Good morning. Welcome to Innovation Day. I'm Michelle Simmons, Senior Vice President of Investor Relations. Thank you for joining us in Austin and on the webcast. Before we get started, a few housekeeping items. First, if you can silence your phones, that would be great. This is all webcast. Today's discussion may include forward-looking statements and references to non-GAAP financial measures.
Please refer to the materials provided today for the relevant disclosures and reconciliations. Today's discussion also does not constitute an offer to sell or the solicitation of an offer to buy any securities. We've got a full agenda today. The first half of the day will focus on Flex, and we'll have management presentations, a product showcase, and it'll be followed by Q&A.
The product showcase will not be webcast, so there will be about an hour in between, and there will be a countdown timer online to let you know when we're going to return. To ensure we remain on track, we ask that you hold your questions for the Q&A until the Q&A portion of the program. After the Flex Q&A wraps up, we'll break for lunch and then return for the Axiom portion of the day. We have team members all around should you have any questions about logistics. With that, I'm delighted to get us started. Please welcome Revathi Advaithi.
Good morning, everyone. Thanks for coming. I hope you all had a great time at Franklin's. Whoever is on the webcast, all I'll tell you is that you missed some great Texas barbecue. And some amazing cowboy hats. Thank you for the dinner, and I know there was a lot of conversations yesterday, but let me kick off today with just telling you where you're at.
You are in our Austin facility, which is one of our very largest U.S. facilities, and it's a working facility. But today, for you, we've had them shut down the areas around this because otherwise it's typically quite noisy. Please don't go wandering off into the equipment and stuff like that, even though they're shut down and there are people preventing you from doing this.
This is a factory where we do so many different products, and we thought it would be a good thing to showcase our capabilities for Flex and Axiom here. What I'm going to do is really go through just a quick setup before I hand it over to Michael Hartung. The important thing, I think, for all of us to know and what you want to talk about is elections. Let me start off with that, is you have to think about this in the context of AI, and do we believe that AI continues to be an accelerator, whether it is for the U.S. economy or the global economy? I think our belief is that that's fundamentally right.
If you start from that premise, that compute is going to continue to expand, and you are going to need more compute capability than what you have today, our belief is data centers will continue to get built. Now, is the narrative a little different in terms of do permits take a little longer and things like that? Maybe that is true, and we are perfectly fine with that.
If you think about Flex and our history and heritage of how we have forecasted and managed through some significant ups and downs, whether it is the pandemic, whether it is the supply chain shortage, or think about crisis after crisis, one thing you will all agree is we know how to forecast, and we know how to work through these ups and downs. In general, we are quite conservative in terms of how we think about forward-looking forecasts.
I would say whether you hear from Michael or me later in the day about Axiom, we have taken these things into account as we are thinking about what is the impact of AI and is there any change in pace to how data centers get built out. A little bit about going into Flex and the history. I know most of you know this, but I will tell you, when I started as CEO in 2019, it is going to be eight years now in February, seems like a long time ago. We came into a contract manufacturing industry that was ripe for change. Like I told some of you last night, the whole thesis was reshoring was becoming a thing.
There was already talk about geopolitics and what was going to happen, and it was clear that the EMS landscape needed to change, and Flex being one of the largest EMS providers, we wanted to be at the forefront of it. What we transformed Flex from was really being a very fiscally disciplined company that focused on value creation and where we were going to put our investment.
We did a lot around portfolio and mix, what good old-fashioned industrial companies do. Go where you can win, focus on the right customers, provide difficult-to-do things, and customers will pay you for it. We made many difficult decisions as we transformed the portfolio over the last few years.
The results speak for itself, as all of you know, fantastic earnings appreciation, a year ahead of schedule, 3X our EPS, and then have consistently beat the S&P by a pretty significant amount. In the middle of all this, we did a few other things, but right now we are entering our next chapter. Our thesis around Flex and Axiom was this when we announced it in May, was that Flex and Axiom are two fundamentally different companies.
W e built a product company within Flex. We needed to make sure that we took that outside to drive the right capital allocation strategy, the right management attention, the right R&D attention, and we needed to focus Flex on making the right investments for the next value creation opportunity in Flex. That is the story behind Flex and Axiom.
That story still fundamentally holds true today as we are entering our next chapter into Flex. So, two purpose-driven companies. Flex is going to be one of the world's largest contract manufacturing companies. Nothing has changed with that. You will hear from Michael and team, diversified portfolio, many cool end markets to invest in, and we are really excited about this next journey in Flex because there are so many things that I wanted to do in Flex that I couldn't because we were so focused and most of the capital going towards building this power business that we did.
Axiom, which you will hear about later in this afternoon, is really we started building a power and a product company within Flex over the last only three years. Think about this. We are a very young company, and it is important when you hear Chris talk today, you will hear from a technology perspective, we have built a very uniquely differentiated portfolio for Axiom that is very technology-focused and innovation-focused.
We are ready to really focus Axiom on being the next big industrial company. The one thing I want to make sure that you all take away, let me see if I can get to this slide, is that both, whether it is Flex or whether it is Axiom, our real focus is on long-term value creation. Michael is going to talk a lot about this today, why we think that there is many cool investments to make in Flex, there is high growth opportunities within Flex, two very different growth strategies like I talked about.
The most important thing that I am super proud of is that we are able to stand up two very talented management teams with two very unique experience sets to run the two companies. Hopefully you will get a feel for that as you meet the rest of the team later today. I would say what I want you to walk away today at the end of the day, and hopefully you will get this in by the time you finish the Axiom presentation, is that you are going to get a significant EMS contract manufacturing company that has potential for value creation, just like we have done over the last eight years.
Then with Axiom, you are going to get an AI-native industrial company that has significant growth opportunities and the ability to disrupt and innovate in terms of the power space. You walk away with the excitement that we feel, and the product showcase will show you our focus on innovation and kind of the next steps here with the two companies. I think with that, I am handing it over to Michael, maybe. Let me see. It is supposed to come up eventually. I do not know how this works.
Good morning, everyone. It's good to see some familiar faces from last night. Hope you enjoyed the brisket as much as I did. Maybe a little disappointed, I don't see a cowboy hat or two out there, but maybe next time in the follow-up calls, we'll get there. Thank you, Revathi, for the introduction. Certainly appreciate the opportunity to lead Flex and appreciate Revathi's mentorship over the past few years. We do have a lot to cover this morning, a lot of information to share.
What you just heard was from Revathi, and she walked you through the rationale behind the spin. For the balance of the morning, we'll describe for you in greater detail how we're taking Flex from a leading EMS company into a value creation company. Now, through the course of the day, you're going to get a lot of new information, but just to walk you through the agenda that you have in front of you from a Flex perspective, after myself, I'll walk you through where Flex is going and how we intend to get there. You'll be followed by two of our- Delivered at global scale, operating in every major region.
Now, those services, they start with design. We typically, we don't execute design for design's sake. We execute design because they're aligned with our target markets for growth, and they enable us to help our customers get their products to market faster and more reliably than they could otherwise do on their own. Now, design is also tightly linked to the manufacturing platform I mentioned earlier. It's been built over 55 years.
It's rooted in automation, and it's scaled now through a connected management system. Now, that combination is already differentiated, but we've even differentiated further with our choice to vertically integrate what we manufacture. Sheet metal fabrication, injection molded plastics, our own Coreworks branded electrical components, and mechanical components. We also have an operating at scale and aftermarket business. We have a fulfillment business that delivers products, operations capability to generate cash and attractive returns.
Now, importantly, both businesses are entering the spin with strong momentum. RMS and ITS have both delivered four consecutive quarters of growth, and over that time, margins have expanded faster than revenue. In fact, from FY 2024 through FY 2026, RMS expanded segment operating margin by 90 basis points, ITS by 150 basis points. Together, those two segments increased segment income by 17%. That's what we mean by starting from a position of strength.
This combination of advanced manufacturing capabilities, a complete suite of services across the product life cycle, serving diversified end markets at global scale, give Flex a distinctive position in the marketplace. On the one hand, we're more diversified to competitors that are heavily concentrated in AI infrastructure. Our six high-value markets give us multiple opportunities for growth and margin expansion.
Then compared on the other side to some smaller specialists, we operate at a completely different level of scale. We can help customers launch complex products, ramp production, regionalize supply chains across multiple markets, all with one partner. How do we create value? It comes down to really three disciplines in our playbook, and the first one is financial rigor. We prioritize high-quality earnings that maximize cash. That means better margins. That means tightly managing cost and working capital.
That means ruthlessly allocating capital to the highest returns. Second, productivity improvement. Every improvement we make gets amplified through a global network of 77 factories. We've made seven years of progress, but we see that as our baseline. We don't see that as our ceiling. Automation, data, physical AI, all these things will accelerate savings from here. You'll actually see that firsthand in our showcase. We'll highlight our manufacturing system, hosted by our expected Chief Operations Officer, Rodrigo DallOglio.
Third, portfolio optimization. We're intentionally shifting our mix towards high-value markets by concentrating capital where growth, differentiation, and returns are the strongest. We're also improving businesses where that improvement creates more value. What matters is how all these things work together. Financial rigor improves quality of earnings and cash. Productivity expands margins and earnings power. Portfolio optimization, it shifts our mix towards faster-growing, higher-margin businesses.
Each one of these things reinforces the other. When you combine that with our management system, that's what makes value creation repeatable. Doing it consistently is what builds long-term shareholder value. The clearest expression of our strategy is actually the choices we make on where we put our capital, and our priorities are straightforward.
First, we'll maintain investment-grade balance sheet and reduce leverage. Second, we'll fund organic growth and productivity initiatives where we see attractive returns. Third, we'll pursue selective acquisitions if they strengthen our positions in high-value markets. If we have capital beyond those needs, we'll return it to shareholders, primarily through share repurchases. Just as important, though, we won't spread capital evenly across the portfolio. That's what portfolio optimization means for us.
We'll invest it where there's strong secular growth, where our capabilities are uniquely positioned to give us a clear right to win, and where we can earn attractive returns on that investment. Our high-value markets will be the leading destination for our capital. To be clear, this isn't growth at any cost or growth for any reason. It's about profitable growth in the right places, backed by differentiated capabilities and strong returns on capital.
That's how we improve the mix of the company and the quality of our earnings. Another important point is that our growth doesn't depend on any one market or any one technology cycle. Within our broad portfolio, we're prioritizing investments in six high-value markets: medical devices, drug delivery in our healthcare business, energy infrastructure and robotics in our industrial business, advanced networking and satellite communications in our communications business. Why these six?
These six were highlighted specifically because they're tied to long-term secular trends that enable us to grow that business at double digits. They also happen to be markets that require complex solutions, and those solutions enable us to earn margins above the company average. Importantly, we're not starting from zero. We already have capabilities in these markets, and we already have established customer positions in each of them.
In fact, today, those markets are 24% of company revenue. We expect that level to approach 30% in FY 2027 and to be in the range of 35% to 40% by the end of FY 2029. These six markets, they give us multiple paths to double-digit growth at margins above the company average. As they become a bigger part of our portfolio, they make the entire company stronger and more resilient. Help me connect that strategy to more economics.
If high-value markets are going to grow materially faster than the overall company, they're going to become a bigger share of Flex. More of our revenue, more of our earnings are going to come from businesses with stronger growth, greater differentiation, and better economics. Mix is the biggest driver of our margin expansion.
Productivity and operating leverage will add to it, and together, they get us to an adjusted operating margin of 7% or greater by FY 2029. Our margin is driven first by growing the high-value parts of our portfolio faster, then compounding that growth through productivity and operating leverage. Playbook is only as good as the team that runs it and the results that it produces. Our playbook has produced results.
Over the past seven years, those disciplines in our playbook, they've expanded margins, they've delivered double-digit earnings, they've delivered strong free cash flow, and they've meaningfully reduced our share count. As I mentioned earlier, the playbook is only as good as the team that runs it, and we built this team deliberately. At its core are experienced Flex leaders that know our customers, they know our business, they know our management system.
That continuity really matters in a company at the size and complexity of Flex. We've added to that strong base two important leaders that complement that experience. Amy Schwetz, our expected Chief Financial Officer, brings the financial leadership and capital discipline to strengthen both financial rigor and to translate that strategy into clear financial results. Ivan Brockman, our expected Chief Business Transformation Officer, he'll provide us with dedicated leadership across strategy, corporate development, portfolio optimization.
He'll keep us on track to make sure we're investing behind the best opportunities and continuously improving the value of Flex. This is the team that will take Flex from EMS leadership to a value creation company. Let me put some numbers to the strategy. For FY 2027, our expectations remain unchanged. We continue to expect RMS revenue will grow mid to high single digits, and ITS revenue will grow low double digits to low teens.
Together, that gives us total growth in the high single digits to low double digits range, with adjusted operating margin of between 5.9% and 6.1%. On a pro forma post-spin basis, we expect adjusted operating margin of between 5.7% and 5.9%. As usual, we'll provide FY 2028 guidance at the start of FY 2028, but directionally, we expect continued revenue growth, continued margin expansion, double-digit EPS growth, free cash flow conversion of 80% or greater, and capital expenditures at approximately 2%.
Looking beyond FY 2028 into FY 2029, we're targeting mid-single-digit revenue growth with adjusted operating margins of 7% or greater on a pro forma post-spin basis. We'll hold ourselves accountable. Each quarter, we'll report adjusted operating margin, earnings growth, free cash flow conversion, and capital deployment, along with our progress on the high-value markets growth and mix. Let me come back to where we started, the three things that define where we're taking Flex.
First, we're starting from a position of strength. Second, we have a proven playbook that demonstrates we know how to create value. Third, we're leveraging our leadership position in EMS to build a value creation company. Now, if you remember just two sets of numbers from today, make them these: high-value markets growing from 24% today to between 35%-40% in FY 2029, and adjusted company operating margin of 7% or greater by FY 2029. Those two numbers are connected. As our high-value markets outgrow the rest of Flex, the mix of the company improves.
Productivity and operating leverage add to that benefit, driving higher margins, improving earnings, improving free cash flow generation. We will continue to invest behind the opportunities with discipline that improve our performance each and every day.
Again, this is not growth for growth's sake. It is profitable growth that we can repeat over and over again. That is how we compound long-term shareholder value. That is where we are taking Flex. Now, I will hand it over to Mike Thoeny, our expected president of RMS, and he will show where that mix is actually happening in RMS and why we are confident we can deliver it. Thank you very much.
Okay, good morning. Great to have you with us here today. As a quick intro, my name is Mike Thoeny. I am the expected president of Regulated Manufacturing Solutions at Flex, spanning our healthcare, industrial, and automotive businesses. I have been at Flex for over six years now. I have spent my career leading the design, launch, and global scaling of new technology products to market. Michael just showed you how Flex will create long-term shareholder value through our repeatable playbook and disciplined capital deployment toward high-value markets.
I will be discussing the role that RMS plays in this transformation. RMS serves highly regulated and precision-driven industries where quality, compliance, reliability, and execution are not just features, they are the price of admission. Customers pay for performance, the ability to deliver complex products predictably and repeatably at scale.
Within RMS, we focus on high-value markets where high barriers to entry, increasing complexity, and differentiated capabilities create attractive, defensible positions. These include medical devices and drug delivery within healthcare, and robotics and energy infrastructure within industrial. They are driving the mid to high single-digit top-line RMS growth that Michael mentioned in his opening.
Automotive remains a stable end market, and its compute platforms and power electronics are a source of differentiated capabilities we leverage into adjacent high-value markets like robotics. These markets share one trait that is important to underscore. They are hard to enter, and they are hard to leave. RMS combines regulatory expertise, manufacturing excellence, and customer intimacy with a strategic focus on high-value markets that drive durable growth and margin expansion. Let us start with some details on healthcare.
Post-spin, this is a leading destination for capital as one of Flex's most attractive long-term growth markets, supported by strong secular tailwinds. Here is why we win. Regulatory barriers give us durability, and design participation gives us better economics. In fact, Flex design contributions earn, on average, an additional 250 basis points of margin over base EMS programs. That durability rests on real barriers.
Our customers are understandably risk-averse, and they trust Flex to be a safe and dependable scaling partner. Regulatory complexity, stringent quality requirements, and specialized manufacturing are a moat that takes years and real investment to cross, and Flex is well-entrenched at global scale with 12 FDA-registered sites and more than 20 ISO 13485-certified sites. Even a competitor with a qualified site would need years and millions of dollars to take over a program.
That is why once we are qualified in, we typically stay for a decade or more across generations of the product. Our position is reflected in our customer relationships. We have active engagements with eight of the top 10 medical device companies and seven of the top 10 diagnostics, life sciences, and imaging companies. The demand behind these markets is structural. Aging populations, rising chronic disease, and evolving models of care moving out of the hospital and into the home drive durable demand for innovative medical technologies and drug delivery solutions.
These needs do not turn with the economic cycle. Drug delivery is particularly fast-growing, with GLP-1 therapies alone growing more than 25% annually in recent years. The more that we contribute across this chain, design, industrialization, services, the more of the program we control and the more margin we earn. You can see it in the numbers.
We are one of the largest manufacturers of continuous glucose monitors in the world. In drug delivery, we are ramping several major programs with leading pharmaceutical companies. This is portfolio optimization in practice. We win on capability, we grow the content, and we stay with the program through generations. Healthcare provides high-quality earnings for RMS programs that are the hardest to enter and the hardest to leave, where our capabilities let us capture more value over product life.
We pursue both organic growth opportunities and targeted M&A where it accelerates our business. Let me bring this to life with an example from Merck. Merck needed a multi-dose auto-injector for chronic disease therapies that could support multiple molecules in their portfolio, with a connected, safe, patient-friendly platform designed for adaptability and reuse across therapies and patient needs.
Flex served as the end-to-end design and manufacturing partner, from design through industrialization, regulatory submission support, and product launch. One partner for the complete journey. The result was a versatile, connected drug delivery platform designed to improve the patient experience and enhance treatment adherence, and it positioned Merck as a leader in its therapeutic areas.
Building on a platform we had already qualified, this third-generation device launched in 2023, production ramped within one quarter, and the collaboration was recognized with the 2025 PDA Drug Delivery Innovation Award. This is a great example of our right to win in healthcare, a differentiated design position in a complex connected injector, leading to a long life cycle program with deeper connections with a strategic customer. Merck values this partnership, and we grow with them for the long term.
Next, let's talk about industrial, which is a double-digit top-line growth engine for FY 2026 for RMS. We are focused here on two markets at the center of related but distinct investment cycles: energy infrastructure and robotics. Each of these markets are on track to double their revenue in FY 2027. Beyond these growth markets, industrial spans broad markets, from semiconductor equipment to metering, making this our most diversified business unit.
Our focus on continued portfolio optimization has already led to results, a 230 basis point improvement in operating profit from FY 2025 to FY 2026. Energy infrastructure is seeing significant investment in power generation and grid modernization, fueled by electrification and accelerated by the rapid build-out of AI data centers. As power demand outpaces grid capacity, customers are turning to new generation capacity and behind-the-meter solutions.
Our right to win in energy infrastructure builds on our heritage in manufacturing critical power infrastructure, developed through the portfolio that is now Axiom. Following separation, Axiom will own the system IP, while Flex will continue to leverage the manufacturing expertise to industrialize, test, and scale these systems. Unlike our competitors, Flex serves as one partner across power electronics, modular fabrication, systems integration, and aftermarket services, delivering complex power systems at global scale.
These capabilities span data center, grid, and residential applications with strong relationships at customers like Bloom Energy, Base Power, and SolarEdge. Flex will also continue as EPC Power's manufacturing partner after the spin-off when it becomes part of Axiom. Post-spin, we become a neutral manufacturing partner to data center and energy OEMs, a substantial market we can now serve. Robotics is being shaped by a different set of forces.
Labor constraints, productivity demands, and advances in physical AI are accelerating adoption across factory and warehouse automation. In these markets, strong demand is creating an execution challenge. Customers are sitting on backlogs, racing to scale, and looking for partners who can take complex systems to volume faster and with less risk. Unlike many competitors, we don't just supply the market, we see it from every angle.
We are a customer. We run automation in our own plants. We are a supplier. We build robotic platforms for the OEMs scaling in this market, and we're an innovator. We're applying physical AI across our own factories at real scale. One example is our own proprietary modular automation platform. Over the last year and a half, we've deployed hundreds of these platforms across our operations, improving our productivity by greater than 30% on these processes.
Our capabilities behind physical AI are ones we already own. This is where our automotive investment pays off. The ruggedized compute, power electronics, and motion actuators we designed and built for automotive transfer directly to robotics, unlocking more content, reusable platforms across customers. That's exactly the kind of proven, redeployable capability robot makers need as they move from early production to reliable and repeatable scale.
Robotics and energy infrastructure put Flex at the center of investment cycles, complex, high-barrier markets where our scale and execution turn demand from automation, electrification, and AI infrastructure into profitable growth. Let me make this concrete with one partner, Teradyne. For two decades, we've built Teradyne semiconductor test systems, among the most complex products we make in the company. When AI demand surged, Flex and Teradyne partnered to quadruple output in six months and delivered 100% on time through this ramp.
And that track record opened up the next chapter. Today, we play a dual role with Teradyne Robotics. We manufacture critical components of their cobots and mobile robots in our own factories, which let us validate physical AI applications in real production and replicate what works across our sites. Why does this matter? In robotics, a strong design is only the beginning. The hard part is industrializing it and reaching reliable global scale.
Robot makers own their designs, but they need partners who can get them to scale. That is what we bring, and Teradyne is the proof. In their own words, "Flex is an ideal partner for advancing intelligent automation." That same combination of complexity, speed, resilience, and trust is what we bring to warehouse automation and the next generation of intelligent machines. To wrap up RMS, you have seen our proven playbook in action.
RMS brings durable, high-quality earnings protected by a moat that takes competitors years to cross. As medical devices, drug delivery, energy infrastructure, and robotics grow faster than the segment, they drive richer mix, higher margins, and stronger returns. I will hand it over to Dennis to discuss the strong growth we are seeing in ITS, where advanced networking is benefiting from many of the same secular trends driving our RMS energy infrastructure business. Thank you.
Good morning. I am Dennis Kirkpatrick, the expected President of Flex Integrated Technology Solutions. I have been at Flex for 21 years, and in that time, I have actually worked in four of the six business units within Flex, most recently as President of Lifestyle and Industrial. I also spent about 13 years in what was called Communications, Enterprise and Cloud, which is now Communications, and CPI, which is moving to Axiom.
Integrated Technology Solutions, or ITS, serves markets that move data and enables an AI from the network core to the connected edge. Our communications business provides the physical infrastructure that moves data throughout the network, and our lifestyle business includes premium connected endpoints that deliver data to users. Michael described ITS as a scaled platform that uses engineering, procurement, and advanced manufacturing to generate cash and attractive returns.
Our mandate is straightforward: strengthen the economics of the core, concentrate investment in advanced networking and satellite communications, and improve, reprice, or exit programs that do not meet our return criteria. Communications is well-positioned in several higher-value markets, benefiting from powerful secular trends such as AI-growing data intensity, and increasing connectivity. Advanced networking and satellite communications is where we will concentrate our investment. This is not the only place where ITS grows.
We will pursue growth across the entire portfolio where it meets our returns, and the rest of ITS will generate the cash that funds our priorities. Within lifestyle, we are taking a disciplined approach. We are managing that portfolio for quality and not revenue. It remains an important source of ITS's scale and cash, with opportunities in edge connectivity, like retail kiosks and AI-enabled wellness trackers. This portfolio discipline is already producing results.
From FY 2024 through FY 2026, ITS expanded segment adjusted operating margins by approximately 150 basis points through program discipline and improved mix. As our higher value markets continue to accelerate, we expect to further improve our returns. Our differentiation is scale at speed. Our customers rely on us for early stage engineering, for production-ready supply chain, industrialization from NPI to launch, lifecycle services, and on a global footprint that is already at scale. The takeaway is simple.
ITS combines a hard-to-replicate platform with disciplined portfolio management and targeted investment in high-value markets to deliver profitable growth, stronger cash flow, and attractive returns. Advanced networking is the largest high-value market within Flex and the largest growth opportunity within ITS. We expect a second consecutive year of double-digit growth in FY 2027, as AI data center investment accelerates demand for high-speed switching and optical connectivity. Technology in this space is just rapidly advancing.
Networks are moving from 800 gigabits to 1.6 terabit and beyond. Optics are moving closer to the silicon, and increasing power densities are creating new thermal and integration challenges. As these architectures become denser, customers increasingly need a partner who can manage large ASICs, optical integration, thermal loads, advanced tests, and regional deployment as one single system. Each technology builds on the one before. We carry forward process know-how, test software, and automation investment.
We solve incremental problems quickly where new entrants start from scratch. For end-to-end networking system, the days of awarding programs simply on the lowest price RFQ are over. Advanced networking requires automation and infrastructure investment now as part of the entry ticket. This is similar to the moat that Mike described in healthcare. Replicating this by a competitor would take years and tens of millions of dollars.
That installed base and that of capability matters. Today, we have hundreds of engineers already working and engaged in process development for the systems and silicon for the next generation. This barrier to entry is why Flex is the consistent choice for five of the top market leaders in advanced networking.
Each of these partnerships is built on trust and proven execution that spans over 20 years. I want to spend some time talking about Cisco because I feel it is a great example of this strategy in action. We have been partners for more than 20 years with Cisco, and our role has evolved well beyond EMS in three ways. First, speed at scale. On a recent platform for hyperscale deployment in Guadalajara, Mexico, we went from NPI to mass production in half the normal time. We then scaled to more than 20,000 units per quarter.
You will see later in the showcase that these products are really complex. They have three different enclosures, more than 12 complex integrated circuit boards, and we will see that a little bit later. Second is resilience. At the same time, we established an additional location in Chennai, India, and have grown the output there by more than 30 times while maintaining strong quality and delivery. Third is our depth of engagement.
We engage early in the product lifecycle around the technologies and manufacturing capabilities needed for each new generation. Our role in this program extends further into vertically integrated components like sheet metal and post-production repair and refurbishment. We are applying this proven playbook with Cisco to the next wave of AI infrastructure. Speed at scale, regional resilience, and earlier engagement on next-generation technologies. Satellite communication is ITS's second targeted growth market, expecting double-digit growth in FY 2027.
Our active customers cover 95% of the industry, and this market is rapidly growing. In fact, over the past five years, the number of low Earth orbit, or LEO, satellites has tripled. Today, rapid low Earth orbit constellation deployment, rising demand for highly reliable data and bandwidth availability, along with shorter replacement cycles, are shifting this market from fragmented builds to industrialized production at scale.
We identified this opportunity early, about six years ago, and we invested ahead of the growth curve, building capabilities and customer positions to win as demand accelerates. Flex has eight sites certified to AS9100 around the world, including one we added just this month in Romania. We combine ruggedization, integration, RF testing, regulated quality systems, regional supply chain capabilities to deploy mission-critical connectivity at a constellation scale.
This is illustrated by a recent win, where we were the only partner who could provide end-to-end process capability while others had to outsource, adding incremental time and cost for our customer. This is a market where reliability and speed favor partners that can move phased array architecture from early production to global volume. As new players enter, our pipeline continues to grow as we build on our position with the industry leaders.
In the product showcase, you will see how Flex participates across the network, from equipment in space to the ground infrastructure that connects it, to the terminals at the user's edge, giving us multiple ways to grow as this network expands. Satellite communications extends our industrialization platform beyond the terrestrial position. This further shifts ITS's mix towards technology-rich, higher-value business, supporting profitable growth and attractive returns that Michael described.
Flex's early entry into this market established customer relationships and specialized manufacturing capabilities, positioning Flex as a trusted partner from the space to earth to user ecosystem. Let me leave you with this, the role that ITS plays in Flex's value creation playbook. We are a scaled platform that generates cash and attractive returns.
We are concentrating our investment in advanced networking and satellite communications while taking a disciplined approach to the rest of the portfolio. We have already expanded margins, ITS adjusted operating margins by approximately 150 basis points since FY 2024. As our high-value markets continue to expand, we see the opportunity to improve our mix and our returns further.
Alongside the opportunities that Mike outlined in RMS, that focus will result in stronger earnings quality, durable value creation for Flex. Thank you. Okay, with that, we are going to transition to the product showcase, where you will see real-life examples of Flex manufact-
For our virtual attendees, please log back in one hour from now for our financial and Q&A session. Attention, everyone. As you make your way to the product showcase room, you can leave your belongings behind in general session. Enjoy product showcase, everybody.
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Good morning, everyone. I'm Amy Schwetz, and I'm excited to be here today as Flex's Chief Financial Officer. I hope you enjoyed this morning's showcase and that it demonstrated Flex's differentiated capability and the unique relationships and deep relationships that we have with our customers. Michael started out today's presentation by describing the Flex playbook: financial rigor, productivity improvement, and portfolio optimization.
Now it's my job to explain to you how we translate that into earnings, cash generation, and returns. The takeaway is really a simple one. We have a clear strategy, a disciplined operating model, and a financial framework that's designed to compound earnings over time. Mike and Dennis described our priorities: shifting our portfolio to high-value markets and expanding margins.
You'll see throughout my section how these priorities actually build on each other, creating a durable path to long-term value creation, higher earnings, and cash flow. I'd like to start with the economic model behind our strategy. Our financial framework starts with three objectives, each supporting by clear operating levers and measurable results. We're shifting the portfolio to six high-value markets. We'll focus our internal investments on these markets, and we'll participate in selective M&A where we see the opportunity to either strengthen our position and/or our capabilities.
At the same time, we'll actively manage the lower-value components of our portfolio for margin, cash generation, and returns. We are already seeing evidence that this strategy is working. We've seen four consecutive quarters of year-over-year growth in both ITS and RMS revenue. In FY 2026, 24% of our revenue came from these high-value markets. Second, we're expanding margins.
Margin improvement comes from these high-value markets, and it also comes from ongoing productivity initiatives within the business. RMS and ITS expanded adjusted operating margins by 150 basis points, or by 90 and 150 basis points respectively from fiscal year 2024 to 2026. That improvement is coming through mix, it is coming through productivity, and it is coming through services growth. That expansion has continued in the first half of FY 2027, and we plan to further build on these efforts as a standalone company.
Third, we are compounding earnings and cash flow. With strong cash conversion, disciplined capital allocation, deleveraging through exchanges of the Axiom retained stake, and share repurchases, we are creating multiple avenues for earnings per share growth. This is an intentionally simple model. We improve the mix, we improve profitability, and we allocate capital effectively.
Let us look more closely at the portfolio evolution that is going to drive this growth. Looking ahead, our high-value markets become an increasingly important part of our portfolio and our growth profile. Overall, we expect Flex organic revenue growth to remain in the mid-single-digit range, even while we shift the mix of the portfolio.
Within that framework, our high-value markets are growing at double-digit rates. With that framework, these markets are benefiting from durable secular drivers, attractive customer relationships, and opportunities to gain share from our position of strength. As a result, we expect our high-value markets to grow from 24% of revenue in FY 2026 to nearly 30% in the current fiscal year, to 35%-40% in FY 2029.
The combination of our high-value markets and the base-level business should translate to mid to high single digits for RMS growth and low to mid single digits for ITS growth. These growth rates compound on an already exceptional growth that we have seen in the first half of FY 2027. Our base portfolio continues to provide diversification, resilience, and market breadth across complex and regulated industries.
Although high-value markets represent the areas of the business that we are most focused on growth, we have areas of our base business that continue to grow at healthy rates. At the same time, we continue to optimize our lower-value markets by repricing, reducing, or exiting those lower-value programs, even while we support strategic customer relationships. This is not simply revenue growth. It is a higher-quality growth profile for Flex. As the mix improves, we will see margins improve as well.
We see a clear pathway from fiscal 2027 margins of 5.7%-5.9% to 7% or more of adjusted operating margins in FY 2029. I want to be clear in the room that the focus on margins is not a new one to the Flex team. It is something we have been doing for the last several years. In fact, adjusted operating margins of the combined RMS and ITS segments have improved from 4.4% in FY 2024 to 5.7% in FY 2026.
In the first half of FY 2027, we have continued to see this year-over-year growth, putting us on track to deliver 20 to 40 basis points of improvement in adjusted operating margins this year. On a revenue base as large as Flex's, this creates significant operating profit momentum.
There are three primary drivers of this margin expansion that I want to share with you today, and I'm going to talk about them in order of magnitude. The first is mix improvement. As we've discussed, this is placing an emphasis on our high-value markets growing faster at better margins than the rest of the portfolio. At the same time, we're repricing, reducing, and exiting lower-value programs. Our experience in these high-value markets shows a minimum of 150 basis points premium to our average segment margins at Flex. Mix also includes growing our services business.
This includes design, fulfillment, aftermarket solutions, businesses which are accretive to our overall margins and deepen our relationship with our customers. We expect approximately two-thirds of our margin expansion to come from high-value market volume and mix improvement over the period. The second driver I want to talk about is productivity.
Automation and network optimization continue to improve manufacturing efficiency across our global footprint. In the showcase, Rodrigo outlined how our proprietary technology, MAP, when deployed, increases productivity by 30%. You've seen today from and heard from Mike and seen in the showcase from Colin that as we serve our customer in the high-value market of robotics, we not only help our customers, but we also are able to improve our own internal manufacturing processes.
Our continued focus and our rich history of operating facilities in strategic areas around the world efficiently provides the opportunity for further margin expansion over time. Lastly, as we make portfolio moves, we'll do what Flex has always done, which is manage fixed cost leverage to expand margins. Taken together, these actions support more than 100 basis points of margin expansion from FY 2027 through fiscal year 2029.
Strong execution will enable capital allocation choices. Our capital allocation framework is a straightforward hierarchy. We maintain investment grade and our healthy balance sheet through deleveraging. We invest in organic growth and automation within our portfolio. We participate in selective M&A in those high-value markets, and we repurchase shares. Let's start with the strength of our balance sheet.
Our leverage objective is to quickly reduce debt to maintain our investment-grade rating. We intend to reduce the retained Axiom stake through tax-efficient exchanges, not open market sales. This could begin as early as the first full quarter following the spin and will be completed within 24 months following the spin. The proceeds will be applied to debt, and they're subject to market tax and lockup considerations. The impact of the deployment will be twofold. First, we improve EPS by reducing interest expense.
Secondly, and importantly, we reach our targeted leverage levels. We expect this leverage level to align very closely with where Flex has performed historically. Next, we'll reinvest in the business. Capital expenditures will be disciplined at approximately 2% of revenue, and we'll do this while supporting growth of our high-value markets and automation within our facilities. The ITS business and RMS business have operated at this 2% level for the last several years.
In recent years, most of our acquisition and growth capital built the business that is today Axiom. After the spin, this capital goes to our six high-value markets. We're excited about the growth to be generated with focused capital deployment, both organic and through selective and disciplined M&A. These markets have generated, and we expect to continue to generate very strong returns at approximately double our weighted average cost of capital.
Finally, we return cash to our shareholders. Over the past two years, diluted shares outstanding have decreased by approximately 14%, and share repurchases will remain our favored mechanism for capital deployment at Flex. We have a simple test here of whether or not a capital allocation decision makes sense. Does it create long-term value?
We intend to be intentional, and as Michael Hartung described earlier, and I love the word, ruthless in our capital allocation choices, so we can answer to that question a resounding yes. This discipline will be supported by strong free cash flow generation with an objective of 80% or more free cash flow conversion. Once again, this level of free cash flow generation is not a new bar for the Flex team, and it is one the team has delivered consistently prior to the large capital expenditures of 2027.
We will focus on expanding margin, working capital rigor, and capital discipline in order to return to these cash conversion levels. These capital allocation decisions, in turn, directly support our EPS growth. One of the most important takeaways from my presentation today is that we have multiple pathways to grow earnings and EPS. Revenue growth of mid-single digits provides the first component of this change, led by high-value markets, but supported by growth in our base-level markets as well.
This adds to the already impressive scale of Flex. Operating margin of 100 basis points or more from our 2027 levels adds an additional layer through mix improvement, productivity gains, and fixed cost leverage. Finally, debt reduction lowers interest expense and improves earnings power substantially, approximately $100 million from our 2027 pro forma interest expense levels. I will reiterate that EPS growth is not dependent on one value driver alone.
It is not dependent on volume. Multiple independent drivers support the earnings growth, making the model more resilient across economic cycles. The multiple value drivers provide the opportunity to grow earnings faster than revenue, a clear pathway to creating shareholder value. Share repurchases provide the opportunity to further amplify that EPS growth over time.
We will provide transparency by reporting progress on the metrics that we believe matter most, namely our growth, our progress in growth in high-value markets, earnings, and cash conversion. All of these elements come together to build our outlook and our longer-term targets. We expect revenue growth in fiscal year 2027 at high single digits to low double digits. We will continue to build on this momentum through FY 2029, anchored by high-value markets growing again at double digits.
This results in overall growth rates in the mid-single digits, even as we intentionally shift the mix to these high-value markets. We expect Flex pro forma adjusted operating margins to expand from 5.7%-5.9% in fiscal 2027 to 7% or more in FY 2029. This movement alone would generate over $200 million of increased adjusted operating income.
Cash generation will remain a core strength for Flex. It will be supported by working capital rigor, disciplined capital spending at 2% of revenue. We expect Flex's free cash flow conversion to be 80% or more of adjusted net income and provide opportunities to return cash to shareholders via buybacks. We expect high-value markets to increase from 24% in FY 2026 to 35%-40% in FY 2029, even while we reduce the overall cost structure and improve the strength of Flex's balance sheet and return capital to shareholders.
Flex is positioned to deliver durable, high-quality growth by combining a stronger portfolio, expanding margins, strong cash generation, and smart and disciplined capital allocation choices. As we execute this strategy, we expect the result to be earnings growing faster than revenue, greater resilience, and compelling long-term value for our shareholders .
The Flex leadership team is already working to deliver these results and is committed to delivering these financial outcomes. Thank you for your attention. At this point in time, we are going to ready the stage for Q&A, and I will invite my colleagues up here to join me. Thank you.
Thank you, Amy. We will now kick off our Q&A session, once everybody gets up here. How you guys doing? All right, here we go. We ask that you please limit your questions to one and one follow-up, and Blaine and Luke will bring around some mics for you, and if you can just state your name and your firm and then ask your question. All right. Mark.
Mark Delaney with Goldman Sachs. Thank you very much for putting the event on. First question was on a comment you made, Michael, during your comments, and Amy, you picked up on this as well, about putting capital where the returns are, and you spoke about investing more. I do not know if you could share a little bit more around how much capital you think you may need to invest in order to better target those six areas you are most focused on.
Maybe, Amy, you start with the structure, and then I will follow up with the commentary.
Yeah. Our projections that we put out, our targets are based on organic growth. This is growth that we believe is within our control at sort of that 2% of revenue from a perspective of capital deployment. I think just in terms of where we want to go, Michael Hartung referenced this in his comments as well, that the capital deployment hasn't been and will not be a peanut butter approach.
This is really about giving capital to where the returns are, where it will generate that for our business, and understanding and making capital at Flex a true competition for capital over time. It's something that frankly is tracked today. I was really excited to see that when I came on board. As we started our operating reviews, we're looking at metrics like ROIC. The teams understand where their capital is at as a percentage of revenue, and that's something that we'll continue to do and track and drive in order to create that strong competition.
Mark Delaney, maybe just a qualitative aspect to that. If you think about a total budget, you have to make choices on where you deploy that capital. Capital is not infinite. If you look at the track record, you've seen that discipline align with the strategy. Over the past three, four, or five years, we've been intentionally deploying that capital to assets that now will become part of the spin into Axiom.
Mission accomplished. I think the exciting part now is that post-spin, we're able to refocus not just our management's attention, but our capital into six new high-value markets that lend the same type of opportunity for growth over time.
Helpful. My follow-up was around the portfolio optimization. Any sizing around revenue and EBIT that you may look to exit over time? Thanks.
I will take that one. I would say the good news is, we are starting from a position of strength. We are not being forced to do any of this. These are all things that will be thought of really seriously in terms of what creates the longest, most durable shareholder value over time. I think our history probably demonstrates where we are likely to go in the future.
If you think back, I do not mean to be a historian here, but if you think back to the Agility Solutions days when I led that business, over a period of five years or so, we took out over $2 billion of lower-performing, higher-volatility consumer-related businesses, and we replaced that with higher-quality, higher-profitability business, some of which is now spinning into Axiom, and improved that margin from a two handle to a six handle, and actually enabled the company to get to that 6% bogey one year earlier than we committed.
Joseph.
Hey, Joe Cardoso from JPMorgan. Thanks for the questions here. Maybe first just wanted to start off with the growth and the outlook there. Any way you can kind of decompartmentalize the contribution from the different six high-value markets that you guys framed out today? It sounds like networking is a big piece of that today.
Yeah.
Just trying to think about how that composition evolves over the forecast period that you guys laid out.
Sure. I will take that one. What we intended to do was first provide this high-level view on how we thought RMS and ITS would grow and perform over time, and we tried to give you more detail from a high-value markets perspective by at least saying, as a portfolio, these are how we intend to drive the businesses from that level.
Started talking about 24% today, going to 35%-40% in FY 2029, and maybe I could give you some more color underneath that to put you in the right direction, but we do not really intend to disclose each high-value market because we will manage that as a portfolio. If you think about the spread of these markets, on the one hand, you have these larger, more mature markets. One of those, as we shared earlier, is advanced networking.
It is one of the largest of our high-value markets, and so you would expect that one of our larger growth opportunities will come in that space. I would say on the other end of the spectrum, you have these markets that are more emerging in nature, where technology is driving faster adoption, and those markets, although smaller, are growing at a higher rate versus the balance of the portfolio.
In the middle, we have healthcare, and I think about healthcare as the ballast, right? This is the investments that you make over a long period of time that provide steady, durable revenue growth and margin expansion. So that colors how we think about high-value markets driving performance over time.
Thank you. Then maybe a follow-up and just trying to double-click there. When you guys think about your high-value markets, which areas of the portfolio do you guys have the most vertical integration today? Where are there opportunities to do more M&A on that front? What areas of the portfolio are more where you guys are leveraging your manufacturing expertise? Thank you.
Yeah. Let me frame up what the strategy is behind that, and then I will ask Mike and Dennis to step in and say how those things are really taking place in the business itself. What we talked about earlier is we focused on these high-value markets for a number of reasons, right? One, they were tied to these longer-term secular growth trends that gave us confidence that we could grow these businesses at double digits.
I would say the other important factor is typically these markets required more complex solutions than the others, and those enabled us to earn higher margins, not because we were putting parts together differently. It is because we could apply more of our portfolio of services against each one of those opportunities. So, as Mike showed earlier, design increases profit margin. Vertical integration, we fabricate sheet metal, we injection mold plastics.
If we incorporate Coreworks into that bill of material, all of those services operate at higher margin. Similarly, we don't stop at manufacturing the product. We fulfill that product, B2B, B2C. That also operates at margins higher than the company average. Then that circular economy piece is increasingly important as well, as we bring those products back for repair, refurbishment, or recycling. We pick the markets where we can apply more of the services and expand the margin profile accordingly. Mike and Dennis, maybe you share more. Dennis, maybe you start off on ITS.
Yeah. Maybe the only thing I would say about all the value-added services, it does go across both segments. I'll talk a little bit about ITS. Our value-added services breaks down into three different buckets. It's the vertically integrated components that we talked about. It's our component services where we have our Coreworks brand, and we also do buffering programs there, and we have our aftermarket services that we preference.
Within ITS, we actually see a really strong penetration in our lifestyle business, which is one of the ways where that business continues to add scale and accretive margins to the business overall. That's the way we build on top of it. But we also see that, as I mentioned in the showcase, with our advanced networking business.
Imagine that you have these large-scale deployments around the world, and you need to manage spare parts, you need to manage repair, refurbishment. We do that across the business, and ITS is a big benefactor of our value-added services. I also talked a little bit about the sheet metal integration, which we do around the world, and that works very well within our ITS business.
I'll add a couple of points here, just building on the last comment in terms of enclosures and such. If you look at our energy infrastructure market, we also have products where we're not just building PCBs, we're leveraging some of the expertise that we've built in some of the products that now are going to be owned from an IP perspective by Axiom that we've built. I think I'm going to go on, give you a couple more examples on the design side.
You saw in our product showcase what design does for healthcare products. We talked about our high-value markets for drug delivery and medical. The idea of injecting design into that is that margin increase. We talked about this overall average for all of healthcare when design is implemented. We increase, compared to EMS programs, our margins by 250 basis points.
And of course, some of those opportunities can exceed that number as we continue to advance in these markets by adding design capability and also building the entire product instead of just a circuit board or a smaller piece. So those are a couple of examples in the RMS side where this type of factor can help improve our growth and our margins.
Steve.
Thank you. Thanks for all the details. Steve Fox from Fox Advisors. First question, I was looking at the margin targets. It seems like the incremental margins are considered conservatively in what you just put up in terms of the waterfall. Can you sort of talk about how to think about the leverage you get off of volume, especially on the focus areas? And then I had a follow-up.
Yeah. So, I'll start again by just outlining the drivers of where we're at with margins. So, growing from 5.7% to 5.9% to 7% or more in 2029. The largest component of that is high-value market mix and volume from that high-value market growth as well. Secondly, we move into productivity, and finally, fixed cost leverage. I think in terms of, Steven, I think where you're going with this question is, what's the or more that we can do around margins?
But believe me, it's something that we think about on a fairly regular basis as well. I think the few things that build into that start with where we land in that high-value market range, so the 35% to 40%. Pushing towards that high end of that high-value market component as a percentage of revenue will certainly help our margins over time.
Fixed cost leverage and continuing to address the cost structure absolutely will help over time. I think the other piece of this is we generally tend to see our services grow with the business, so fairly linear. To the extent that we can overdrive that services growth from a design fulfillment and aftermarket solutions perspective, we absolutely would lean into that, and we would see that as a further lever to growth over time.
I think as we look at the longer-term targets that we put out there from a margin perspective, the thing that we're really excited about as a standalone Flex team is the opportunity to essentially get back to where Flex was at with the high-value Axiom business in the second quarter of this year with the pieces that we have in place with the Flex portfolio today.
Great. That's helpful. Just as a follow-up, obviously automation in the factory floor is increasing. Is there a way you could talk about a little bit more how your internal plan expands automation over, say, the next three years a little bit?
Yeah, I wish Rodrigo was up here to help, but let me give it my best shot here. When you think about what you saw out in the product showcase and listen to Rodrigo go through the different elements of our manufacturing system, there's probably a couple things to think about. The first is, our MAP system is a proprietary technology that we focus on 13 different processes that are constant in our factories that were previously done manually.
That 30% productivity improvement is a real measure that we cascade throughout the business. We've deployed hundreds of them and will continue on that same sort of trajectory throughout the network as we both expand the number of processes it applies to and expand the number of sites in the network where we benefit from.
I think the exciting part about that, though, is in parallel, we've been doing a lot of work around harmonizing the data on the balance of the equipment in the facilities, so that now these two lines are starting to converge, because data is the real power going forward to unlock more value and accelerate savings.
So we've got the standard platform in place with the data that goes along with that. Now we've harmonized the data. Now we've set the stage for physical AI deployment. That doesn't just focus on the factory floor. This will extend to a wide variety of our processes. Think about planning. Think about the efficiency of really scheduling your factory around the dynamic nature of the supply chain itself. All of these things will start to unlock more value.
Then there's also the deployment of this connected management system in our factory as well. It's our own internal AI tool that actually connects all these data points, enable us to make decisions faster and better than we were in the prior world. So, I think there's tremendous opportunity out there, and it's why we think we're just at the early stages, where our performance over the past seven years is the baseline, not the ceiling. Lots of opportunity in fueling the chain productivity.
Ruben.
Yeah, thank you. Ruben Roy from Stifel. We will probably talk about this more this afternoon, but in looking at some of the product demos and the discussion around ITS and RMS, it seems like there could be some overlap between what Flex is doing and what Axiom is doing. Just wondering if you would talk a little about that and how you are structuring against some of the potential overlap.
Yeah, thanks for the question, Ruben. I think it is actually, at the end of this, my goal will be that it is really clear. There are probably two areas where those lines come closer together, and I will address those, and I think that gets to 90% of your question. The first one is around energy infrastructure in the Flex post-spin business.
Simply put, the product portfolio around embedded power and critical power spins in its entirety, and that is what you will see in this afternoon's session. Beyond that, all of the contract manufacturing capability stays with Flex. What that means for us is that we get to focus on OEM opportunities in the marketplace that span power generation, transmission, distribution, storage. All of those capabilities in contract manufacturing stay in the business. So, product spin, contract manufacturing stays.
I think the next area that causes a bit of a question is around the compute side versus the networking side. First, I would ask you to step back and remember the rationale behind how we decided what would go to Axiom. Again, Revathi will do a much better job of describing this in the afternoon, but this was a business that was based on solving for a particular thermal management problem that was present in the data center infrastructure build-out.
Those things required embedded power, critical power, and compute to be tightly linked, because that is how the design takes place at the OEM level, at the hyperscaler level, et cetera. What that does not typically include is networking. Networking stayed. We will continue to invest in networking, especially high-speed switching, optical gear, network interfacing cards, and that delineation becomes very clear moving forward.
Great. Thanks. As a quick follow-up, maybe just if we can talk a little more detail, Amy or Michael, on M&A and how you are thinking about the verticals. You talked about the six growth areas that you are focusing on. Any other detail on how quickly you want to kind of pursue some of those opportunities?
How about I will have Amy Schwetz start with how we create the capability and capacity to do it, and I will talk about what the priorities will be.
Yes. So, the hierarchy of capital allocation, absolutely in order. So, the non-negotiable that we know out of the gate and we have alignment on is investment grade. So we are going to maintain the health of the balance sheet and maintain that investment-grade rating over time. So that means reaching our targeted leverage level is job one.
That leverage level that we aspire to is similar to where Flex has been in the past from a leverage level perspective. So that is job number one. Second goal is to drive the organic growth that we believe is possible in this business through those high-value markets, but also margin expansion through automation at our facilities around the world. So we are going to be controlled with that at about 2% of revenue.
We believe that that bar is appropriate and enough to do the things that we want to do with the business over time. Then the third is this selective M&A. But I do not want you to think that we have a blank check or that we are 100% focused on M&A. We have to be very disciplined about this. We have got to be intentional about where we put money and make sure that it is generating the returns that we expect to see for the business.
We are focused on those high-value markets because we think organic capital deployment and inorganic capital deployment can drive ROIC levels that we want to see in this business, and that is double our weighted average cost of capital or more as we move forward.
Finally, just based on our cash generation prospects and our objective of 80% or more free cash flow generation, we believe we are going to have excess cash to return to shareholders. So, that is the litmus test. Three and four can interchange depending on the opportunities that are available to you, but we are focused on creating these multiple pathways to shareholder value.
Let me just add to that with where we intend to invest. As Amy alluded to earlier, it will be related to our high-value markets, so things that can improve our position in those markets will be the candidates that we will consider. I think in this case, looking at our history is probably a good indication of where we will go in the future.
Think about a formula where we have an ability that we have demonstrated to identify attractive assets in the marketplace that are operating with a higher level of IP, a higher level of structural margin that we can acquire, combine with capabilities that are already inside of Flex, and then create something of greater value as a result of that process.
I would say when you think about the portfolio of opportunity and you think about that sort of methodology, healthcare is a perfect place to think about where that could take place for a number of reasons. One, we already have a strong position in medical devices and drug delivery, and there is still attractive markets in healthcare that we are thinking about.
It also lends itself to this idea of acquiring IP, acquiring capability that are operating structurally at a higher margin than we are today that we can actually benefit further with scale and the capabilities that we have in the company to create something of better value than when we took it. So, higher value markets definitely across that spectrum, but really, I think healthcare is probably the area that I would think most about the opportunity for platform development.
All right. That is all the time we have for Q&A, but I will turn it over to Michael for some closing remarks.
All right. Action-packed day. I hope you enjoyed yourselves. Hope you are with the walk-