Q4 2019 Earnings Call

October 24, 2019

Conference calls scheduled to lift approximately one hour. Please note that this conference is being recorded.

Now I'd like to turn the call over to this other bearish hurt successes senior director of Communications and Investor Relations other.

Good morning, and thank you for joining us today.

The words believe expects intend plan anticipate and similar terms often identify forward looking statements.

Let me now I'll turn the call over to Todd Kelsey Todd.

The non-GAAP results excluded a 35 cents benefit due to a nonrecurring tax event and a five cent expense due to restructuring in order to rightsize our communications business.

Through our continued focus on productivity and exceptional execution, our teams achieved fiscal fourth quarter 2019, adjusted operating margin of 4.8%.

Finally, I'm quite pleased with the progress we've made through inventory reduction efforts.

We reduced inventory by an additional $56 million or eight days within the fiscal fourth quarter.

[noise], our engineering solutions organization grew nearly 25% year over year, highlighting the value our customers see in our differentiated service offering where we help create the products that build a better world.

Our aerospace and defense sector delivered 32% revenue growth in fiscal 2019.

We continue to have exceptional wins performance and funnel growth within the sector as leading Oems are attracted to our strong brand and expertise in this end market.

The efforts by the team over the past several years to diversify the sector portfolio in markets such as heavy equipment rail in Threed printing led to revenue growth of 30% for the fiscal year in the sector, excluding semiconductor capital equipment.

During fiscal 2019, we grew in each of our three geographic regions and across all service offerings.

Our wins exceeded $200 million each quarter within the fiscal year, highlighting the consistency and diligence of our business development processes.

I'm excited about the traction our plexus brand has gained as it speaks to our commitment to help create the products that build a better world.

Please advance to slide nine.

Our portfolio continues to further differentiate in the markets that feature highly complex products and demanding regulatory environments.

We anticipate fiscal 2020 revenue in the combined healthcare life Sciences, industrial commercial aerospace and defense sectors to exceed 90% of our portfolio consistent with our fiscal fourth quarter of 2019.

These sectors have programs with longer life cycles in many cases 10 years or more.

In addition, we have achieved compounded annual growth rates in the teams within these markets. Our goal is to maintain these growth rates as we move beyond fiscal 2020.

Operationally our teams remain focused on providing exceptional service for our customers.

In addition, we're confident we have plans that will deliver strong operating results.

We're focused on delivering fiscal 2020 operating margin performance within our target range of 4.7% to 5%, which would enable solid EPS growth in the fiscal year.

In summary, our teams remain focused and aligned to our consistent successful strategy.

We're confident in our ability to continue to deliver strong results and create shareholder value.

I'll now turn the call the Steve for additional analysis of the performance of our market sectors and operations Steve.

Thank you Todd good morning.

Please advance to slide 10 for review of the fiscal fourth quarter and the full year performance of our market sectors for fiscal 2019, as well as our expectations for the sectors for the fiscal first quarter of 2020.

Our healthcare life Sciences revenue increased 1% in the fiscal fourth quarter. The result was slightly better than our expectations a flat revenue.

For the full year fiscal 2019 sector achieved growth of 17%.

Strong historical wins performance yielded several new program ramps, which fueled the sectors third consecutive year of double digit growth.

Looking at the fiscal first quarter, the introduction of lower costs next generation products will impact topline revenue.

As a result, we expect a mid single digit decline for healthcare life Sciences sector in the fiscal first quarter.

However, we expect the ramp of new programs will return the sector to growth in the fiscal second quarter.

Revenue in our industrial commercial sector increased 6% for the fiscal fourth quarter, which was meaningfully better than our expectations of a low single digit decline.

As we look at the fiscal first quarter of 2020, we see modest strengthening in the semiconductor capital equipment sub sector being offset by modest softness in the energy management and self service sectors.

The net result that we anticipate a low single digit increase in for our industrial commercial sector in the fiscal first quarter.

Due to strong execution from our global operations teams, our aerospace and defense sector grew an impressive 15% in the fiscal fourth quarter.

The result was significantly above our expectations of a high single digit increase.

The strong quarterly performance kept an outstanding year, resulting in 2019 growth of 32%.

A combination of new program ramps and robust end market demand enable the increases for the fiscal fourth quarter and the full fiscal year 2019.

As we look towards the fiscal first quarter. Our operations teams are extremely busy integrating new programs. As a result, we're expecting a modest increase for aerospace and defense sector in the fiscal first quarter and more meaningful growth in the fiscal second quarter.

Our communication sector declined 33% in the fiscal fourth quarter results I was in our line with expectations of a 35% reduction.

For the full fiscal year of 2019, the sector declined 20%.

As we look towards the fiscal first quarter, we do not anticipate significant changes in the cable sub sector market.

As a result, we're expecting our revenue to be flat and our communication sector for the fiscal first quarter.

Please advance to slide 11 for an overview of the winds performance of the fiscal fourth quarter.

The grey line indicates our wins momentum even with the robust revenue growth of 10% in fiscal 2019, the strong winds performance kept our.

Please advance to slide 12 further insight into the wins results by region.

The Americas region winds of $132 million were exceptionally strong in the fiscal fourth quarter.

The Americas strength was led by the aerospace and defense team as a majority of the sectors wins are for our sites in the United States.

The APAC region wins, a $59 million in the fiscal fourth quarter are largely from existing customers.

The impact team consistently delivered operational excellence throughout fiscal 2019.

Their commitment to excellence is enabling the growth with existing customers is a great Foundation for continued success in fiscal 2020.

The AMEA region winds of $11 million included two strategic wins with existing customers.

The region grew over 10% in fiscal 2019, mainly through strong customer relationships.

These wins will enable that trend to continue in fiscal 2020.

Please advance to slide 13 for further insight into the manufacturing wins performance by market sector.

Our healthcare life Sciences team generated wins totaling $52 million in the fiscal fourth quarter.

The wins included a new life Sciences customer who specializes in DNA sequencing technology.

The industrial commercial sector produced $33 million of manufacturing wins.

The highlight is the award of a significant next generation product from existing customer and our connectivity some sector.

The wins include several new space programs as well as meaningful market share gain with a large aerospace customer.

The sector has set itself up for another strong year in fiscal 2020.

The final qualified manufacturing opportunities continues to be robust with a formal remaining steady at $2.6 billion in the fiscal fourth quarter.

The healthcare life Sciences team exited 2019 with a funnel larger than that ahead at the start of the year.

At $1.6 billion in the fiscal fourth quarter. The sector is poised for another strong year wins in fiscal 2020.

With approximately two thirds of their almost 400 million dollar funnel associated with new customers the sectors focus on maintaining a healthy balance will continue into fiscal 2020.

Our markets Hectoliter, Dan Lewis and his team has set up this fiscal 2020 to be another great year.

As Todd highlighted we achieved record quarterly revenue of $810 million in the fiscal fourth quarter.

In a record $3.2 billion for fiscal 2019.

Strong execution yielded strong operating margin performance at 4.8% adjusted operating margin in the fiscal fourth quarter was at the higher end of guidance.

As we look to the fiscal first quarter, we remain focused on operational efficiency and we are guiding operating margin in the range of 4.5% to 4.9%.

Achieving record revenue of $3.2 billion, and our Fortyth anniversary as a testament to flex is differentiated strategy and the team's ability to execute it.

However, the cause for celebration goes beyond the financial results.

In fiscal 2019, our teams drew our market share and are differentiated market sectors.

Enable future growth to the expansion of our engineering manufacturing and aftermarket service facilities.

Invested in tools and technology like automated manufacturing and underside enterprise resource planning.

And most importantly invested in our people who are the real differentiator for plexus.

I want to thank each of the 19557 plexus team members for delivering a great fiscal 2019, and I want to praise them for positioning flexes for continued success in fiscal 2020.

I'll now turn the call the Pat for an in depth review of our financial performance Pat.

Thank you, Steve and good morning, everyone. Our fiscal fourth quarter results are summarized on slide 16.

Fourth quarter revenue of $810 million was above the top end of our guidance and sequentially higher by $10 million.

Gross margin of 9.6% was sequentially higher by 70 basis points, primarily due to improved mix better fixed cost leverage and continued cost containment efforts.

We experienced margin expansion across all three of our manufacturing regions.

Selling and administrative expense of $38.6 million was slightly above our expectations, primarily due to higher variable incentive compensation expense.

As a percentage of revenue SG and it was 4.8% sequentially up 20 basis points.

During the fiscal fourth quarter, we completed all restructuring activities to address revenue declines within our communications sector.

These activities result in charges of $1.7 million, which were lower than previously anticipated.

Before consideration of the restructuring charges adjusted operating margin of 4.8% was at the higher end of our guidance and sequentially improved by 50 basis points.

Included in this quarter's operating margin was approximately 70 basis points of stock based compensation expense.

Non operating expenses of $4.1 million were lower than expected impart due to foreign exchange gains.

Our GAAP effective tax rate for the fiscal fourth quarter was a benefit of 10%.

During the quarter, we reasserted that a majority of our undistributed earnings for certain foreign subsidiaries are permanently reinvested, therefore do not require liability for withholding taxes.

As a result related liability of approximately $10.5 million was reversed and benefited the fiscal fourth quarter.

GAAP diluted EPS of $1.23 included non cash benefit of 35 cents per share related to this special tax items and the charge of five cents per share related to the after tax restructuring activities.

Excluding these items non-GAAP EPS of 93 cents was above the top end of our guidance primarily due to strong operational performance.

Turning now to the balance sheet and cash flow on slide 17.

In the fiscal fourth quarter, we continued our cash repatriation strategy by bringing back approximately $75 million of offshore cash.

Since the enactment of US tax reform last year, we have brought back approximately $600 million.

During the quarter, we purchased approximately 538000 shares of our stock for $31 million and an average price of $58.38 per share.

We expect to execute this program on a consistent basis throughout fiscal 2020, However, we will take market conditions into consideration.

For the fiscal fourth quarter, we were pleased with our free cash flow results, we generated $108 million and cash from operations and spent $16 million on capital expenditures, resulting in free cash flow of $92 million.

Resulting in free cash flow of $25 million.

We ended the year with a strong balance sheet cash totaled $226 million sequentially higher by $21 million due in part to strong cash flow generation.

Total balance sheet debt was $288 million and our gross debt to EBITDA ratio was a healthy 1.5 times at year end.

Cash cycle at the end of the fourth quarter was 80 days, a nine day improvement from the fiscal third quarter.

Please turn to slide 18 for details on our cash cycle.

Sequentially inventory days improved eight days, primarily due to our continued efforts around inventory management, we're pleased to see our team's commitment to drive a $56 million sequential reduction in inventory.

Over the past two quarters, we have reduced inventory in excess of $100 million.

Days in receivables or sequentially higher three days, primarily due to the timing of shipments fiscal fourth quarter shipments were weighted more towards the last month of the quarter in contrast to last quarter.

Sequentially payable days and customer deposits improved one day each.

Fiscal first quarter gross margin is expected to be in the range of 9.1% to 9.5%.

At the midpoint of this guidance gross margin would be approximately 30 basis points lower than the fiscal fourth quarter.

During the fiscal first quarter margins are anticipated to be lower as we experienced a reduction in billable hours within engineering services as we transition resources on the new programs.

At the midpoint of our revenue guidance anticipated SGN, they would be 4.6% of revenue on a sequential improvement of 20 basis points, primarily due to lower variable incentive compensation expense.

Fiscal first quarter operating margin is expected to be in the range at 4.5% to 4.9%, which includes 65 basis points stock based compensation expense.

A few other notes for the fiscal first quarter depreciation and amortization expense is expected to be approximately $14 million slightly higher than the fiscal fourth quarter.

Non operating expenses are expected to be in the range of $5.1 million to $5.5 million.

At the midpoint of this guidance these expenses, we'd be sequentially higher by $1.2 million.

Two primary reasons for the sequential increase.

With our second quarter to hire a facility operational in the fiscal first quarter of 2020, we will no longer be capitalizing interest.

Also in the fiscal fourth quarter, we benefited from $500000, a foreign exchange gains, which we do not anticipate for the fiscal first quarter.

We estimate an effective tax rate of 13% to 15% for both the fiscal first quarter and full year.

This is before any impacts which might result from the finalization of pending tax regulations.

Continuing our share repurchase activity during the fiscal first quarter, we estimate diluted weighted average shares outstanding to be in the range at 29.7 to 29.9 million shares.

Our expectation for the balance sheet is consistent working capital requirements.

Based on our revenue forecast, we expect this level of working capital will result in cash cycle days of 80 to 84 days for the fiscal first quarter.

At the midpoint of this guidance cash cycle days will be sequentially higher by two days.

For the fiscal first quarter, we expect free cash flow around breakeven as we ramped new programs in our APAC region, we anticipate generating free cash flow as we move through subsequent quarters and expect to deliver free cash flow of approximately $100 million for fiscal 2020.

Finally, our capital spending estimate for fiscal 2020 is expected to be in the range of $60 million to $75 million, which does not contemplate any site expansions.

With that I will now open the call for questions Brandon.

Thank you will not begin the question and answer session. If you have a question. Please press star one of your telephone keypad, if you'd like to be removed from the Q. Please press the pound signed with ASP is trying to speakerphone. Please pick up your headset first before you dialing once again if you have a question. Please still star one on your telephone keypad.

And from Longbow Research, we have Shawn Harrison. Please go ahead.

Good morning, everybody and congrats on the strong finish this fiscal year.

Thank you thanks good morning.

So hoping to see.

Can you down a little bit more single digits is it pretty broad range for looking out at this fiscal year.

Fiscal year.

Sure. So I mean, obviously, Sean it's a it's a little early to make bold predictions about fiscal 2000, but though I'll give you our best view as we know what today. So we're expecting reasonable growth I'd call. It in fiscal Tony of certainly below the levels of of 18, and 19 where were in double digits.

But we're looking at we're thinking about mid singles.

One is we anticipate communications to stay at depressed levels. So I will not modeling in any expansion of any meaningful expansion beyond new program ramps within communications. So no end market expansion in.

Semi cap, we still what we're seeing I would call at some modest growth and slightly above fiscal 19, its modeled nowhere near fiscal 18.

And then we look at the rest of the sectors.

Strong growth Nonetheless, due to no new program ramps and good end markets there.

Healthcare, we have a little bit of a headwind going on with these transition into some lower cost programs, that's going on right now so that certain our topline in the near term so.

Not as strong a growth from healthcare in 20 as opposed to 19, although we're positioning ourselves for a really good 21 and health care because we have a number of very significant game changing programs that are are ramping but theyre more if we're fortunate that are laid up 20, but they're really looking more like gift.

21 of really moving the needle on revenue so let's get out things look from a revenue standpoint, but with that said I mean are big focus for 20 is around cash and operating margin expansion. So Pat talked about us targeting free cash flow in the area of $100 million, we think thats, a very achievable level.

Double digit EPS.

Growth range in fiscal 2000.

As you move through fiscal 2000, where you're going to get more the leverage.

In the mid term horizon.

But we do have to manage that with some of our regions are ramping new programs and Thats part of the reason why cash cycle in the fiscal first quarter will be up a couple of days. So we have to balance those two but by all means our teams are still focused on driving improvements.

And this is Steve in the maybe I'll hit your supply chain question.

Used the word easy.

There are always challenges in terms of attracting something down.

Okay, Alright, thank you very much.

Paul Your line is open.

I think you might be on mute.

Hi, Joe Your line is open.

Okay can you had checked to see if you're there you go ahead.

Hi, Jeff a question.

Yes, I am here are you there.

Yes. Please go ahead.

Okay, sorry about that congratulations.

I've been a lot of good questions asked already but.

First of all.

Thank you said Dan in there in.

2020, it's more of a lay up here and that.

And 21 should be better is that.

Well potentially from a revenue growth standpoint, we expect toys to be a strong year from an EPS standpoint, the one thing that.

It's really factoring into to 20 that shouldn't be overlooked is we're expecting more than a 100 million dollar headwind in the communications business.

20 versus 19 so.

To overcome that is really taking.

Certain amount or depressing a certain amount of the growth that we expect.

Okay, and then we're talking about the communication segment.

Yes.

Did you sort of flattish reduced here do you expect it to come back and just doesn't.

Good luck.

With that.

Yes.

Yes. So this is Steve.

I think the thing that we need to watch for us what the this capital spending patterns of the missiles look like as we come through the end of calendar 2019, so they'll be coming out with their expectations probably in the December January timeframe, and I expect that to kind of set the tone for what fiscal 2000 is going to look like for.

Our customers and for us for the full year eminent what I'd say is we're modeling it as if it doesn't come back although if you read some of the industry press, there's an expectation that.

All right.

And then well on than non operating expenses and the guidance.

Sure Dan.

This past and not.

The run rate, which should be looking at for the year.

It from JP Morgan with Paul Coster. Please go ahead Sir.

Yes.

A few quick one so it's a slow in the healthcare and much songs, who Sigma new useful to the next generation programs launching at lower cost producer with them too. So it's picked as its improved condition why is it temporary and not.

So do you will persist.

No meaningful change and trade dynamics or.

End markets are market dynamics from what it is today, so I'd call it are modest growth economy.

Your traditional business.

Yes, well, it's still ramping so it's not at its ultimate margins, yet, but we'd anticipate overtime that would be.

One thing to recognize Paul is at the ended the quarter, we always see high Mark with our cash balance and then right at the start of the next quarter a lot of that cash is going out the door to pay.

Yeah, our expectation is Todd kind of talked about in the short term here the headwinds or the the pressure is putting on our topline revenue in Q1 with a couple of these lower cost.

Was there any budget flush there was it.

Market share gains with new new customers or or existing customers.

I think our operations teams execution and ability to meet the customer's demand is driving our strength there.

For the sector and the wins there are newer programs not ones that we've had in the past. So this is a lot of this stuff has also created with growth with new programs, it's not exclusively exclusively related to just increases in current programs.

Alright, Thank you very much.

Thank you Mike.

Thank you Brandon so I'd like to take a moment.

And by thanking our plexus team members globally for delivering an outstanding fiscal 2019 is through your passion that you helped create the products that build a better world and this leads to exceptional customer service in a vigorous culture.

And the process of it you achieved outstanding revenue growth produced strong profitability in position plexus for future success.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.

Q4 2019 Earnings Call

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