We operate 16 global certified auto facilities. They operate 16 FDA facilities around the globe. So there is a highly diversify global platform that were operating profit.

Okay. Thanks that’s helpful. And Mike regarding your comments on your ability to accommodate customers that maybe want to increase manufacturing footprint in North America and the U.S. you talked about a 6 million square foot capacity? How quickly and do you have the capacity available to actually ramp production for customers or would you have to actually build out that infrastructure or put more equipment in place?

No, so first of all we have a great footprint as you can imagine with 6 million square feet. I would say we're probably no more than 60% or 70% utilized that 6 million square feet. So I think we could probably bring a significant amount of facility to bear. But keep in mind facilities is not just the only answer. It's all about the equipment and even more importantly about the resources. What's interesting in the U.S. is that I talked about investing $300 million. We brought on innovation centers in San Francisco and Boston and New York just over the last couple of years. Is the center of our automation on a worldwide basis and we're now up to 700 automation engineers on a worldwide basis. We added 650 design engineers over the last year and I am going, yes 200 of them were in the United States. So it's not just factory or facility because the facilities, we can go rent a facility and be able to bring that up, but it's not only just facility space, but it’s the experience, it's about the talent, it's about leveraging up the existing talent pool that we have in the operation, it’s about having the center of our automation here, it’s about the center of innovation here, and that's what leverages across to being able to ramp securely for customers in a predictable way and in a rapid way. So it’s more than just the 6 million square feet, just think about that as just being one of the things we have to go work to ramp a customer.

Got it, okay. Thanks very much.

Keep in mind. We're going to customer now for 20 years and telling them, hey, guys you need to move towards manufacturing and flexibility and variable manufacturing cost, so that as currency change, as taxes change, as your end markets change, you can actually change along with it and we'll provide the infrastructure for you to go move. And we've moved an enormous probably close to $5 billion a year that we've moved from Point A to Point B. And it's an enormous amount of capability just to know how to move and ramp and do things in a secure way, move those supply chains in a secure way. So I think there's a lot to it. It's more than just the facilities space, but we've got actually have the facilities space. We have the knowhow. We actually have the processes and we have the people. So it's a super cool and interesting position to be in and we’re pretty pleased and we put $300 million into it over the last four years.

Got it. Thanks again.

The next question is from Jim Suva from Citi.

Thank you very much. My question is a little bit regarding the NIKE relationship, which NIKE has been very vocal and positive speaking about the relationship with Flex. You mentioned in your prepared comments that it’s currently about the loss making situation. Can you give us an update about the timeline, because we would like to see losses turning to breakevens then into gains. How is that progressing and update us on any timeline? There’s so many variables, whether it would be shoe size or color, more fabric may go into this because anything then changing for the timeline like it taking a little bit longer puts and takes a little bit faster. Any update on the timeline of how that’s going because it's such a complex yet important relationship? Thank you.

Thank you, Jim. Yes, certainly just as you ended that question, it is a very important relationship and one that we've been strategically partner to drive their manufacturing revolution. There is really no change in our expectation since what we lined up last May at our Investor Day. Fiscal 2018 for us was going to see meaningful revenue for CTG, meaningful is a couple hundred million dollars. We continue to roll this thing up and we anticipated to be a top 10 customer for Flex in fiscal 2019. And it’s a clear path for us to have $1 billion revenue business with them long-term. So we've highlighted before all the different activities that we're partnering with them. We continue to get greater visibility with where we’re moving with it. We continue to look to grow our capacity and capability as the revenue profile grows and we're continuing to expand the product portfolio. So as it relates to the profitability, we said all along this is going to a multi-year process and we're in investment cycle right now. We cross into profits in the last quarter next year in Q4 of fiscal 2018. And our Investor Day coming up in May, we're going to be able to provide you much deeper insight into how this relationship is moving and how we think about it as we build out our long-term vision for Flex.

I'm just going to add a few comments. When we started on this journey, we kind of thought about it with our customers like a 10-year journey and we're both committed to each other to go really revolutionize how issues get built. And if we can do that sort of thing it gives them all kinds of options in terms of regionalization and customization and the other kind of things that will be able to drive their flexibility from a product standpoint and their profitability from a margin standpoint. Just reading between the lines, and how you reading between the lines in terms of what NIKE makes comments about, is the innovations that they're seeing and coming out of our team that is our team, our guy and their guys are probably above expectations of what the anticipated. So they were hopeful about their own manufacturing revolution. I think the results that they're seeing are above expectations and we've been able to build not only results in terms of innovating on how manufacturing is done, but the amount of teamwork we've been able to develop with their guys and collectively finding solutions together is really, really high and that's going to be extremely important as we work to integrate the design process all the way in through the manufacturing and automation process. So that's a lot of what you're hearing from NIKE I think. So I think that's a little bit of something to read between the lines and we're doing really well. We're going to see other innovations come out of the relationships. We had some self lacing shoes at the CES that you saw that we're working on together and we're going to see other innovations come out over the course of the years. But we actually haven’t figured out how to – you just talked about you’d really like to see breakeven and profitability and why you don't want to see it as much as I do. But it just takes time to reinvent. So we're thinking about this time as our 10-year cycle and if we can actually get it to run like as we expect it provides a layer into CTG of continuous revenue and margin expansion at a higher – significantly higher than CTG margin. So it actually is going to help redefine the entire CTG category.

Great. Thanks for the details and we’ll see you in. Thank you.

You’re welcome.

Thanks Jim.

And the last question is from Ruplu Bhattacharya from Bank of America.

Hi. Thanks for taking my questions. Hey, Chris can you just quantify how much of a drag Bose was to CTG margins this quarter, and do you think Bose is still a drag say in the June quarter?

Hi, Ruplu, we are not going to be specific with regards to those types of elements talking about profitability with this customer. I’ll just go back to say this is a very strong global leader, a great partner of ours. We've now got about three plus months under our belt with them. That performance that we have as we integrate and we drive forward with them is going to just continue to improve. So just think if it as ability for us to leverage a really strong special scale relationship and expand with a new top brand that we're just going to continue to make improvements and grow with them as we move forward.

Great. And just real quick, Mike it's been a long time since we've talked about tech and Flex power. Are those businesses individually profitable and do you still see them as a necessary part of your portfolio?

Yes, they're both profitable and we're pleased with the performance of both of those. They are actually growing this year rather nicely and they are a strategic part of our portfolio, they are not – you don't have to have them in order to run the rest of the businesses, but there are nice strategic add and we've been able to leverage them very effectively and they contribute nicely from both our revenue standpoint and as well as operating profit margin standpoint. So we continue to believe they perform well.

Great. Thanks so much. End of Q&A

So I think we're out of time. So let me just make a couple comments to close. Once again, thanks again for your interest in Flex. As a quick recap, Flex’s Sketch-to-Scale strategy continues to show great promise. This quarter is a great quarter of a year-over-year adjusted operating margin growth. We're pretty excited about that. Free cash flow was exceptionally strong and continues to grow on a sustainable basis. As this free cash flow that enables a very consistent capital return program to shareholders, so we remain structurally and strategically positioned to deliver meaningful earnings and margin expansion. And with that, I’d like to conclude today's call. Thank you.

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