Flex Ltd.

Good afternoon and thank you for standing by. Welcome to Flexa's second quarter fiscal 2024 earnings conference call. Presently, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star 1 on your phone. If you would like to withdraw your question, please press star 2. 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, Revati Advaiti, 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. 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 spinoff pursuant to a merger agreement entered into by Flex and Nextracker in connection with Nextracker's initial public offering. We believe that the spinoff 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 spinoff. The spinoff 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 spinoff 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 return the call over to our CEO, Revati.

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 five, 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 68 cents of adjusted EPS. Since we have now announced the separation of Nextracker, we are able to provide CoreFlex's results, which excludes Nextracker. For CoreFlex, 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%. CoreFlex adjusted operating margin came in at 4.7%, up both sequentially and year-over-year, and we delivered 56 cents 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 six. 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 puts 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 percent 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 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, with much of that growth 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 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 markets with how we are operating as a company. Flex is a more agile and operationally efficient company, and you 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 CoreFlex. 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 Marduk 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 next tracker value in a shareholder-friendly transaction. As David outlined, we expect to distribute a 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. Paul?

Okay, thank you, Riv. Thank I'll begin with our second quarter performance on slide eight. 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 68 cents for the quarter, increasing 8%, which includes 8 cents of Nextracker non-controlling interest. Looking at Coreflex results, which excludes Nextracker, in the quarter, Coreflex revenue was $6.9 billion, down 5%. And as Revathy 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 56 cents of BPS, 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 is 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. On to slide 12 for our quarterly guidance. For total flex, we expect revenue in the range of 6.5 to 6.9 billion, with operating income between 375 and 425 million. interest and other expenses 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 57 and 65 cents based on approximately 448 million weighted average shares outstanding. This guidance includes approximately eight to 10 cents 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 and 6.3 billion. Core adjusted operating income between 280 and 310 million, which equates to adjusted operating margins between 4.7 and 4.9 percent. At the midpoint, this would be up both sequentially and year over year. CoreFlex adjusted earnings per share is expected to be between 47 and 52 cents. And looking at our gap 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'll provide guidance for total flex, including Nextracker, which remains comparable to our prior guidance. We now expect full year revenue between 28.1 and 28.8 billion adjusted operating margin now between 5.8 and 6% and adjusted EPS between two 49 and two 66 per share. This includes approximately 30 to 35 cents in non-controlling interest expense from next tracker. 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 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, adjust the DPS between 205 and 218. 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 FY24 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 that 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. This is another proof point on how we've evolved and improved and are now operating at a level better than at any time in the company's history.

Thank you, Paul. Overall, I'm really pleased with how we are 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 begin the question and answer portion of today's call. If you would like to ask a question, please press star 1 on your phone. As a reminder, we ask that you please limit yourself to one question and one follow-up. One moment please for your first question. Your first question comes from the line of Matt Sheeran from Stifel. Your line is now open.

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. You talked a little bit about some auto headwinds in some of the data con 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?

Hey, Matt, so first of all, I appreciate the question. I think it's spot on. Let me just give you some specifics. And, you know, Ray, you might have some comments as well. But what we had previously called out was, you know, weakness in more of our consumer-facing markets. And, you know, 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 on 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 guys are all seeing too, we're expecting comps 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'll still be up, but it'll probably be up more like low single-digit. So those are some of the bigger end markets. We've seen some contraction, but I guess I would sort of bookend that comment by saying, although things are choppy in some areas, things like next-gen mobility looks great. You know, cloud, great. Digital health, you know, continues some really nice to see some things there. So, you know, they just unfortunately just 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, you know, 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, you know, it's really well managed through the cycle, which is what you're seeing present out today. So, you know, 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 of that. Very helpful information. And as my follow-up, just regarding reiterating that 265 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'll 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 some of the markets that are softening are even lower margin, below average than I would have thought. So I was curious, how many of these markets where maybe you're still not getting you know, average margins, would you consider either exiting, repricing, you know, reconsidering the strategy in some ways? I'm just curious how, you know, how pliable you're going to be towards some of these other markets going forward. Thanks.

Sure. So, you know, I wouldn't say there's any major end markets we're planning on exiting, but I would sort of caveat that statement, Stephen, by saying You know, portfolio management is a constant process, and we're always evaluating and, you know, maybe not, quote, divesting per se, but, you know, de-emphasizing. I think your comment on mix is spot on. You know, it's kind of nice that, you know, 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, you know, some market choppiness and kind of a guy down on the top line, You know, mix definitely helps. Mix definitely helps. I don't know. Is that a helpful commentary?

Yeah. Maybe, Stephen, 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 are 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 the six markets. It doesn't matter whether you're on reliability or agility. I see that normal course of action.

Okay. No, that's definitely helpful. And then just, I was wondering if you could dial in a little bit more on the auto market. You know, you mentioned the UAW strike, but away from that, can you talk about you know, just maturity of programs and whether they're contributing to margins, how, you know, 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 months on EVs and things like that.

Yeah, I'd say I'll start with saying that, you know, a few years ago, we kind of stated our intention in automotive to really drive our focus on what we call next gen mobility. And, you know, our EV platform that I've talked about before, which is a combination of our own designs and designs that we work on with our customers has been very successful. in different geographies and also in North America in terms of winning platforms. We talked about large bookings expansion in automotive, which will take kind of two to five years to ramp up and get to maximum volume production. But that is our strategy on automotive. And we can see that in terms of our bookings and our core volume growth, both in automotive. I'd say that the noise that you see today in terms of EV is kind of part of, I would say, the growing pains that you're going to see in any end markets that is going through such a hyper growth cycle. And we see that that's a good thing. We believe that there is good growth to be had. We also think there is disruption in the overall supply chain in automotive, which provides a great opportunity for EMS companies like Flex. So you put all that together, I would say, My overall view on EVs and an automotive is that it is a good place for Flex to be, and we continue to have really strong growth as a result of that, and we want to be diversified in our automotive EV and markets.

Great. That's helpful. Thank you. Thanks, David.

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

Hi, thank you for taking my questions. 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 bits 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 presidential 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 bits 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 bits, if you can just delve into that margin improvement on lower revenues?

Well, the good news, Rublu, is that there will be no more sell-siders that ask questions because I think you had eight of them in there, but I'm just teasing. So let me start with revenue. I called out a few of the end markets that were seeing declines. By the way, by my math, the midpoint, about $2.5 billion down. Consumer devices was a piece. We talked a little bit about renewables. We talked about being a little bit more conservative with auto. We talked about comms infrastructure. So I think those are going to be some of the bigger drivers, partially offset by continued growth in the areas that Revathy and I have been talking about for a couple years now. NextGen Mobility and auto, cloud, digital health, all look pretty good. So that's what drove the D rate on revenue. You asked about utility versus resi for renewables. You know, first I'll just say, and I think we've disclosed this before, the renewables business is now, you know, well over a billion dollars for Flex. It's a big piece of the business. There's some confidentiality around customers. We have made some disclosures that would, you know, in partnership with our customers. So I think you know that, you know, there's a couple names out there that tend to be more in the residential space. And that's where we've been pinched here a little bit in terms of some forecast changes and a little bit of choppiness. But our long-term view remains very bullish on that whole renewables space, and we do expect it to continue to grow. You asked about automotive. I would say we're fairly well geographically dispersed. We're not overly concentrated in North America. So although the UAW, we are expecting and seeing some impact here in Q3. It doesn't affect Europe. It doesn't affect China. so much. In terms of margins, so $2.5 billion sales cut with no change to OP, there's a couple things that are in our favor on that. One, and this is what I think Stephen well pointed out, you know, the margin mix helps. You know, we're seeing volume reductions in areas where, you know, our margin rates tend to be a Um, two, you know, we, I did mention in the prepared remarks, there is going to be some restructuring here in the third quarter, and there's going to be tailwind both in Q3 and Q4 for that. Um, and then, you know, three Q2 came in a little bit better. And so that that's dropping through. And so I think those three pieces kind of help us to, you know, hold the line on, on operating part profit. And then the last thing that you asked about, uh, was recoveries. So if I think about the full year. Joe Piazza, Revenue year on year for core flex recoveries are down meaningfully versus what we've you know what we thought over the last couple of quarters. Joe Piazza, I would say that's a very good new very good news for a couple of reasons one it's going to have a beneficial impact on inventory this chip shortage thing. Joe Piazza, it's although there's still tightness in some areas it's gotten much, much better. And that helps with cost too, cost pass-through included. And so when I think about full year, I think at the midpoint of our guide, high single digit down for the full year, I would guess at this point, maybe half of that comes from changes in pass-through. So it's not all the revenue headwinds that you're seeing are core markets. Some of that is just inflation pass-through, as you knew that we would see when things got a little bit more normal.

Yeah, thanks for all the details. I really appreciate you going into all of that. Just real quick on a quick follow-up. Now that you've announced the remaining Next Tracker transaction, does that change your philosophy around the 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 were quite bullish in 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. You know, we, we continue to believe that there's a significant disconnect. Um, hopefully with the next track or separation, people sort of realize the arbitrage there and, and things, things sort of rationalize a little bit. Um, you know, I would say the, the, probably the distant third at the moment would be M and a, you know, as always we're reserved the right to change our minds, but, but stock buyback is, is clearly the, the, you know, expected use of free cash.

And, you know, the only thing I'd add is I'll remind you that, you know, 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, Rubaloo.

Your next question comes from the line of Sameek Chatterjee from JP Morgan. 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, just 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 and or is there something else embedded in there in terms of recovery going from 3Q to 4Q? In any sense, you can give us on the timing of those cloud 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, Sumit. So, yep, there is some ramp tailwind as we move through Q4, as we continue to ramp. Cloud is a piece of it. There's a 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 smaller 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 next tracker numbers out. Just wondering if you can share your thoughts about sustainability of that base 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 base?

Yeah, Sumit, I would say first is, you know, steady margin expansion has been a core part of our story the last, you know, four to five years, right? And through the different cycles we've seen, we've been very consistent in our ability to drive margin expansion. So I view the 50 basis points margin expansion as sustainable. and continue to track in the way of margin expansion. And it comes from the things we talked about. One is definitely continued change in our mix. Our focus is more on growing areas like cloud, next-gen mobility, digital healthcare, all of those that are better margins. So mix plays a role in it for sure. We have done a lot around optimization of our factories and driving productivity you know, through automation, through CapEx investments. So that is very sustainable. So if I look at how we're getting margin expansion, you know, I would say that it's a very sustainable story. And I think that it's good that we have been able to do that consistently. And, you know, reiterating FY25, EPS also points in that direction.

Great. Thank you. Thanks for taking my questions.

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

Oh, hey, guys. Thanks for taking my question. I have two questions, if I can. Firstly, I just want to double-click on the buyback. You know, just you mentioned the authorized $2 billion buyback. I'm just curious about cadence, especially kind of, you know, blackout around the kind of spin-off timing, which is – kind of for March quarter 2024. And also, I was looking at the share count kind of seems to be flat based on a 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 300-meter run rate for the next few quarters? Or could be some technicality around the spin-off timing?

Well, the good news is now, you know, quiet periods are essentially over because that's out in the public domain that we do and intend to spin. And so that has sort of created some stops and starts over the last, I mean, really over the last two years. But so that helps a little bit, you know. We give our last quarter share count as part of our guide. I think you've known us to continue to buy stock as we've moved through the quarters, and so that's probably a slightly conservative view, if you want to read into that a little bit. In terms of specific cadence, I'm not going to say exactly what we intend to buy here in our third quarter or our fourth, other than to say stock buyback is clearly a capital allocation priority for us.

Got it. Thanks for that. Just a quick follow-up. Just in terms of the free cash flow, potentially it could be a bigger driver for the share price appreciation. It's nice to see 2Q deliver a much stronger FCF versus 1Q being a cash use. Just curious if you guys are reiterating $600 million or above in terms of four-year FCF, and are there any potential upsides just based on the better margin profile in the back half?

Yeah, it's a, it's a great question. Um, and so I'll, I'll just say, you know, predicting, you know, cashflow is a little trickier than predicting the PNL. It can kind of bounce around a little bit, but, um, what, what we're going to do is we're going to update everyone about the free cashflow expectation targets. Once the separation is complete. And here's the logic on that. There's lots of puts and takes from next tracker specifically. And because the timing is not perfectly certain other than we expect at some time in Q4. It's just a little hard to predict. But what I want to make sure is clear, we're definitely headed in the right direction. We're particularly pleased with how we did in Q2. We generated, you know, like you said, we generated north of $200 million in free cash flow. That was up significantly both year on year and also sequentially. I'm quite pleased with our inventory performance as it came down again in the quarter. We inflected, you know, a couple quarters back, and I'd like to see the continued progress there. And that free cash generation was after 145 million in capex. So we're clearly not under investing in the business. So I would say nothing has fundamentally changed and we still expect to grow free cash flow.

Great. Thanks again. I'll go back to the queue.

Yep. Thanks, George. And welcome.

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

Yes, good afternoon. Thanks for taking my question. You mentioned NICs as a key tailwind to core flex margins going from fiscal 2Q to 3Q, even 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 just to be clear on your question, are you talking Q2 to Q3, Mark?

Yeah, from the 4.7 you just did, I think the midpoint of guidance is 4.8. You mentioned MIPS is one of the key drivers as to how margins are actually maybe expanding a little bit as revenue drops. But is there anything with restructuring programs you just did or incremental pricing that may also be playing a role? Just trying to think through some of the buckets and pieces that are helping margins in the upcoming quarter based on guidance. Yep, got it. Got it. Okay.

So I would say probably the biggest singular tailwind is, you know, our continued push on productivity programs. You know, in our prepared remarks, you did, you know, 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 know, you look at some of the end markets that are contracting right now, you know, 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. You know, 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. No, that's very helpful. Thanks for all the details on that. And then, yeah, I know no guidance on NextTracker, but just a level set on where you stand currently is, 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?

This is David. Yeah, 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 20th. But otherwise, we're moving in process.

Okay. Thanks so much for taking the questions.

Early Q4 is what we're thinking, guys.

I think that was the last question, right?

Great. Thank you all.

Okay. Thank you all for joining. I just want to thank the Flex team, you know, 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. Thank you for joining. You may now disconnect.