Flex Ltd. (FLEX) Q4 2023 Earnings Call Transcript

Thank you, Chris. Good afternoon, and welcome to Flex's Fourth Quarter Fiscal 2023 Earnings Conference Call. With me today is our Chief Executive Officer, Revathi Advaithi, and our Chief Financial Officer, Paul Lundstrom. Both will give brief remarks followed by a question-and-answer session. Slides for today's call, along with a copy of the earnings press release and summary financials, are available in the Investor Relations section at flex.com. This call is being recorded and will be available for replay on our corporate website. As a reminder, today's call includes forward-looking statements based on our current expectations and assumptions. These statements involve risks and uncertainties that could lead to actual results differing significantly. For a full discussion of these risks and uncertainties, please refer to the cautionary statements in our presentation press release or the Risk Factors section in our most recent filings with the SEC. Please note that this information is subject to change, and we have no obligation to update these forward-looking statements. Lastly, unless otherwise stated, all results provided will be non-GAAP measures, and unless otherwise noted, all growth metrics will be compared on a year-over-year basis. The full reconciliations from non-GAAP to GAAP can be found in the appendix slides of this presentation as well as in the summary financials available on the Investor Relations website. Now I'd like to turn the call over to our CEO, Revathi.

Thank you, David. Good afternoon, and thank you for joining us today. Starting with our fiscal Q4 results on Slide 4. Overall, it was another solid quarter. Our revenue grew 9% year-over-year with growth in our reliability, agility, and NEXTracker segments. Adjusted operating margin came in at 4.9%, and we delivered $0.57 of adjusted EPS, which was a new record for fiscal Q4. Looking at the full year results, fiscal '23 was very strong despite the continuing challenges in the macroeconomic landscape. We grew revenue 17% year-over-year with adjusted operating margins for the full year at 4.8%. And we delivered adjusted EPS of $2.36, up 20%. That's the third year in a row EPS has grown at least 20%. Clearly, we can see the progress we have made by executing on our strategy. Turning to Slide 5. We got a lot done this year. We completed the NEXTracker IPO, getting the pricing and timing right for a great showing despite what is still a very tough IPO market. Looking across the organization, we had another record year in automotive wins. Not only has automotive revenue grown 40% over the last 2 years, but the composition continues to shift to next-gen mobility with an increasing percentage of our wins being design-led. In the business areas we're targeting, we are providing industry-leading design and engineering capabilities to secure long-term wins and build customer trust. Now this is also true for our wins in the healthcare space. As medical devices become smarter and more complex, OEMs are looking to increase their outsourced manufacturing to help navigate this complexity. Our extensive experience and capabilities in highly complex automation and global scale positions us well to help healthcare customers succeed in this changing landscape. As with our automotive business, our design and engineering capabilities and track record of serving leading healthcare brands give us a competitive market advantage. We had exceptionally strong growth in our cloud business this year as we ramp new hyperscale cloud programs. Our vertical integration, advanced technology capabilities, and scale help drive these opportunities, and we have 1 with multiple hyperscale cloud partners. Other notable trends this year include our growth in renewable energy-related hardware from inverters to EV chargers, accelerated by the global shift to clean energy. We also see increasing demand from the U.S. IRA passage, creating additional opportunities to help our customers take advantage of this growing market. Now turning to supply chain. We continue to navigate the ongoing challenges in supply constraints during the fiscal year. However, we did see improvements in many areas as the year progressed. While there is still the occasional challenge, which is a part of our everyday business, the most significant supply issue remaining is the constraints with larger node semiconductors that primarily affect our reliability segment. Regionalization remains an important topic as companies strive for efficiency and resiliency. There's a lot of complexity here, and that topic often gets oversimplified. Our core value proposition is that we connect, design and advance manufacturing, supported by vertical integration and complex supply chains. Then we bring circular economy capabilities such as refurbishment and recycling to minimize waste. And we do this in every major theater of operation, which is critical to regionalization. Because at the heart of regionalization is about moving production closer to consumption, adding resilience to the value chain, and addressing sustainability concerns. Flex has a strong track record of helping customers optimize their outsourced manufacturing and services, guiding them on what products should be produced where and balancing the dimensions of technology, labor, and supply. We are very well positioned to help companies reduce risk, decrease time to market, and become more resilient. A good example is in our lifestyle business, which significantly outperformed weak consumer end markets in fiscal '23 from targeted wins and share gains. Many of these wins came from our ability to regionalize our customers' manufacturing and deliver in multiple geographies. Overall, we've done very well managing through this cycle, and that is reflected in our fiscal year performance. We have built strong relationships with our customers and our suppliers, increased our opportunities for growth, and implemented new capabilities across our operations that make us even stronger and more resilient going forward. Now turning to Slide 6. Our accomplishments and contributions are being recognized by our customers and industry groups who acknowledge Flex as a leader in advanced manufacturing technology as well as our efforts to deliver for our customers in a responsible and sustainable manner. I'm very proud of what we have accomplished. Paul will provide guidance in just a moment, but I want to make a few comments as we look ahead to fiscal 2024. As you're well aware, it's a highly dynamic environment, and there is increasing uncertainty with general concerns on recession, interest rates, and geopolitical dynamics. However, we always want to provide the most transparency we can based on our visibility into current customer demand. We will manage through this environment as we have through all the challenges of the last several years. Looking past the near-term macro uncertainty, we believe the fundamentals of outsourced manufacturing remain very strong. Our value proposition and our ability to manage through the cycles positions us well for the future. With that, I'll turn it over to Paul to take you through the financials.

Thank you, Revathi, and good afternoon, everyone. I'll start with our performance in the fourth quarter. Our revenue reached $7.5 billion, representing a 9% increase. Gross profit was $594 million, with gross margin improving by 60 basis points to 7.9%. Operating profit stood at $364 million, with operating margins improved by 60 basis points to 4.9% year-over-year. Earnings per share for the quarter was $0.57, up 10%. Looking at our segment results, Reliability revenue grew 14% to $3.2 billion, with operating income of $142 million, up 1%, and an operating margin of 4.4%. While revenue growth was strong, program investments and labor inflation continued to put pressure on margins, but we anticipate improvements in reliability margins over the next few quarters. In the Agility segment, revenue rose 5% to $3.7 billion, with operating income increasing by 13% to $171 million, resulting in a strong operating margin of 4.6%. Lastly, NEXTracker revenue was $519 million, an 18% increase year-over-year, with operating income reaching $70 million, tripling last year’s figure, and an operating margin of 13.5%. For the full fiscal year, revenue totaled $30.3 billion, up 17%, with gross profit at $2.3 billion and gross margin improving to 7.7%. Operating income for fiscal year 2023 was $1.4 billion, reflecting a 23% increase, and we achieved a record operating margin of 4.8%. Our EPS for the year was $2.36, an increase of 20%. The notable difference between our GAAP and non-GAAP earnings was mainly due to charges related to the NEXTracker IPO. In terms of our full year performance by business unit, Reliability revenue was $12.7 billion, with an operating margin of 4.8%. Within this segment, automotive revenue surged 22%, driven by new projects in next-gen mobility. Health solutions grew by 9%, and industrial revenue climbed 24%, supported by strong growth in renewable energy and EV charging. The Agility segment generated $15.8 billion in revenue, maintaining a 4.4% operating margin. This margin reflects our focus on more profitable business, along with effective cost management in a slowing consumer market. Within Agility, CEC experienced a 30% rise, bolstered by new cloud wins and critical infrastructure. Consumer devices revenue faced expected declines due to weak market conditions, while lifestyle revenue increased by 2%, benefiting from market share gains that offset weaker consumer spending. NEXTracker closed the year with $1.9 billion in revenue, a 31% year-over-year improvement, and an operating margin of 10.7%, more than 4 points higher than last year. We were satisfied with our performance and our ability to achieve strong sales and profit growth in a difficult year. Regarding cash flow, we saw inventory improvements in Q4, with net working capital advances decreasing by 8% sequentially. Total gross inventory also fell by approximately $300 million this quarter. While we’re beginning to see positive signs, we are still facing shortages and extended lead times for some materials, so we expect inventory changes to be gradual. Our Q4 net CapEx was $180 million, totaling $615 million for the full year, in line with our target at 2% of revenue. We expect similar investment levels for fiscal 2024. Our free cash flow was $270 million for the quarter and $335 million for the full year. We anticipate stronger cash generation in FY '24 as component shortages begin to ease, estimating free cash flow at $600 million or more. Regarding our financing and capital structure, we made minor debt repayments in Q4, including retiring a $79 million Indian CapEx loan and a EUR 250 million term loan. This totals over $300 million in debt retirement, although you won’t see all of it consolidated because we added $150 million of debt to NEXTracker as part of their IPO. Our cash balance of $3.3 billion is solid and above our typical level, resulting from the volatility in cash cycles due to component shortages and proceeds from the NEXTracker IPO of about $700 million. We do not intend to maintain this higher level of cash indefinitely. We continue to focus on capital allocation priorities, including investing in future growth and returning capital. We repurchased $44 million in stock during the quarter, totaling $337 million for the fiscal year. Looking ahead to our segment outlook for the fiscal first quarter, we anticipate mid-single to low double-digit revenue growth for Reliability Solutions, driven by positive trends across all three business units. However, we expect Agility revenue to decrease by mid-single to low double digits due to weakness in the consumer end market impacting lifestyle and consumer devices while CEC sees modest growth. For our quarterly guidance, we forecast revenue between $7 billion and $7.5 billion, with adjusted operating income ranging from $320 million to $350 million. Interest and other expenses are estimated at around $52 million for the quarter, with an expected tax rate of about 13%. Consequently, we project adjusted EPS between $0.47 and $0.53 per share based on approximately 459 million weighted average shares outstanding, factoring in around $0.03 to $0.04 due to noncontrolling interest from the NEXTracker IPO. Regarding our full-year guidance, while the macro environment is quite dynamic, we expect the favorable trends in Reliability to persist through the year based on current demand indicators. For Agility, we anticipate ongoing challenges beyond Q1, but with potential improvements towards the year's end. We also foresee continued growth for NEXTracker given their strong position in the utility solar market. Overall, we expect full-year revenue between $30.5 billion and $31.5 billion, an adjusted operating margin between 4.9% and 5.1%, and adjusted EPS between $2.35 and $2.55 per share, including approximately $0.17 to $0.19 for noncontrolling interest tied to the NEXTracker separation. In closing, I want to reaffirm our confidence in our strategy to meet our long-term goals. Over the past three years, we've shown our ability to navigate various challenges, enhance our portfolio, and still achieve double-digit annual EPS growth. We will continue to rise to the occasion in this current environment and focus on delivering long-term value to our stakeholders. Now, I'll turn the call back to Chris to start the Q&A.

I was just curious if you are still comfortable with the fiscal '25 guidance that you laid out at your analyst meeting a year ago and how it might change within a slowdown in some of the core Agility segments? And then secondly, I know you just said that you're not planning on carrying the excess cash for a while, but I mean your stock was recently under $20, and you're putting up very strong guidance here. What's the impetus that would get you to sort of buy back significant stock going forward?

Steve, I'll start with the first one and give it to Paul for the second one. I'd like to start by saying that we're not giving a fiscal '25 guidance here. But we're very comfortable with how we have progressed towards those long-term goals that we have set for ourselves. We had said that our expectation was for a high single-digit CAGR over a number of years. We still expect that to be the case even with a slower growth in fiscal '24. '23 was really strong at 17%. And so overall, we still feel good about our kind of fiscal '25 guidance that we have given, though we're not really going into details here. And then you'll see with our current guide and what we performed with fiscal '23, that it still remains on track, even with all this craziness around the macro dynamics and everything that's happening, I think we've managed the situation really well, which makes us comfortable with the long-term goals we have given you. Paul, on cash?

Yes, Steven, I appreciate your question about cash. As I mentioned earlier, cash was definitely on the higher side at the end of Q4. Our top priority is stock repurchase. In Q4, our activity was much lighter than I would have preferred due to the blackout related to the NEXTracker IPO. Once we realized we would be entering the market, we had to halt trading, followed by a quiet period. If it had been up to me, we would have executed more repurchases in Q4. However, I can assure you we will conduct more in Q1 than we did in Q4. Stock repurchase is currently our highest priority in terms of capital allocation.

Could you share any strategies you're implementing to manage the Agility segment during a down year?

Yes, I would say we've done really well in managing the Agility segment. A couple of years ago, around three years back, we focused on establishing the right operational model to help Agility navigate the fluctuations in demand cycles, especially since it tends to be more volatile than our reliability business. This approach has significantly benefited us, as evidenced by the operating margin performance of Agility during this period. We anticipate the trends we've discussed previously, where lifestyle and consumer devices are experiencing some pressure, especially evident in the consumer market. The lifestyle segment might start to show improvements a bit sooner since we've been noticing the effects for several quarters. Regarding the CEC, there remains considerable noise in the cloud area. However, we still expect positive growth in the cloud, having had a strong fiscal '23 with a 30% growth rate. Overall, while we anticipate some fluctuations in demand for Agility during fiscal '24, we are confident in our operational strategies to manage margins for this business throughout the cycle.

First, I just want to confirm my understanding of how the guidance was prepared compared to your previous reports. You're maintaining a flat share count sequentially, which means you're not factoring in any significant use of proceeds from NEXTracker. You mentioned there's a $0.03 to $0.04 impact from noncontrolling interest. So, can we conclude that the EPS guidance would have been at the midpoint of $0.53 to $0.54 if there hadn't been any transactions?

You're absolutely right, Mark. So all else equal, we would be up quite a bit more year-on-year if we look at it purely on an EPS basis. Your comment on share count is also correct. We typically guide flat, but I think everybody knows we're sitting on over $3 billion worth of cash. As I mentioned to Steven, our capital allocation priority is currently weighted towards repurchase.

Got it. Okay. That's helpful just to level set on guidance and relative to the prior accounting methods. And then just my question on the business was last quarter on your earnings call, you said you expected to grow in fiscal '24. You're not formally guiding for revenue growth a little bit year-on-year with the new revenue guidance. You're calling out though increased macro headwinds that it sounds like got a bit more difficult over the last 90 days. So maybe you can just talk about whether or not they have become incrementally more challenging so your views come down overall? Or is there something incremental on a company-specific basis, that's offsetting like share gain?

So Mark, what I'd say is that we've been super consistent on this for the last maybe 3 or 4 quarters, right? We've talked about how we are planning for demand slowdown, what our recession playbook looks like. And we've been really focused on forecasting the right demand on behalf of our customers for a while. So we've been super consistent in terms of our view of how fiscal '24 will play out. And that's why it's not much of a surprise. We're very comfortable saying a few months ago in our last earnings call that we'll see positive growth for fiscal '24; we're guiding in line with that. So despite all the noise in the last 90 days, we haven't changed our view in terms of how we see fiscal '24 play out. I mean we have to talk about macro headwinds and all of that. There's too much noise in the system not to talk about it, right? But what I would say is we've been very consistent, right? And we've been talking about this for 3, 4 quarters in terms of how we see the recession play out, how we're planning for it. And I would say despite all the noise, we've been quite consistent in what we said 90 days ago and what we're seeing now regarding our overall growth rate. So we're not seeing anything change from our views. So I think you're hearing a lot of noise publicly about this, but how we have thought about our 6 segments and how they're going to perform through the cycle really hasn't changed at all for us. We have been super consistent which is what helps us give this kind of guidance and pretty much in line with what we thought it was going to be. Paul, anything you want to add to that?

No, I'd just say the turmoil that we're seeing externally is more regional banking than it is with our end markets. They haven't changed significantly, a couple of little puts and takes. But on balance, I'd say we're pretty consistent. I would say, even over the last 6 to 9 months.

For my first question, it's about your full year fiscal '24 guidance. Paul, what have you considered regarding the year-on-year negative impact on revenue from inflation pass-through and the year-on-year margin benefit from the same inflation pass-through? Additionally, you mentioned free cash flow of $600 million, which is nearly double year-on-year, but noted that inventory will take time to reduce in the near term. Can you share your thoughts on how we should approach free cash flow linearity in '24?

There's quite a bit to discuss on that, Ruplu. If I overlook anything, feel free to redirect me, and I'll address it. First, regarding the guidance and pass-through, Q4 recoveries were actually a bit lower than what we experienced a year ago, during which we were at peak inflation levels. We had significant pass-through then, which, as you and everyone else knows, was quite limited in impact. This past quarter, we saw a slight decrease. Looking ahead, it's challenging to predict right now. We've set a guideline for the full year 2024, but I'm uncertain how it will unfold. We're generally expecting it to be flat. If recoveries decrease percentage-wise, that could be beneficial. Your second question was about free cash flow and inventory. You're correct; we're aiming for cash generation of $600 million or more, which is almost double what we achieved in FY '23. However, improvements in working capital are expected to be gradual. I was pleased with the progress we saw in Q4, with working capital advances increasing and inventory levels decreasing. This bodes well for cash. However, I don't anticipate continuing to see a reduction of $300 million quarter after quarter; the improvement will be slow. Historically, cash flow tends to be more loaded in the latter half of the year, so I think we can expect something similar this year.

Okay. Maybe for my follow-up, I have a question for Revathi. You've been steering the business more towards the longer life cycle areas like automotive, health care, and industrial. So can you give us your thoughts on how you see the capital intensity of the business evolving over the next 2, 3 years? I know you're guiding CapEx to be at the same 600 level as in fiscal '22, which is higher than the past 2, 3 years. So should we expect this level of CapEx going forward? And where do you see the investments more, which end markets and which areas are you investing more to drive future growth?

Thank you, Ruplu. We have been adjusting our business strategy over the past few years. I believe our capital expenditures in recent years will be similar to what you can expect going forward, particularly regarding the balance between reliability and agility. As I've mentioned in previous calls, we've become proficient in utilizing our equipment across various customers and effectively reallocating it based on volume changes. This has been beneficial for managing our capital expenditures across different sectors, impacting both reliability and agility. Overall, capital expenditures for Flex should remain consistent with our previous discussions, but we must be highly efficient with our capital use and manage fluctuating volumes effectively. In terms of reliability, we will see greater investments in production ramps due to the complexity of many programs, especially in sectors like health care and automotive, leading to a higher operational expenses focus on ramps. Additionally, the overall capital allocation will be adjusted due to regionalization trends influenced by current macroeconomic conditions, which we have been implementing over the last couple of years. While this shift will slightly decrease capital expenditures allocated to reliability, it will still support growth in that area of the business. Ultimately, I don’t anticipate significant changes in total capital expenditures, though their distribution may continue to evolve.

My first question just regarding your guidance or framework for FY '24, which calls for a modest growth, 2% or so. Given that your Q1 is basically going to be flat to slightly down year-on-year, it implies a more back-end loaded growth? And do you expect some of that to come from a rebound in CEC? Or is that based on continued growth in the reliability markets?

Sure, Matt. It's a good question. I'm glad you asked. There's not a significant change between Q1 and the full year. I think the midpoint for Q1 is down about 1, while the full year is up 2, indicating a bit of a stronger second half. Looking at the overall business, there are many factors at play, so let me outline a few that illustrate the situation. If we think back to a year ago, we began noticing a slowdown in consumer end markets around June. This was evident in our consumer device business and the lifestyle sector. Investors might not have seen this slowdown in lifestyle because we gained significant market share, but the underlying markets were weak. We haven't yet faced tough comparisons in those consumer markets since the downturn didn't start until June. As we look to Q1, which corresponds to our June quarter, we expect continued pressure in both lifestyle and consumer devices, stemming from the softness we've experienced over the past nine months. This will create challenging comparisons for those businesses. We also expect a slight decline in enterprise IT spending in the first quarter. However, in the second half, particularly in the CEC business, we anticipate strong cloud growth. The overall market conditions will be what they are, but we expect to gain significant market share in the second half, which will benefit the CEC segment. Additionally, all three areas within reliability are showing growth, with some expected increases in the second half. The health solutions segment is performing well and should continue to grow as we move into the latter part of the year. The renewable energy sector within reliability is also progressing nicely, and we are seeing robust demand for our next-gen mobility products in automotive, like EV and ADAS. So, while Q1 and the first half may be softer, particularly in consumer segments, as we overcome those comparisons, the situation should improve, and we have promising growth opportunities in the latter half of the year, especially within reliability.

Okay. That was helpful. And then just regarding the expectations for margin improvement within reliability as you progress through fiscal '24. What are the key drivers of that?

It will be similar to the inventory situation, with a gradual improvement in reliability. We are currently making several investments in that business, as Revathi mentioned over the last couple of quarters. This has created some pressure on margins. Another challenge with reliability at this time is that we are still facing shortages of larger node semiconductors, leading to some idle resources. This has been a significant challenge for us over the past year. We don't want to take high-quality resources offline as we need to be prepared when supplies arrive. Additionally, we have several ramps in that business that we must ensure are well ready and funded for, but we anticipate a gradual improvement as the year progresses. We expect to see better chips, an increase in ramp rates, and improved absorption.

I'm curious now that we're getting closer to the IRA funds starting to flow and hopefully some clarity on who's going to benefit where. Can you give us any color on how you're thinking about it within your renewables segment? And then I have a follow-up.

I'll tell you, Shannon, there is going to be a very well-executed conference call in about 20 minutes from the NEXTracker team, and they can probably better cover IRA than I can. I'm half-joking. They probably won't say a whole lot either because it's still taking shape. I think we've been talking about clarity on that for quite some time. You have a government agency that has been tasked with adjudicating the details of all of that big complicated bill. We thought it was going to be clarified in December. Then we thought it was going to be clarified in January and then February, and here we are, we're still a little bit ambiguous. What I will say is we do know it is a tailwind for the industry. It helps with volume, and it probably helps with margin. We just haven't really been able to figure out exactly how it's going to manifest itself in the P&L, other than to say it's going to be a good guy. It will be a good guy for Core Flex, and it will be a good guy for NEXTracker.

And Shannon, where we're clearly seeing outside of NEXTracker, where we've seen already both volume and equipment ramps going in, in North America for residential solar customers. We're seeing some push in the EV business as a result of it, also charging stations. So we are clearly putting in investment for program ramps with our customers on revenue growth driven by the IRA. So I'd say that the volume benefit, we are starting to see that already in those areas outside of NEXTracker. I'd say in terms of margin benefit, I think that's where the noise still exists in terms of who exactly is going to see which part of it.

Okay. And then, not to beat a dead horse here, but just on the cash return side of things. As I look at you've got $3.3 billion of cash. You've got $600 million of cash flow generation this year. I assume you're probably going to do a secondary once you get through the 6-month period that's about $500 million given where NEXTracker is trading. So that gets me to close to $4.5 billion worth of cash. I understand that you're saying that you want to buy back more stock, but why not what's precluding you from saying we're going to do a $2 billion share repurchase. So we're going to be in the market. We're looking at 250, 300 a quarter. Just to give investors and those of us trying to forecast some idea of the magnitude that you're thinking.

Yes, that's a good question, Shannon, and I appreciate it. I want to be clear about our priorities. Right now, our main focus is on share repurchases. Similar to the NEXTracker transaction we announced over two years ago, it sometimes takes time to fully implement our plans throughout the organization. There are factors that aren't always visible to the market. However, share repurchases are definitely a current priority for us. We plan to do more in the first quarter than we did in the fourth quarter, and there will be another reauthorization after our Annual Shareholder Meeting in August. We understand your concerns.

I just want to add that investors have clearly recognized our success with our capital allocation strategy. Our timing in executing this strategy has been effective. While I won't provide specific numbers or timelines, I believe we are offering clarity on our cash usage. It doesn't make sense to discuss exact figures at this moment, but we are committed to this approach and have executed it well in the past. I trust that investors will see we will continue to maintain this strategy over the next year.

Just like we did with the NEXTracker IPO, which is why I mentioned that I think we thread the needle on that.

Great. Just to clarify, nothing's changed on your thoughts about NEXTracker should be a stand-alone business at some point here, though.

So just on the year, you finished at a record here at 4.8%. You mentioned a guide point of possibly exceeding 5% for the first time. You're seeing some nice upside from product mix shift, anything else you want to kind of point out that maybe driving some structural uptick here? Any automation methods you're implementing? And where do you kind of see the longer-term margin targets with the portfolio today?

So Paul, I'll start and then maybe Paul Lundstrom can jump in. I'd say we've been consistent over the last few years when we have talked about how margin will improve for these businesses, right? And we have talked about 2 things. One is continuing to change the mix in the kinds of businesses that we'll pursue within our 6 segments, which is a very important part of what we look to do. Because we have said that our available markets are really large within these businesses, and it's up to the business leaders there to move the mix. So we measure that consistently. We look for bookings movement in terms of margins. So mix is a big part of it. On terms of operations side, absolutely, yes. We have been very good at the kinds of investment we make in automation. So it's not just automation for the sake of automation, right? We are very, very prudent in terms of where we invest in automation, and we have a very good futuristic plan of how our factories will look like. You've seen that from the kinds of awards we have won for manufacturing excellence. So operational efficiency is definitely driving some of the margin improvement that you've seen in the last year. I would say our manufacturing plants are operating the best they've ever operated at, and we expect that, that will continue to improve every year because automation is improving every year. So it is from both sides that we're seeing margin improvement, Paul, and I'm not willing to give any new targets that we haven't already shared with you that are consistent for FY '25.

Great. My follow-up question is, as you transition to higher-margin products in healthcare, automotive, and industrial sectors, are you noticing a greater demand for more complex and lower volume products that offer higher margins? Do you anticipate gaining more market share from smaller EMS competitors in the U.S. due to your specialization in these higher hurdle rates? Are you becoming more competitive in this area? Are there any notable displacements you would like to mention?

Yes, Paul, while I don't believe we're taking share from smaller EMS companies just yet, we do notice that each sector has its unique characteristics. For instance, in the industrial sector, we handle a lot of complex, lower volume products that generally yield higher margins. In automotive, we're seeing an increase in complex products, particularly with our own EV platform products and those we manufacture for clients. These are typically higher volume and success depends on getting automation right, optimizing the footprint, and stabilizing the program as it gains traction to ensure good margins throughout the cycle. The healthcare sector shares similarities with automotive in that regard. Our cloud businesses have focused on scaling efficiently and sustaining that scale through high levels of automation. Margins are influenced by the specific business's volume and mix; industrial usually leans toward lower volume, complex products. Automotive and cloud sectors are also growing in complexity but maintain higher volumes. Each sector has its distinct factors, and there is no universal approach. Thank you. So on behalf of the Flex leadership team, I just wanted to give a thank you to all our customers and our shareholders for your support. And then I want to thank the Flex team across the globe for continuing to work and their dedication and contributions to the business. So thank you all. Thanks for joining us today.

Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.