Q2 2024 Plexus Corp Earnings Call

Participants

Shawn Harrison; Investor Relations; Plexus Corp

Todd Kelsey; Independent Director; Plexus Corp

Oliver Mihm; Chief Operating Officer, Executive Vice President; Plexus Corp

Patrick Jermain; Chief Financial Officer, Executive Vice President; Plexus Corp

David Williams; Analyst; The Benchmark Company LLC

James Ricchiuti; Analyst; Needham & Company Inc

Melissa Fairbanks; Analyst; Raymond James

Steve Fox; Analyst; Fox Advisors LLC

Anja Soderstrom; Analyst; Sidoti & Company

Presentation

Operator

Good morning and welcome to the Plexus Corp conference call regarding its fiscal second quarter 2024 earnings announcement. My name is Britney Whiting, and I will be your operator for today's call. At this time, all participants are in a listen only mode. As a brief discussion by management, we will open the conference call for questions. Conference call is scheduled to last approximately one hour, but please note that this conference call is being recorded.
I would now like to turn the call over to Mr. Shawn Harrison, Plexus's Vice President of Investor Relations. Shawn?

Shawn Harrison

Thank you, Britney. Good morning, everyone, and thank you for joining us today. Some of the statements made and information provided during our call today will be forward-looking statements, including without limitation as regarding revenue, gross margin, selling and administrative expense, operating margin, other income and expense, taxes, cash cycle capital allocation and future business outlook.
Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of factors that could cause actual results to differ materially from those discussed, please refer to the Company's periodic SEC filings, particularly the risk factors in our Form 10-K filing for the fiscal year ended September 30, 2023 as supplemented by our Form 10-
Q filings and the safe harbor and fair disclosure statement in our press release. We encourage participants on the call this morning to access the live webcast and supporting materials at Plexus' website at www.plexus.com, clicking on Investors at the top of that page.
Joining me today are Todd Kelsey, Chief Executive Officer; Pat Jermain, Executive Vice President and Chief Financial Officer; and Oliver Mihm, Executive Vice President, Chief Operating Officer. Steve Frisch, our President and Chief Strategy Officer, will unfortunately not be participating in today's call due to a death in the family. Our thoughts are with Steve and his family.
With today's earnings call, Todd will provide summary comments referring before turning the call over to Oliver and Pat for further details. Let me now turn the call over to Todd Kelsey. Todd?

Todd Kelsey

Thank you, Sean. Good morning, everyone. Please advance to slide 3. I was pleased with the performance of our team during our fiscal second quarter, positioning Plexus to deliver ongoing industry-leading revenue growth, along with sustained higher levels of profitability and increased free cash flow generation. Our go-to-market team delivered $255 million in new program wins consistent with our fiscal first quarter, reflecting both market share gains and new outsourcing opportunities.
Our ongoing wins momentum when combined with the $240 billion available market that is directly aligned to our strategy, supports our expectations of delivering our 9% to 12% revenue CAGR goal. Our target remains a 5.5% GAAP operating margin exiting fiscal 2025, which equates to a greater than 6% non-GAAP operating margin, excluding stock-based compensation expense. We continue to align our operations to achieve this return and expect sequential operating margin expansion in both our fiscal third and fourth quarters.
We generated $65 million of free cash flow for the fiscal second quarter, a particularly strong result, aided by continued progress on our working capital initiatives. I anticipate we will sustain our free cash flow momentum during our fiscal second half. Later in our prepared remarks, Pat will provide more details regarding our increased fiscal 2024 free cash flow forecast of approximately $100 million as well as our plans for deploying excess cash to create additional shareholder value.
Please advance to slide 4 for a review of our fiscal second quarter results. We delivered fiscal second quarter results at the top end of our guidance with revenue of $967 million and non-GAAP EPS of $0.94, including $0.25 of stock-based compensation expense. Our non-GAAP operating margin of 4.2%, including approximately 70 basis points of stock-based compensation expense, met our expectation entering the quarter.
Please advance to slide 5 for the fiscal second quarter, we won 32 new manufacturing programs worth $255 million annually when fully ramped into production, supported by solid contributions from each of our market sectors, including our semi-cap subsector and capitalizing upon the value created by our differentiated service offering and superior execution as well as our focus on being the leader in highly complex products in demanding regulatory environments. Our go-to-market organization is win. Winning significant new outsourcing opportunities and gaining market share in support of sustaining Plexus has industry-leading revenue growth.
Please advance to slide 6 we continue to integrate sustainable and responsible business practices into our operations and partner across our value chain to maximize our collective impact. A few highlights from the fiscal second quarter are as follows. We expanded our engagement with the UN Global Compact by joining the climate ambition accelerator, a program that will help Plexus advance our energy transition strategy and accelerate progress towards setting science-based emissions reductions targets we delivered on our fiscal 2024 initiative to assess our top 100 suppliers based on environmental and social impact criteria.
These efforts build the foundation for a more transparent supply chain, aiding our goal to deliver a more sustainable, responsible and resilient sourcing strategy. We strengthened the value added capabilities. We offered our customers to design manufacture and service products while reducing their environmental impact.
We were recognized by Glasgow, Scotland center for engineering, education and development as a finalist for their net zero Hero award based on the capabilities we developed to assess the global warming potential of the products we help create pictured on this slide are members of our team in Scotland who delivered this work. We also partnered with Purdue University on a custom curriculum to deepen our mutual understanding of E-Co design principles in order to strengthen our sustainable product development solutions.
Finally, we are excited that later in the fiscal third quarter, we will release our annual sustainability report, which captures the demonstrated progress made in fiscal 2023 to advance our sustainable and responsible business practices as we realize our vision to help create the products to build a better world.
Please advance to Slide 7. We believe our revenue growth is in the early stages of inflecting higher. And for the fiscal third quarter, we are guiding revenue of $960 million to $1 billion. Robust demand from our aerospace and defense market sector, an ongoing gradual recovery in demand for semiconductor capital equipment that is aided by our market share gains over the past two years and continued new program ramps are more than mitigating the inventory correction headwinds from our healthcare, life sciences and industrial market sectors.
We are also forecasting non-GAAP operating margin of 5.2% to 5.6%, which excludes approximately 70 basis points of restructuring charges associated with realigning our manufacturing capabilities to best support long-term customer needs and approximately 60 basis points of stock-based compensation expense. Following these actions, we do not expect any further restructuring activities this fiscal year.
As mentioned with our fiscal first quarter update, while we continue to measure our performance against GAAP metrics, beginning with this fiscal third quarter, we are excluding stock-based compensation expense from our operating margin and EPS guidance for easier comparability to peers. Therefore, on a directly comparable basis, the midpoint of our fiscal third quarter non-GAAP operating margin guidance is 50 basis points higher than our fiscal second quarter results. We're at the high end of our previously provided outlook of 30 basis points to 50 basis points of sequential operating margin expansion.
Finally, we are guiding fiscal third quarter non-GAAP EPS of $1.22 to $1.37, which excludes $0.21 of stock-based compensation expense and $0.21 of restructuring charges. We continue to anticipate a strong finish to fiscal 2024 positioning Plexus for further momentum into fiscal 2025. For the fiscal fourth quarter, we anticipate modest sequential revenue expansion, reflecting a continuation of the trends we expect for the fiscal third quarter.
We are also anticipating an additional 30 basis points to 50 basis points expansion in non-GAAP operating margin for the fiscal fourth quarter, benefiting from volume leverage and operating improvements from our restructuring actions. At the midpoint, our non-GAAP operating margin exiting fiscal 2024 would be improved by 90 basis points when compared to our fiscal second quarter trough.
In summary, I'm pleased with how our team continues to execute for our shareholders despite a challenging macro environment, we remain focused on delivering our 9% to 12% organic revenue CAGR goal over the long term, generating at least 5.5% GAAP operating margin in excess of 6% non-GAAP operating margin exiting fiscal 2025 and producing more consistent and greater free cash flow.
I will now turn the call over to Oliver for additional analysis of the performance of our market sectors. Oliver?

Oliver Mihm

Thank you, Todd. Good morning. I will begin with a review of the fiscal second quarter performance of each of our market sectors. Our expectations for each sector for the fiscal third quarter and some directional sector commentary for fiscal 2024. I will also review the annualized revenue contribution of our wins performance for each market sector and region, and then provide an overview of our funnel of qualified manufacturing opportunities.
Starting with the industrial sector on slide 8, revenue decreased 4% sequentially in the fiscal second quarter. This result met our expectation of a low single digit decrease. Incremental revenue gains resulting from resolve supply chain constraints helped to compensate for softer end market demand across certain markets subsectors. As we start the fiscal third quarter. Inventory corrections are creating muted demand in multiple subsectors, offset in part by incremental increases in semi-cap and the early stages of recovery in broadband communications. This will result in flat revenue for the industrial sector for the fiscal third quarter.
Industrial market sector had strong wins in the fiscal second quarter of $104 million. Wins were balanced across subsectors and included three substantial program wins from existing customers and semi-cap. Additional new program wins for the fiscal second quarter included a win with a new customer that leverages AI enabled technology to support more sustainable mining operations.
Plexus was selected in part due to our capabilities across all of our services, including our ability to commercialize their design, assemble their product and provide sustaining services. This program will be built and serviced in our Boise, Idaho facility. We also expanded our portfolio with a leading energy infrastructure customer to include engagement from a new division with a complex mechanical assembly that will be produced in our Xiamen China campus.
Looking ahead, we now anticipate a low single digit decline in revenue for our industrial market sector for our fiscal 2024 as a gradual strengthening in semi-cap and the early stages of an anticipated communications uplift is more than offset by some delays in new program ramp timing and generally muted demand associated with customers working through inventory.
Please advance to Slide 9. Revenue in our Healthcare Life Sciences sector was down 1% sequentially for the fiscal second quarter, which modestly exceeded our expectation of a low single digit decrease. Demand increases inside the quarter from both existing programs and new product launches drove the improvement in the near term. We believe inventory corrections have largely subsided as revenue has stabilized. We expect our Healthcare Life Sciences sector to be flat for the fiscal third quarter.
Healthcare Life Sciences sector wins for the fiscal second quarter were strong and totaled $109 million. Our wins included programs with two new customers. We have been awarded the production of a point-of-care diagnostic device for our Chicago, Illinois facility and an in vitro fertilization device for our Bangkok, Thailand facility. This marks our first Healthcare Life Sciences win for our facility in Bangkok.
Our fiscal second quarter wins also included a competitive market share gain with a long-standing customer awarding Plexus, the production of a patient monitoring device due to our consistent exceptional operational performance and executive engagement and relationships. The award is for our Guadalajara campus and marks the expansion of services for this customer to all three of our operating regions.
Looking at the healthcare life sciences market sector for fiscal 2024 as a result of inventory corrections and the approximately five percentage point growth headwind from the year-over-year reduction of components procured at above historical market prices. We continue to anticipate year-over-year revenue decline in the 10s. The strength of new program wins gives us optimism for F '25 as they ramp to volume.
Advancing to slide 10, our aerospace and defense sector increased 2% sequentially in the fiscal second quarter, beating our expectation of a low single digit decrease improved supply chain performance and new program ramps proceeding ahead of schedule contributed to the better than expected performance.
As we look to the fiscal third quarter, continued robust commercial aerospace demand and new programs. Strength in the defense and security and space subsectors contribute to our expectation of a high single digit increase for the aerospace and defense sector.
Our fiscal second quarter wins for the aerospace and defense sector were strong at $42 million. We won two new programs with a recently acquired space subsector customer supporting both military and commercial applications. These assemblies will be produced in our Kelso, Scotland facility. We also won the next generation product from an existing customer in our security subsector that will be built in our Penang Malaysia campus for fiscal 2024 aerospace and defense, demand continues to be robust across all of our subsectors. As a result, we continue to expect revenue growth for fiscal 2024 to exceed the high 10s growth witnessed in fiscal 2023.
Advancing to slide 11, we can review the regional highlights of the manufacturing wins for the fiscal second quarter. The Americas wins were robust at $120 million and included a substantial win from an existing communications subsector customer for the production of its next generation device in our Guadalajara, Mexico campus, the APAC regions. Fiscal second quarter wins of $94 million included a significant program expansion with an existing Healthcare Life Sciences sector customer for a monitoring device that device is built in our Penang, Malaysia campus. The major regions second quarter wins of $41 million continues its recent strong wins performance and includes a substantial award from an existing semi-cap customers for our facility in Livingston, Scotland.
Please advance to slide 12 for a review of our funnel of qualified manufacturing opportunities. Given solid wins harvesting the past few quarters as well as the typical ebb and flow of programs in and out of the funnel, the total funnel decreased to $3.5 billion, while sequentially lower recall that our qualified funnel of manufacturing opportunities only breached the $3.5 billion threshold in fiscal 2023.
Further multiple market sectors noted the strength of their unqualified early-stage opportunities as we continue to pursue programs and our large addressable market for outsource industrial sector funnel dipped slightly to $893 million funnel demonstrated resilience as we backfilled almost all of the wins. The semi-cap subsector had both strong winds and a substantial increase in the funnel size.
Aligned with our sector strategy, the opportunities reflected in our funnel are balanced across a variety of markets and across both existing customers, new divisions of existing customers and new customers. The Healthcare Life Sciences sector wins performance contributed to the reduction in the funnel declining to $1.8 billion. Strengthen early-stage opportunities provides optimism for future wins growth for the Healthcare Life Sciences sector.
The funnel for the aerospace and defense sector remains strong at $822 million with the great breadth and opportunities across the commercial aerospace, defense, security and space subsectors.
Lastly, the funnel of opportunities for our Engineering Solutions remains robust customer decision-making saw incremental improvements during the fiscal second quarter and our wins rebounded slightly as a result. In addition, the market sector diversity within the funnel has improved positioning Plexus to benefit from the future growth and significantly improved utilization of our engineering team.
I will now turn the call over to Pat for an in-depth review of our financial performance.

Patrick Jermain

Thank you, Oliver, and good morning to everyone. Our fiscal second quarter results are summarized on slide 13, with revenue at the top end of our guidance, gross margin of 9.1% came in above our midpoint due to slightly better fixed cost leverage, productivity improvements and the start of savings from our restructuring efforts led to a sequential gross margin improvement despite the impact from seasonal compensation cost increases.
Selling and administrative expense of $47.6 million was slightly above our guidance. However, as a percentage of revenue, SG&A of 4.9% was consistent with expectations. Non-gaap operating margin of 4.2%, which excludes 120 basis points of restructuring charges, met the midpoint of our guidance. This results included over 70 basis points of stock-based compensation expense.
We call last quarter that I mentioned, we would begin sharing non-GAAP operating margin and EPS exclusive of stock-based compensation expense for easier comparability to peers. This exclusion is reflected in our fiscal third quarter guidance. We have also included a table in our press release presenting operating margin and EPS, excluding restructuring charges, and stock-based compensation expense. For the last six quarters.
Nonoperating expenses of $10.5 million were favorable to expectations due to lower than anticipated net interest expense. Non-gaap diluted EPS of $0.94, which excludes $0.36 of restructuring charges, was at the top end of our guidance due to the factors previously mentioned, along with a favorable tax rate. Turning to our cash flow and balance sheet on slide 14, we were pleased with our free cash flow performance. This quarter, we delivered $88 million in cash from operations and spent $23 million on capital expenditures, resulting in free cash flow of $65 million.
This results significantly exceeded our net income expectations with a usage of cash in the fiscal first quarter, we have now generated free cash flow of $33 million through the first six months of fiscal 2024. During the quarter, we purchased approximately 186,000 shares of our stock for $17.6 million. We have approximately $38 million available under our current $50 million authorization and expect to consistently exercise the remaining amount during the second half of fiscal 2024 creating additional shareholder value.
We ended the fiscal second quarter with a cash balance of $265 million and total debt of $438 million. We had $261 million available to borrow under our credit facility and a conservative gross debt to EBITDA ratio of less than 1.8 times. In addition to funding our share repurchase authorization, we will use any excess cash to reduce borrowing under our credit facility. For the fiscal second quarter, we delivered return on invested capital of 9.9%, which was 170 basis points above our weighted average cost of capital cash cycle at the end of the fiscal second quarter was 91 days, 10 days favorable to expectations and sequentially improved by four days.
Please turn to slide 15 for details on our cash cycle. Our cash cycle improvement came from a combination of lower inventory days and higher days in advance payments. We were encouraged to see our supply chain and regional teams drive sequential improvement in both areas. They delivered a $56 million sequential reduction in gross inventory, which now sits at the lowest quarter-end balance in two years.
As Todd has already provided the revenue and EPS guidance for the fiscal third quarter. I'll review some additional details, which are summarized on slide 6. Pete fiscal third quarter gross margin is expected to be in the range of 9.3% to 9.7%. At the midpoint, gross margin would be 40 basis points higher than the fiscal second quarter. Improved productivity across all of our regions, better fixed cost leverage and savings recognized from our restructuring efforts are contributing to the anticipated improvement. \
We expect selling and administrative expenses in the range of $45.5 million to $46.5 million, which is fairly consistent with the fiscal second quarter. Note that our SG&A guidance is inclusive of approximately 5.5 million of stock-based compensation expense. Nonoperating expenses are anticipated to be in the range of $10.5 million to $11 million, which is also fairly consistent with fiscal second quarter.
Our non-GAAP effective tax rate for both the fiscal third quarter and fiscal year is expected to be in the range of 15% to 17%, with continued attention and focus on working capital efficiency. Our expectation for the balance sheet is that we will recognize further reductions in working capital investments compared to the fiscal second quarter. Based on our revenue forecast, we expect that this level of working capital will result in cash cycle days in the range of 84 to 88 days.
At the midpoint, this would be a sequential improvement of five days, which is mainly related to reductions in gross inventory. This improvement should lead to another quarter of positive free cash flow.
Couple of comments on the full year, we continue to expect capital spending in the range of $100 million to $120 million, which will equate to less than 3% of revenue last quarter. I mentioned that we could generate up to $50 million in free cash flow for the fiscal year. With further progress on working capital initiatives, we are now projecting approximately $100 million of free cash flow for fiscal 2024.
With that, Britney, let's now open the call for questions.

Question and Answer Session

Operator

(Operator Instructions)
David Williams, The Benchmark Company.

David Williams

Good morning and thanks for taking my questions. Good morning. I guess maybe maybe Oliver, can you if you think about the industrial segment and you mentioned some of that weakening there. That seems we've been hearing maybe a little bit better commentary out of some of the semi suppliers in terms of some improvement there, even on the communication side. So just wondering if you could maybe parse through where you're seeing some weakening and whether you think that inventory related and more demand related? Or if it's just specific maybe took to where Europe where you have greater exposure?

Todd Kelsey

Yes, David, I'll start with some of the good things are happening in the industrial segment, and I'll pass it over to Oliver and talk about maybe where some of the challenges are.
If we take a look at SemiCap, first of all, we as we've talked about the last few quarters, we believe we were through the bottom and are seeing incremental improvement within semi cap demand. Now that the bulk of what we're seeing in revenue gains is from market share and market share gains that we had recently, but we are seeing some modest market improvement as well, too, which we anticipate will accelerate likely into '25. But it'll we expect to just accelerate at some point and we're also seeing some signs of improvement within communications as well, too. So again, early signs, I'm not ready to declare a great recovery at this point, but we are seeing some positive momentum there, and I'll pass it over to Oliver now.

Oliver Mihm

Yes. So to add onto that, if I consider other subsectors inside industrial, Jim, on we are seeing a little bit more of a muted outlook and either say electrification or automation and industrial equipments. I would attribute that to inventory corrections as we seen rippling through other subsectors in prior quarters.
And then specific, just to reiterate what Todd said at the end and on a positive note, even if we see some incremental pushouts and say semi-cap due to a fab to fab delay or something like that on the whole, both for semi-cap and broadband communications, we're sure at sealing those early indications of modest market rate improvement.

David Williams

Great, great. Thanks for that and you had mentioned some delays in that industrial on the programs. Is that related to maybe some of the fab pushouts you talked about just now?

Oliver Mihm

Sorry, just the second half of your sentence, I didn't catch it.

David Williams

You had mentioned earlier that there were some program delays within the Industrial segment. Is that related to maybe some of the pushouts or on the fab delays that you just spoke of?

Todd Kelsey

Yes, exactly right. The same correlating those two points would be correct.

David Williams

Okay. Great. Great. And then maybe, Todd, can you talk a little bit about the improvement that you're seeing in the Engineering Services side? And has that really improved outside of the restructuring actions that you've taken last quarter and is that is that I guess from a in terms of the operating margin boost this quarter, is there a way to think about that contribution?

Todd Kelsey

Yes. Well, certainly the restructuring activity helped but we are seeing a demand improvement in engineering as well, too. As Oliver mentioned, wins ticked up and the encouraging thing, a number of the new program wins are, I would call brand new programs that have the potential for for many follow-on phases. So we're getting a lot more confident around our demand within engineering solutions.
The other thing I'd add is we're seeing a good diversification within our funnel and within our wins within engineering. And I view that as a real positive as we continue to penetrate the other sectors beyond healthcare life sciences.

David Williams

Okay.

Patrick Jermain

David, I was just going to say from a margin standpoint, some of our actions we've taken will benefit Q3 and that's reflected in our guidance, but probably more so fully in Q4 and going onward after that.

David Williams

Okay. perfect. And maybe just one more for you on the free cash flow that's sort of been an area of focus for you all, and you've done a fantastic job of paying off. Can you talk about maybe what the puts and takes are there and how we should think about that, maybe the free cash flow as we get beyond this year maybe into next year, just kind of given the progress that you've made thus far. Thank you.

Patrick Jermain

Sure. And maybe I'll start with this quarter and where we saw improvement because I think that's going to lead into future quarters as well. I mean, we had anticipated forecasted actually an investment in working capital in Q2 and the reverse happen. We generated $65 million of positive free cash flow, and there's probably three main areas that came from obviously gross inventory, a lot of effort around getting after aged inventory on big effort to moderate, what's actually coming into our facilities, some adjusting minimum order quantities, bringing down lead times.
All of those have benefited gross inventory, but then also higher advance payments and some of that's linked to excess and obsolete inventory. So getting customer commitments to that excess and obsolete inventory have benefited us and then some capital spending pullback that some of that's just deferral that we'll see in Q3. But some of that is just based on our revenue growth and pulling back on some of that spending. So going forward, David, we do see a path to continuing to bring gross inventory down.
So generating similar amounts of free cash flow in Q3 and Q4 would be our expectation. And then as we get into '25, I think getting back to a more normalized free cash flow that we've seen kind of pre pandemic is our expectations. So just a reminder, from a cash cycle day perspective, each day we pull out is $10 million of free cash flow. We're freeing up. So really nice improvement in Q2 and expectation for Q3 and beyond.

David Williams

Thanks so much.

Operator

James Ricchiuti, Needham & Co.

James Ricchiuti

Hi, good morning. You may have addressed this. I may have just missed it. I was on another call, but I was hoping I heard some reference to the inventory correction in industrial and some of the subsectors spreading. And I was wondering, yes, it sounds like you're on the margin a little bit more positive about what you're seeing in semi cap. So where are you seeing some signs of that, you know, potentially some softening in industrial?

Todd Kelsey

Yeah. I'll jump in there, Jim, and provide our provide some oversight or overview and as to how we're looking at industrial. Yeah, you're correct that our commentary here in our script prepared remarks was pointing out some inventory reductions on creating some muted demand, specifically in industrial equipment, automation and electrical electrification. And we do see still incremental pushouts, say inside semi-cap, as we hear about fab delays, bad deployment delays. But on the whole, both within semi-cap and comms, we're seeing early an early incremental modest market improvement.

James Ricchiuti

Got it. And just maybe a tougher one to answer, but just the broader correction that you're seeing in healthcare and even in some of the industrial markets where you've maybe seen the inventory challenges a little earlier on any sense as to when that correction, those headwinds may begin to abate?

Todd Kelsey

Yeah. So maybe I'll take guide through each of our markets here, Jim, and talk about where I think we're at the moment. If we look at A&D continued strong really across all subsectors with within aerospace and defense. So that would include security and commercial space, strong growth and in each of those subsectors in fiscal '24 and the outlook for '25 looks encouraging as well, too. If we go over to healthcare. That's where we've seen the most severe inventory corrections.
Now, we believe we've hit the bottom there. So there's been stability in our forecast over over the course of the past quarter where previously we had been seeing degradation on a quarter over quarter basis. So there's signs we've hit the bottom there.
And then the question just becomes when do market's recovery recover. So as we looked at 25 right now, we're projecting some strong growth within health care, but that's a result of program ramps, not market recovery at this point. So as markets recover. I think we could have a really strong growth projection at that time or growth outlook.
And then looking at industrial, that's been the latest one to soften a bit. So over half the sector, I would say is on an upward trend right now that the in SemiCap and our communications business and the balance is seeing a bit of an inventory correction at this point. And that's really kind of taking away from the growth that we're seeing in the other two subsectors.

James Ricchiuti

Got it. That's helpful. Thank you.

Todd Kelsey

Sure.

Operator

Melissa Fairbanks, Raymond James and Associates.

Melissa Fairbanks

Thanks so much. And maybe just a follow-up, Todd, on on your comments on the healthcare business. We know you faced some headwinds there for quite some time first from simply supply constraints now maybe an overcorrection in terms of the buying patterns, but you actually slightly outperformed your expectations in March.
Can you maybe give us an update on what you're seeing in each product category there or any greater level of detail in terms of where the inventory corrections are coming? Or maybe what's what's getting a little bit better?

Todd Kelsey

Yes, I think I'll pass it over to Oliver to give you a little color on that, Melissa.

Oliver Mihm

Melissa. Good morning. We consider our Q2 performance. I would say that's less subsector based and more customer specific. So we had a few customers that specifically increased their demand through the quarter. And then we had a couple of program ramps, both with new customers and existing customers that were essentially ahead. So moved a little bit faster than expected. And those are the things that all contributed to the beat or kind of better performance at emerging?

Melissa Fairbanks

Yeah, excellent. Excellent. So for my follow-up, and this might not be fair, but it seems like we have to talk about a eye on every call. So in the past, you've talked about deploying AI and machine learning in your own manufacturing processes. Some of your peers recently have been pretty outspoken about their own exposure to AI, either in the data center, some of the more industrial applications like power management. Can you remind us if you've got any direct exposure to this market outside of your own internal processes?

Todd Kelsey

Sure. Absolutely, Melissa. I think the most direct line that I can paint for you is if you contemplate a I mean, build out associated with that and how that's going to ripple through to SemiCap equipment that can be something that we're going to participate heavily in. We also expect AI to drive continued innovation.
So for instance, within health care, you could expect that to drive faster product innovation as they develop. For instance, I'm kind of making things up and algorithms to enable them to come up with patient outcomes more quickly and the innovation and device launching associated with that, we think that's something we would do directly stand to gain from.

Melissa Fairbanks

Excellent. Thanks very much. That's all for me for now.

Todd Kelsey

Thank you, Melissa.

Operator

Steven Fox, Fox Advisors LLC.

Steve Fox

Hi, good morning. I had two questions. First off, you mentioned on the semi-cap side that you're not only winning new programs, but you're seeing your funnel expand at the same time. I think that was the only area where you said that this quarter you called out some growth that's benefiting from new programs, et cetera. It seems like you have a lot of momentum there.
But And my question is, I was wondering if you could sort of right-size us on where you're seeing the most success on semi-cap, why you're taking share is there anything changing in the supply chain? Because I know at times you compete with EMS companies, but there's also sort of Tier one Tier two players, the semi cap guys that do some of the stuff you do. So sort of what's changed maybe over the last couple of years as has the industry has gone through this downturn for you guys thanks and I have a follow-up.

Todd Kelsey

Sure. So I'll take this. Steve, it's Todd. So from a semi-cap standpoint, and this goes with the new wins as well, too, we basically play across the entire spectrum within semi-cap, our semi manufacturing in the process of as well as test and back end. So that's a significant piece of business for us as well.
The reason we're taking share is execution. I mean, with our team performs incredibly well from a from a standpoint of quality and delivery within that market space, we ship finished systems. So I think our our capabilities are some are outstanding within the space, and that's recognized by our customers. And I would say we're where we're kind of playing across the technology spectrum as well as memory and logic on another big play for us within SemiCap is our engineering capability. So we're able to bring a lot of technology into our offering for our customers.

Steve Fox

Great. That's helpful. And then just secondly on Pat, you mentioned improved productivity. Could you just put a little color around that? What and where are you seeing the benefits right now? And what kind of initiatives are helping productivity maybe in the future?

Patrick Jermain

Yeah. Maybe I start and then Oliver could could jump in on. It's really across all of our regions. We've seen productivity improvements come in in Europe. We've secured some new wins. So leveraging our capacity better is benefiting our gross margin within Europe. Some same can be said for Amir, where we work on increasing capacity and utilization with some of the new program ramps that are going in. So Oliver, unless you add anything else from a productivity standpoint that you're seeing?

Oliver Mihm

Yeah, I'll add two things, bad things. First, just in terms of utilization, I'll note that our Bangkok site broke even in fiscal second quarter. So that's good news and as that as those program ramps continue to approach for volume production, that profitability will obviously improve, continue to improve.
And then specifically, internally, we have something that we measure called transformation costs, essentially the costs required to transform raw materials to finished product. And we've got laser focus on improvement goals by site. It's something that we think is really important for us as a business. And so that will continue to drive additional benefit as well.

Patrick Jermain

Yeah, one of those areas would be around quality and scrap and seen scrap expense coming down with improved quality of that processing. And that's just one example, the focus on transformation costs that Oliver mentioned.

Steve Fox

Great. That's all super helpful. Thank you.

Patrick Jermain

Thanks, Steve.

Operator

Anja Soderstrom, Sidoti.

Anja Soderstrom

Thank you for taking my questions. And I also have two acquisitions here and investment, the funnel contraction for the quarter. How should we think about that? Is there lumpiness there? Or how should we think about that going forward?

Oliver Mihm

But yes, and Doug, I'll answer that. Anja, this is Oliver. As I consider the fund on the whole, the first thing I'll point out is that we do not manage that quarterly boundaries. So there's typical ebb and flow, and that's it's a natural part of the process also reflect on the fact that we've had a number of quarters of really strong wins recently that contributed to that funnel pulling back.
And then the other thing I'll point out as we continue to still have a larger number than typical of large opportunities in our funnel. And then as of during our prepared comments, we also track internally and something we don't publish what we would call our unqualified early-stage funnel and multiple of our sectors has specifically pointed out that they see a lot of strength there. And so that then gives us optimism that the funnel is going to backfill nicely.

Anja Soderstrom

Okay. Thank you. And then just for some clarification on Pat's comments around them, your free cash flow and the CapEx spend being pushed out. And are you pulling back on that? Is that just a matter of that being pushed out until later this year, are you getting softer on your CapEx spend because you see softer growth ahead?

Patrick Jermain

No, I think some of it Anya, it's just timing between quarters and when some of it hits. And I'd say we typically come into a quarter thinking we're going to spend a lot more than we typically do and that's a quarterly trend we have seen for several quarters. Some I'm keeping the CapEx spending at $100 million to $120 million this year. So that's consistent with last quarter, I started the year, I think, at $110 million to $130 million. So it's come down a little bit just based on our needs this year some, but still pretty consistent with what we expected a quarter ago.

Todd Kelsey

And what I'd add to on is we're very optimistic in our growth potential for fiscal '25. So and so we're not backing off from an investment standpoint.

Anja Soderstrom

Okay, thank you. Actually had one follow-up to just in general with your customer and the sentiment that given the economic uncertainties however, we are in the outsourcing industry as up, how do you see them? Are they more cautious or are there more turning to outsourcing or just in general, what are you seeing anything among your customers when you speak to them?

Todd Kelsey

I think in general there there's a continued movement towards more and more outsourcing. And I think as the economy and flows as the as the when the economy is worse, you generally see an increase in outsourcing. So it's a bit inversely proportional right now. We're seeing good interest in outsourcing is the way I'd put it. So and it continues to improve.

Anja Soderstrom

Okay. Great. Thank you. That's all for me.

Todd Kelsey

All right. Thanks, Anja.

Operator

Thanks, Ernie, and thank you so much for that. I'm showing no further questions. I would now like to turn the call back over to Todd Kelsey for closing remarks.

Todd Kelsey

All right. Thank you, Britney. I'd like to thank everybody for joining us our shareholders, investors analysts Plexus's team members.
In concluding, I would like to state again how pleased I am with our team continues to execute. We remain focused on activities to create shareholder value. And these include delivering our 9% to 12% revenue growth goal over the long term, generating at least 5.5% GAAP operating margin exiting fiscal 2025 and producing more consistent and greater free cash flow. Thank you all and have a wonderful day.

Operator

Thank you for participating in today's conference. This does conclude the program. You may now disconnect.