Flex Ltd. Q2 FY2024 Earnings Call

Good afternoon and thank you for standing by. Welcome to Flex’s Second Quarter Fiscal 2024 Earnings Conference Call. Presently, all participants are in listen-only mode. After the speakers' remarks, there will be a question-and-answer session. As a reminder, this call is being recorded. I will now turn the call over to Mr. David Rubin. You may begin.

Thank you, John. Good afternoon, and welcome to Flex’s second quarter fiscal 2024 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 Q&A. Slides for today’s call as well as a copy of the earnings press release and summary financials are available on 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 contains forward-looking statements, which are based on our current expectations and assumptions. These statements involve risks and uncertainties that could cause actual results to differ materially. For a full discussion of these risks and uncertainties, please see the cautionary statements in our presentation, press release or the Risk Factors section in our recent filings with the SEC. Note this information is subject to change, and we undertake no obligation to update these forward-looking statements. Please note, unless otherwise stated, all results provided will be non-GAAP measures and all growth metrics will be on a year-over-year basis. The full non-GAAP to GAAP reconciliations can be found in the appendix slides of today’s presentation as well as the Investor Relations website. Earlier today, we were pleased to announce our plan to spin off all of Flex’s remaining interest in Nextracker to Flex shareholders. As previously disclosed, Flex retained the option to effect the spin-off pursuant to a merger agreement entered into by Flex and Nextracker in connection with Nextracker’s initial public offering. We believe that the spin-off is the most advantageous form of separation for Flex, Nextracker and our respective shareholders. Specifically, it provides the opportunity to distribute Flex’s interest in Nextracker to Flex shareholders in a tax-free manner for U.S. federal income tax purposes and allows Flex to focus on our core strategies and long-term value creation for our shareholders. As earlier today, Nextracker filed a registration statement on Form S-4 that includes a preliminary proxy statement of Flex, which includes additional information regarding the spin-off. The spin-off is currently expected to be completed in Flex’s fourth quarter ending March 31, 2024, but does remain subject to a number of conditions and no assurance can be given that the spin-off will in fact occur. We understand that you may have questions on this process. At this point, there are no additional details to share other than what has been publicly made available. But we will provide any updates as appropriate. 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. Before we start, I want to say how deeply saddened we are by the horrific attacks on Israel. Our hearts go out to our colleagues, our customers and our friends in that area. Turning to our quarterly results on Slide 5. Overall, fiscal Q2 was another strong quarter with great execution. Revenue came in at $7.5 billion which was down about 4%, adjusted operating margin came in at 5.9% and we delivered $0.68 of adjusted EPS. Since we have now announced the separation of Nextracker, we are able to provide core Flex’s results, which excludes Nextracker. For core Flex, we executed really well even with the market uncertainty. Revenue came in at $6.9 billion, down 5% against a great quarter last year, which grew 24%. Core Flex adjusted operating margin came in at 4.7%, up both sequentially and year-over-year, and we delivered $0.56 of adjusted EPS. I'm really pleased with how these results show their ability to execute and build a resilient company with strong performance through the cycles. Now turning to Slide 6. We'll take a look at market fundamentals and how we continue to navigate a highly dynamic environment. However, I want to point out a few important items that really put into perspective the strength of our model and how we have truly evolved as a company. As you're well aware, we participate in six end markets. But within that, we've been focused on shifting our portfolio more towards next-gen mobility, cloud and digital health. As highlighted in our March 2022 Investor Day, we believe these markets drive the right growth and margin expansion for us, so I'd like to give some specifics on how we're doing in these areas. Next-gen mobility, as we have defined it, comprises our EV, ADAS, autonomous and our EV charging businesses. At the time of Investor Day, we expected a 50% plus CAGR for this space. We continue to see growth in this category on par with these strong expectations. Looking at our overall automotive business, once again this quarter, our revenue growth outpaced industry units. This strength comes from past program wins coupled with continued steady vehicle content expansion. We expect our cloud business to grow just under 20% per year, based on our unique ability to manufacture vertically integrated data center racks and critical power systems for the data center. Even with the increasing trend towards consignment, we're on track to beat these growth expectations this year and also next year. This is based on what we have already won with multiple top-tier hyperscalers, but much of that growth is currently driven by generative AI capability expansions. Lastly, we said our digital healthcare business would have just over a 10% CAGR. We expect that multi-year trend to continue. Right now, we're seeing exceptional growth in our next generation of smarter and smaller devices, including continuous glucose monitors and diabetes drug delivery programs. I'd say the only changes in our life sciences business, but that is just short-term inventory digestion after an extended period of strong growth. One area we touched on during our Investor Day was the clean energy transition opportunity. Last quarter, we announced that our renewables business doubled in our last fiscal year. Despite some lingering weakness in residential solar, we still expect renewables to grow again in fiscal '24. And it is still early days as we look at the potential opportunity from the IRA and other government initiatives to help drive the clean energy transition and upgrade grid infrastructure. Our stated intention at our Investor Day was to focus on these strategic end markets, which has made Flex a more resilient company. Now let's discuss combining the right end market with how we are operating as a company. Flex is a more agile and operationally efficient company and you'll see that in our results with steady margin expansion and EPS growth. Our continued optimization of our mix and our factory footprint combined with driving productivity through automation investments has enabled operating margin expansion both sequentially and year-over-year for core Flex. We also expect this trend to continue and we'll discuss this further when we get to guidance. We have been shaping the company in this direction over the last five years. And we see the impact of our efforts in our improving results and shareholder value creation. Now speaking of creating shareholder value, we're executing on our path to unlock the value of Nextracker. Through this journey, we have created value with multiple transactions growing cash to help fund our capital allocation strategy. We use cash from the pre-IPO TPG investment to fund the Anord Mardix acquisition, which is focused on cloud facilities and critical power. This addition clearly checks all the right boxes for value creation. It delivers double-digit growth, is margin accretive and is synergistic to our overall position in the cloud market. We believe Flex is a great investment. So we're also putting cash from the transactions to work buying back our own stock. Year-to-date, we bought back $500 million worth of stock. And you recall our Board authorized a $2 billion share repurchase program back in August. Now we're in the final steps to fully unlock the Nextracker value in a shareholder-friendly transaction. As David outlined, we expect to distribute our remaining 51% ownership to Flex investors via a tax-free spin in fiscal Q4. With that, I'll pass the call over to Paul to take you through our financial update.

Okay. Thank you, Revathi. I'll begin with our second quarter performance on Slide 8. It was another solid quarter. Second quarter revenue was $7.5 billion, in line with our expectations. Gross profit totaled $676 million and gross margin increased to 9%, up 130 basis points. Operating income was $439 million with operating margins at 5.9%, a substantial year-on-year improvement, up 110 basis points and earnings per share came in at $0.68 for the quarter increasing 8%, which includes $0.08 of Nextracker non-controlling interest. Looking at core Flex results, which excludes Nextracker, in the quarter, core Flex revenue was $6.9 billion, down 5%. And as Revathi mentioned, this was against a great quarter last year, up 24%, which was our strongest quarter in fiscal year '23. Core Flex adjusted operating margins came in at 4.7%, up 20 basis points, and with another quarter of sequential margin expansion, up 40 basis points from Q1. The Flex core business delivered $0.56 of EPS, up 6%. Turning to our quarterly segment results on the next slide, Reliability revenue was flat at $3.3 billion. Auto and health solutions remained strong with some headwinds from residential solar and industrial. Operating income was $171 million and operating margin for the segment improved sequentially to 5.2% on solid execution. In Agility, revenue was down as expected to $3.6 billion as strong cloud growth was offset by the anticipated pressure in comms, enterprise IT and consumer. Operating income came in at $168 million with a solid 4.6% operating margin, up both sequentially and year-on-year and was reflective of strong operational management and improved mix. Finally, Nextracker delivered revenue of $573 million, up 21%. Operating income at Nextracker was $112 million more than double what it was last year, delivering a strong 20% operating margin. Moving to cash flow on Slide 10. We made further progress against our inventory improvement goals reducing net inventory by 5% sequentially and by 7% year-over-year. As we said last quarter, this is an indicator of the overall situation improving and we expect to see further progress over the coming quarters. We continue to invest in future growth opportunities. Q2 CapEx came in at $144 million on target at 2% of revenue. We expect to maintain a similar total investment level for the full fiscal 2024. All that led to free cash flow of $213 million which was up both sequentially and year-over-year. As we've committed to, we continue to prioritize opportunistic share repurchases. We bought back $309 million worth of stock in the quarter and fiscal year-to-date we have purchased $506 million. As discussed earlier, in August, the Board authorized a new $2 billion share repurchase program. Please continue to Slide 11 for our segment outlook for the fiscal third quarter. For Reliability Solutions, we expect revenue will be down high single digits to low teens. Auto demand has been steady. However, with the UAW strikes unresolved, we're taking a more conservative approach in the quarter. We also expect some continued weakness in parts of industrial. Revenue in Agility is expected to be down mid-teens to low 20% with strong growth in cloud offset by near-term weakness in comms, enterprise IT and consumer. Onto Slide 12 for a quarterly guidance. For total Flex, we expect revenue in the range of $6.5 billion to $6.9 billion, with operating income between $375 million and $425 million. Interest and other expense is estimated to be around $50 million. We expect the tax rate to be around 11% for the quarter. All that translates to adjusted EPS between $0.57 and $0.65 based on approximately 448 million weighted average shares outstanding. This guidance includes approximately $0.08 to $0.10 of non-controlling interest from Nextracker. Again, to provide some additional visibility, we included our expectations for core Flex, excluding Nextracker. For Q3, we now expect core revenue to be between $5.9 billion and $6.3 billion, core adjusted operating income between $280 million and $310 million which equates to adjusted operating margins between 4.7% and 4.9%. At the midpoint, this would be up both sequentially and year-over-year. Core Flex adjusted earnings per share is expected to be between $0.47 and $0.52. And looking at our GAAP guidance, we've included approximately $100 million in restructuring, which we expect to implement in Q3. Looking at our full year guidance on the following slide, until the separation, we will provide guidance for total Flex, including Nextracker, which remains comparable to our prior guidance. We now expect full year revenue between $28.1 billion and $28.8 billion, adjusted operating margin now between 5.8% and 6%, and adjusted EPS between $2.49 and $2.66 per share. This includes approximately $0.30 to $0.35 in non-controlling interest expense from Nextracker. Looking at our full year expectations for core Flex, to be clear, this excludes Nextracker for the entire year. Again, this is something new to help you with modeling and is not comparable to previous total Flex guidance. We expect full year revenue for core Flex between $25.9 billion and $26.5 billion, adjusted operating margins between 4.8% and 4.9%, which at the midpoint would be up about half a point year-on-year, and last adjusted EPS between $2.05 and $2.18. On the next slide, I want to highlight just how much Flex has changed as we have shifted to higher value business and improved operationally to manage through the cycles. As you can see, our revenue outlook for FY '24 has changed resulting from some short-term market challenges. However, despite some pressure on the top line, our expectation is that both operating profit dollars and core Flex EPS will hold strong and the operating margin rates will continue to expand. This comes from executing on a portfolio strategy towards higher value businesses, our constant drive to improve operating efficiency and continuously optimizing our cost structure, as we have told you that we would.

Thank you, Paul. Overall, I'm really pleased with how we're executing our strategy on portfolio management, focused on the right kind of growth and driving margin expansion. This combined with executing the capital allocation strategy with a strong focus on buybacks is how we provide value to our shareholders. We expect an extraordinarily strong year for Flex with continued margin performance and EPS growth, even with the near-term challenges. This is also a good time for me to reiterate our Investor Day targets for fiscal '25 getting to core Flex adjusted EPS of $2.65. So we remain confident in the long-term opportunity for Flex. With that, I'll turn the call back to the operator, John, to begin Q&A.

Thank you. We will now start the question-and-answer segment of today's call. Your first question comes from Matt Sheerin at Stifel. You may proceed.

Yes, thank you very much and good afternoon. Just a question relative to your guidance versus 90 days ago, it looks like you're taking down both expectations for both Reliability and Agility pretty significantly. We talked a little bit about some auto headwinds and some of the data comm markets still being weak. But could you tell us exactly what you've seen from customers in terms of their order patterns? And are we hitting the bottom in some of these markets? Or do you expect continued deterioration as we get into calendar '24?

Hi, Matt. So first of all, I appreciate the question. I think it's spot on. Let me just give you some specifics, and Revathi might have some comments as well. But what we had previously called out was weakness in more of our consumer-facing markets. And in particular, I'll just give you one example. Our consumer device business, which is within the Agility segment, we figured would be down for the year around mid-teens. But based on what we're hearing from customers today, we're thinking it'll be down more like 25%, so mid-teens to 25%, a fairly significant change in those consumer-facing markets. We had called out a softening in comms infrastructure before. Our thought had been that should be probably flat for the year but with the ongoing inventory digestion and what we're seeing in some of those end markets right now, what you're all seeing too, we're expecting comms to be down more like 10% for the year for us. Auto has been strong. But now we're sitting in week six of this UAW strike and we're seeing some impact here in Q3, so we're taking a little bit more conservative approach. That said, we're still expecting growth overall for the automotive business. And then I guess, lastly, just a little on renewables. We were expecting robust double-digit growth for the year. But given what you're seeing right now in some of the residential solar space, it will still be up, but it will probably be up more like low single digits. So those are some of the bigger end markets we've seen some contraction, but I guess I would sort of wrap in that comment by saying, although things are choppy in some areas, things like next-gen mobility looks great; cloud, great; digital health continues really nice to see some things there. So they just unfortunately can't quite offset some of what we're seeing there in some of those other end markets.

Got it.

Matt, the only thing I'll add to what Paul said is that one of the things we've talked about consistently for Flex in the last few years is you have to have the right portfolio but you also have to have the right operational strategy to be agile and more operationally efficient. And you can see that playing out right now in our results with our margin expansion, EPS growth. So it's really well managed through the cycle, which is what you're seeing present out today. So market choppiness will be there. I think how we execute as a company is important, and we're pleased with that.

Okay. Thanks for all that, very helpful. And as my follow-up, just regarding you reiterating that $2.65 EPS target for fiscal '25, obviously, it looks like significant growth off of what you're guiding the core business for '24. So how much of that is going to come from the core business growing, margins expanding versus the buyback making up for that deficit?

It's going to be a combination of the three, Matt. I don't want to get too far ahead of ourselves and guide too many of the specifics on that. We need to get through the next six months here, but I think it will be a combination of some top-line growth, some margin expansion, which I think kind of makes sense, given our momentum here, and probably some buyback as well.

Okay, great. Thank you very much.

Your next question comes from the line of Steven Fox from Fox Advisors. Your line is now open.

Thanks. Good afternoon. Two questions, if I could. First of all, given the further progress in margins even though you're seeing weakness in some end markets, it seems to strike a chord that like some of the markets that are softening are even lower margin, below average than I would have thought. So I was curious, like, how many of these markets where maybe you're still not getting average margins, would you consider either exiting, repricing, or reconsidering the strategy in some ways? I'm just curious how pliable you're going to be towards some of these other markets going forward? Thanks.

Sure. So I wouldn't say there's any major end markets we're planning on exiting. But I would sort of caveat that statement, Steven, by saying portfolio management is a constant process, and we're always evaluating and maybe not “divesting” per se, but deemphasizing. I think your comment on mix is spot on. It's kind of nice that some of those end markets that I pointed out to happen to be sort of lower margin if you look at the Flex aggregate. And so as I think about how we're moving with some market choppiness and kind of a guide down on the top line, mix definitely helps. Mix definitely helps. I don't know, is that helpful commentary?

Well, I'm just wondering.

Maybe, Steven, the one thing I'll add is just to say is managing mix and portfolio kind of has been our key theme in the last five years. If you look at what we have done overall in the Agility business and consumer devices, all of that within each of the end markets, we've really managed our mix pretty significantly in terms of moving up the value chain. That's why you see Agility’s margins being such a strong performance, even with the end markets it's in. So our belief is that within these end markets that our pockets that are extremely strong, that really helps us and then there are others that will keep shrinking in size. Nothing significant to talk about, but I think it's part of managing the portfolio even within all six end markets. It doesn't matter whether they are under Reliability or Agility I see that normal course of action.

Okay, that's definitely helpful. And then I was wondering if you could dial in a little bit more on the auto market. You mentioned the UAW strike, but away from that, can you talk about just maturity of programs and whether they're contributing to margins, how sort of the program ramps look into next year, because you seem pretty bullish on new programs continuing to ramp even though there's been a lot of sort of negative headlines in the last couple of months on EVs and things like that?

I’ll begin by saying that a few years ago, we expressed our intention in the automotive sector to focus on next-generation mobility. Our EV platform, which combines our own designs with those developed in collaboration with our customers, has achieved significant success across various regions, including North America, in securing platforms. We have discussed the substantial expansion in automotive bookings, which will take about two to five years to reach maximum volume production. This reflects our strategy in automotive, as evidenced by our bookings and core volume growth in the sector. The current challenges in the EV market are part of the growing pains typical of any market experiencing such rapid growth, and we view this as a positive sign. We believe there is substantial growth potential ahead. Additionally, the disruptions in the automotive supply chain present valuable opportunities for EMS companies like Flex. Overall, I view the EV and automotive space as a promising area for Flex, and we continue to experience robust growth as a result. We aim to maintain diversification in our automotive EV markets.

Great, that's helpful. Thank you.

Thanks, Steven.

Your next question comes from the line of Ruplu Bhattacharya from Bank of America. Your line is now open.

Hi. Thank you for taking my questions. It looks like on the core business, your expectation for revenues has gone down about $2.6 billion, but the expectation for operating margins is 40 bps better. So I was wondering if you can delve a little bit deeper into both the revenue side and on the margins, specifically on renewables, like how much of your business is tied to residential versus utility scale? And how do you see that progressing over the year? And then on automotive, are you tied more to the North American OEMs or the Europeans? And how do you see that mix changing as the mix gets more towards EVs? And then just on the margins, that 40 bps of improvement, does that come more from Reliability or Agility? And Paul, in the past, you've talked about things like components, the lagging at semiconductors being an issue, is that now done? And what is driving that 40 bps, if you can just delve into that margin improvement on lower revenues?

Well, the good news is that there won't be any more sell-side analysts asking questions because you really nailed it. But I'm joking. Let me start with revenue. I pointed out several end markets where we're seeing declines. By my calculations, the midpoint is about $2.5 billion down. Consumer devices contributed to this. We also discussed renewable energy and mentioned a more cautious approach with automotive and communications infrastructure. Those will be some of the major factors, although we will see continued growth in areas like next-gen mobility and automotive, cloud, and digital health, which all look promising. This explains the revenue downgrade. You inquired about the utility versus residential segments in renewables. I should mention, as we have before, that the renewables business is now well over $1 billion for Flex, making it a significant part of our operations. Due to confidentiality agreements, we can’t disclose all our customers, but there are a few known names in the residential sector, which have caused us some forecast changes and fluctuations. However, our long-term outlook on renewables remains very positive, and we expect continued growth. Regarding automotive, we are quite geographically diverse and not overly reliant on North America. While we do anticipate some impact from the UAW in Q3, this won’t greatly affect Europe or China. In terms of margins, we are seeing a $2.5 billion reduction in sales without a corresponding change in operating profit. Several factors contribute to this. First, as Steven pointed out, the margin mix is beneficial, as we are experiencing volume reductions in lower-margin areas. Second, I noted in my prepared remarks that there will be some restructuring in the third quarter, which will affect us in Q3 and Q4. Third, Q2 performed a bit better than expected, contributing positively to the overall results. These factors help us maintain operating profit. Lastly, you asked about recoveries. For the full year, revenue year-over-year for core Flex indicates that recoveries are down significantly compared to our earlier expectations. This is good news for several reasons. First, it will positively impact inventory as the chip shortage situation has improved, although some tightness remains. This also helps with costs, including cost passthrough. Looking at the full year and the midpoint of our guidance, we are projecting a high single-digit decline, and I suspect that around half of this can be attributed to changes in passthrough. Thus, not all the revenue challenges we’re facing arise from core markets; some are simply due to inflation passthrough, as we anticipated when conditions began to normalize.

Yes, thanks for all the details. I really appreciate you going into all of that. Just real quick on that quick follow-up. Now that you've announced the remaining Nextracker transaction, does that change your philosophy around capital return and pace of buybacks? How should we think about that? Thank you. Thanks for all the details.

No problem. And so we've talked about our capital allocation priorities before and I would say, number one, we're never going to starve the core business. We’re quite bullish on a number of our end markets. And so we're never going to starve ourselves for things like CapEx or other internal investments. The number two priority, and this is a high, high priority, is share buyback. We continue to believe that there's a significant disconnect. Hopefully, with the Nextracker separation, people sort of realize the arbitrage there and things sort of rationalize a little bit. I would say probably the distant third at the moment would be M&A. As always, we reserve the right to change our minds. But stock buyback is clearly the expected use of free cash.

And the only thing I'd add is I'll remind you that our Board recently authorized a $2 billion stock authorization, right, and so we expect to continue to just return cash back to our shareholders.

Okay. Thank you.

Thanks, Ruplu.

Your next question comes from the line of Samik Chatterjee from JPMorgan. Your line is now open.

Hi. Thanks for taking my question, and I have just two here. Just parsing through all the numbers that you've disclosed, when I look at 3Q guide versus 4Q implied in there, there's a modest uptick in revenue and a modest uptick in profit that I get to and I hope I'm doing the math right here. But just wondering how much of that is the cloud customer-related projects you've talked about? Or is there something else embedded in there in terms of recovery going from 3Q to 4Q? And any sense you can give us on the timing of those projects? Are they starting in 3Q and then ramping to 4Q? Or is it more of a 4Q event in the numbers? And then I have a quick follow-up? Thank you.

Sure, Samik. So yes, there is some ramp tailwind as we move through Q4, as we continue to ramp cloud as a piece of it. There's a couple of others that we expect to benefit from as well. There's a number of these new platforms that we've been talking about that should give us some continued growth. It's the three areas that we've been talking about. It’s next-gen mobility, it’s cloud as you pointed out, and health solutions should continue to do well in the smart tech device things. You mentioned margins. I do expect a little bit of a margin uptick as well as we move from Q3 to Q4. That's really just a full quarter of restructuring tailwind.

Got it. And on that point, the second question was, you did mention on the core, you're seeing about a 50 basis points margin expansion in fiscal '24 when you sort of adjust all the Nextracker numbers out. Just wondering if you can share your thoughts about sustainability of that pace of improvement going into next year, how much of the reliability improvement through the year is on account of price increases that you start to lap in fiscal '25? And how should we think about sustainability of that piece?

Yes, Samik. Margin expansion has been a key aspect of our business over the past four to five years, and we have consistently achieved it through various cycles. I view the 50 basis points margin expansion as sustainable, and we are continuing on this path. This comes from factors we have previously discussed, including changes in our product mix. We are focusing on growing sectors like cloud, next-gen mobility, and digital healthcare, which contribute to higher margins. We have also made significant strides in optimizing our factories and enhancing productivity through automation and capital investments, making this expansion very sustainable. Overall, our ability to achieve consistent margin expansion is encouraging, and reiterating our FY '25 EPS supports this outlook.

Great. Thank you. Thanks for taking my questions.

Thanks, Samik.

Your next question comes from the line of George Wang from Barclays. Your line is now open.

Hi, guys. Thanks for taking my questions. I have two questions, if I can. Firstly, I just want to double click on the buyback. You mentioned that authorized $2 billion buyback. Just curious about cadence, especially around the spin-off timing, which is kind of in the last quarter of 2024? And also I was looking at the share count kind of seems to be flat based on guide for 3Q versus 2Q, obviously, you may do some buybacks to offset dilution. Just curious, any sort of color you can provide in terms of the cadence and kind of linearity of the buybacks? And should we assume a similar sort of intermittent run rate for the next few quarters or it could be some technicality around the spin-off timing?

The good news is that our quiet periods are now essentially over since it's public knowledge that we plan to spin off. This announcement has led to some fluctuations over the past two years. We've provided our last quarterly share count as part of our guidance. As you may know, we have consistently been buying back stock throughout the quarters, so this might be seen as a slightly conservative estimate. I won’t specify the exact buyback plans for our third or fourth quarters, but it is clear that stock buybacks are a priority in our capital allocation strategy.

Got it. Thanks for that. Just to quickly follow up just in terms of the free cash flow kind of potentially could be a big driver for the share price appreciation. It's nice to see 2Q delivered much strong FCF versus kind of 1Q being a cash use. Just curious, if you guys are reiterating $600 million or above in terms of full year FCF, and is there any potential upside just based on the better margin providing the backup?

Yes, it's a great question. Predicting cash flow is a bit more challenging than forecasting the profit and loss statement as it can fluctuate. However, we will update everyone on the free cash flow expectation targets once the separation is finalized. The situation with Nextracker has several variables, and since the timing is not completely certain, although we expect it to happen sometime in the fourth quarter, it makes predictions difficult. I want to emphasize that we are definitely moving in the right direction. We are especially pleased with our performance in the second quarter, where we generated over $200 million in free cash flow, which was a significant improvement both year-over-year and sequentially. I am also happy with how our inventory has performed as it decreased again this quarter, following an upward trend over the past few quarters. This free cash generation occurred after spending $145 million in capital expenditures, demonstrating that we are not underinvesting in the business. I can confidently say that nothing has fundamentally changed, and we still anticipate growth in free cash flow.

Great, thanks again. I'll go back to the queue.

Thanks, George, and welcome.

Your last question comes from the line of Mark Delaney from Goldman Sachs. Your line is now open.

Good afternoon. Thanks for taking my question. You mentioned mix as a key tailwind to core Flex margins going from fiscal 2Q to 3Q and as total revenue declines. But is there anything additional in terms of incremental pricing or large restructuring programs that may also be playing a key role in the sequential margin strength? And if so, could you dimensionalize how large those other drivers may be?

Sure. So let’s be clear on your question. Are you talking Q2 to Q3, Mark?

Yes, based on the four seven you just mentioned, I think the midpoint of guidance indicates that while revenue is declining, the mix is a key driver that may even be slightly expanding margins. Are there any restructuring programs or incremental pricing that could also be contributing to this improvement in margins for the upcoming quarter, according to the guidance?

Yes, got it. Okay. So I would say probably the biggest singular tailwind is our continued push on productivity programs. In our prepared remarks, you did flag that we pointed out some restructuring. We're going to have benefit from that both in Q3 and also in Q4. But mix is definitely a factor. You look at some of the end markets that are contracting right now, they tend to earn a little less than other parts of the core portfolio. And so we've sort of been a beneficiary of that mix. You asked about pricing; nothing significant to comment on there. I would say it's a combination of productivity programs and mix.

And we’re really, Mark, driving a lot of factory optimization. And that's, like Paul said, that is a big driver.

Okay, that's very helpful. Thanks for all the details on that. And then I know guidance on Nextracker, but just a level set on where you stand currently. Do you still need government approvals or tax rulings in order to do the spin, or do you have all those in place now with the announcement that you're making today?

Mark, this is David. Yes, it's all outlined in the S-4. I know you haven't had time to peruse it all 400 pages, but that will have the outlines of what approvals we've gotten. We still have the shareholder vote. That's on November 20. But otherwise, we're moving in process.

Okay. Thanks so much for taking the questions.

Early Q4 is what we're thinking, guys.

And I think that was our last question.

Great. Thank you all.

Okay. Thank you all for joining. I just want to thank the Flex team on behalf of the leadership team and of course to all our customers and our shareholders for your support. So thank you all. Thanks for joining.

This concludes today's conference call.