Q1 2021 Plexus Corp Earnings Call
Good morning, and welcome to the Plexus Corp Conference call regarding first quarter 'twenty 'twenty one earnings announcement.
My name is Sarah and I'll be the operator for today's call.
At this time all participants are in a listen only mode.
After a brief discussion by management, we will open the conference call for your questions. The conference call is scheduled to last approximately one hour. Please note. The this conference is being recorded I would now like to turn the call at all with the Mr. Shawn Harrison, Texas, Vice President Communications and Investor Relations. Please go ahead.
Thank you Sarah good morning, and thank you for joining us today some of the statements made in the information provided during our call today will be forward looking statements as they will not be limited to historical facts towards believe expect intend plan anticipate and similar terms often identify forward looking statements 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 October three 2020, the supplemented by our form 10-Q filings and the Safe Harbor and fair disclosure statement in yesterday's press release.
Plexus provides non-GAAP supplemental supplemental information such as ROIC economic returning cash free cash flow because of those measures are used for internal management goals and decision, making and because they provide additional insight into financial performance.
In addition management uses these and other non-GAAP measures such as adjusted operating margin per operating income adjusted operating margin adjusted net income and adjusted earnings per share to provide a better understanding of core performance for purposes of period to period comparisons for a full reconciliation of non-GAAP supplemental information.
Please refer to yesterday's press release, and our periodic SEC filings.
We encourage all participants on the call. This morning to access the live webcast and supporting materials at plexus website at Www plexus Dot com clicking on investors at the top of that page.
In order to maintain appropriate social distancing, we are again conducting this quarter's call virtually.
Joining me today are Todd Kelsey, President and Chief Executive Officer, Steve Frisch, Executive Vice President and Chief operating Officer, and Pat Jermain Executive Vice President and Chief Financial Officer.
Consistent with prior earnings calls Todd will provide summary comments before turning the call over to Steve and Pat for further details.
Let me now turn the call over to Todd Kelsey Todd.
Thank you Sean and good morning, everyone. Please begin on slide three.
I will start with an introduction of recent changes impacting our investor relations team.
First you may have noticed the familiar name and voice introducing our call.
I am pleased to welcome Shawn Harrison to the plexus team as our vice President of Communications and Investor Relations.
Sean brings tremendous experience duplexes as a well respected sell side analyst previously with loop capital and Longbow Research.
Here's the 20 year history, covering plexus of knows us well.
I'm very excited for Sean to Leverages, the expertise and furthering plexus as Investor Relations program.
Next many of you have gotten to know and respect Heather berisford over the last two and a half years for her leadership within our Investor Relations team.
Heather has done a great job in taking our Investor relations corporate communications and branding to a new level.
I am pleased to inform you that as a result of her exceptional working capabilities at the has been promoted to vice president of aftermarket services.
I look forward to Heather leveraging our leadership to further our operational performance in this growing and differentiated service offering.
Please advance to slide four for a discussion of our fiscal first quarter results.
Our operations achieved strong results in the fiscal first quarter of 2021.
We expanded our industry, leading GAAP operating margin to five 6% through our focus on productivity improvements and expense management, along with solid performance from our engineering solutions team.
This result includes 64 basis points of stock based compensation expense and represents the third consecutive quarter of GAAP operating margin in excess of 5%.
We achieved quarterly revenue of $830 million, which was in line with our expectations and at the midpoint of our guidance range.
Our industrial sector exceeded our expectations entering the quarter, primarily as a result of upside from semiconductor capital equipment customers.
Our health care life Sciences sector also exceeded expectations as we saw modest improvement in demand for equipment used for elective procedures.
Finally, aerospace and defense underperformed to forecast due to the impact of COVID-19 on commercial aerospace and program ramp delays.
Through this combination of strong operating performance and in line revenue, we delivered GAAP diluted earnings per share of $1 23, including 18 of stock based compensation expense, which was well above the top end of our guidance range.
I'm extremely proud of our global plexus team as they continued to deliver outstanding results, while navigating the complexity stemming from COVID-19.
Please advance to slide five.
Next I will discuss additional accomplishments within the fiscal first quarter of 2021, starting with the recent successes of our go to market team.
While navigating the pandemic our go to market team has successfully leveraged our reputation as the leader in highly complex products and demanding regulatory environments to produce several consecutive quarters of strong wins result.
Our team delivered fiscal first quarter manufacturing wins of $223 million when fully ramped into production.
The quarterly wins included six new logos, an uncommonly high number.
This result highlights the success of our innovative virtual business development efforts.
Underscores the market recognition of our strong performance during the pandemic and provides a significant opportunity for future growth.
Our trailing four quarter manufacturing wins now exceed $1 billion for the first time in history.
In addition, we ex <unk>.
Ended plexus funnel of qualified manufacturing opportunities by nearly $600 million from the previous quarter as our teams are quite successful in moving leads into qualified opportunities.
The end result is a record $3 3 billion funnel of opportunities that aligns well with our strategy.
Further our engineering funnel increase to its highest level in nearly two years.
The engineering funnel is of good leading indicator for future manufacturing wins and additional margin expansion opportunities.
Our healthy rate of new program wins and the considerable expansion in the funnel of qualified manufacturing and engineering opportunities should position us well to achieve our 9% to 12% revenue CAGR goal over the longer term.
Next turning to some operational highlights.
Our engineering solutions utilization strengthened considerably in the quarter as the team engaged in several revolutionary new product development efforts and product launches.
Our customers recognize the value we provide through of differentiated service offering where we help create the products that build a better world.
Our engineering solutions team remains a strong contributor to plexus was profitability and manufacturing growth.
Our manufacturing operations team continued their march towards our aspirational goal of zero defects and perfect delivery, while achieving productivity improvements and driving effective cost management the.
The end result has been the delivery of customer service excellence and the sustained expansion of our industry, leading GAAP operating margin.
Finally, our aftermarket services team exceeded expectations delivering strong revenue and operating income during the fiscal first quarter.
We view aftermarket services as a critical offering in order to provide value throughout the product lifecycle and create sustainable solutions for our customers.
As well as an opportunity to further expand margins.
Advancing to our guidance for the fiscal second quarter of 2021 on slide six.
Okay.
We anticipate a robust fiscal second quarter due to expected increases in medical equipment demand and near term strengthening in our industrial sector.
The health care life Sciences improvements are broad based with 17 of our top 20 customers increasing their fiscal second quarter forecast from what we anticipated one quarter ago.
While the semiconductor capital equipment sub sector is the significant portion of the industrial expansion the sector of showing additional strength with.
With 14 of our top 20 customers increasing their fiscal second quarter forecast during the cycle.
Okay.
Taking the circumstances into consideration, we're guiding revenue of $860 million to $900 million.
As a result of effective expense control and the efforts of our operations team in driving sustainable productivity gains, we're getting GAAP operating margin in the range of five to five 5%, including 73 basis points of stock based compensation expense.
With this strong performance, we anticipate delivering GAAP diluted earnings per share of $1 17.
The $1 32 says, including 22 cents of stock based compensation expense.
Our guidance assumes that COVID-19 will not materially impact end markets on our operations beyond what has already occurred.
I will close with a few thoughts regarding fiscal 2021.
In the near term, we have seen demand strengthening across several of our end markets, resulting in an improved revenue outlook for the fiscal second quarter.
Long term visibility into end markets remains limited yet our history of strong execution provides the opportunity to continue to capture any potential upside demand that may arise.
Looking to the second half of fiscal 2021 based off current customer forecasts, we anticipate quarterly revenue relatively consistent with the fiscal second quarter guidance range.
And operating margin to moderate from the fiscal first quarter result.
Our ability to manage the changes in demand our ongoing focus on productivity improvements and a robust first half outlook is positioned plexus to drive strong EPS growth for fiscal 2021.
I will now turn the call over to Steve for additional analysis of the performance of our market sectors and operations Steve.
Thank you Todd good morning.
I will start on slide seven with a review of the performance of our market sectors for the fiscal first quarter of 2021 as well as our expectations for the fiscal second quarter of 2021.
Revenue within our industrial sector decreased 12% for the fiscal first quarter.
The result was better than our expectations of a low teens decline.
Stronger demand from almost all of our semiconductor capital equipment customers drove the improvement.
As we look at the fiscal second quarter, we are seeing double digit forecast increases from several semiconductor capital equipment customers in.
Addition, there are pockets of growing demand within our energy management and industrial equipment sub sectors.
But the recent strength in our communications sub sector of subsiding.
The net result of that we anticipate a mid single digit increase for our industrial sector in the fiscal second quarter.
Our health care life Sciences revenue declined 7% in the fiscal first quarter. The result was slightly better than our expectations of a high single digit decrease.
Looking at the fiscal second quarter, two recently ramp testers that can detect the viruses, including COVID-19 are reaching full production rates.
In addition, there has been a resurgence in the demand for our critical care device used in the treatment for COVID-19 patients.
And modest forecasted increases with some elective procedure products.
As a result, we expect the high single digit increase for our health care life science sector in the fiscal second quarter.
Revenue in our aerospace and defense sector was down 6% in the fiscal first quarter.
The result was meaningfully short of our expectations of of mid single digit increase.
Production challenges with the ramping space program as well as further degradation in some commercial aerospace programs, where the cause for the lower revenue.
Looking at the fiscal second quarter forecasting from customers within the sector very significantly as they push and pull demand to meet changing end markets.
However, our diversification dampens the overall volatility in the net result is we are anticipating of low single digit increase for the aerospace and defense sector in the fiscal second quarter.
Please advance the slide eight for an overview of our wins performance for the fiscal first quarter.
We won 35, new manufacturing programs that we expect to generate $223 million in annualized revenue when fully ramped into production.
The mix of wins between existing and new customers was well balanced within the quarter with 21 of the wins coming from current customers in 2014, as a result of new relationships.
Included in the 14, new relationships of the addition of six new logos and the expansion into new divisions with eight of our customers.
The continued strong wins performance drove our trailing four quarter wins to a record level in excess of $1 billion.
At that magnitude our wins momentum standard a very robust, 30%, which is above our 25% goal and supports our long term growth strategy.
We can advance the slide nine to review the manufacturing wins by region for the fiscal first quarter.
The manufacturing wins were well balanced across all three regions, which allowed each of them to maintain or increase the trailing four quarter wins performance.
The Americas region wins of $89 million maintains the region's trail for trailing four quarter wins at a healthy $447 million.
Wins of $93 million for the APAC region increased our trailing four quarter wins by 8% to close at $391 million.
While the wins in EMEA at $41 million grew their trailing four quarter wins by 19% to reach $171 million.
The balance wins performance supports each of the region the growth goals over the long term.
Please advance to slide 10 for further insight into the manufacturing wins performance by market sector.
The number of wins per sector was well distributed and each sector had a healthy mix of wins between customers and new relationships.
The industrial sector matched the robust manufacturing wins performance from the previous quarter by securing another $108 million in the fiscal first quarter.
The wins were generated from 13 opportunities with eight coming from customers and five from new relationships.
Our health care life Sciences team produced a healthy wins result of $81 million in the fiscal first quarter.
The mix of the teams of wins.
14 wins were nine from customers and five from new relationships.
The aerospace and defense sector captured eight manufacturing wins totaling $34 million in the fiscal first quarter the <unk>.
Wins were equally split between customers and new relationships.
Looking at the fiscal second quarter, we believe the adjustments we have made to our business development process. We will continue to overcome the challenges that COVID-19 creates and will support continued healthy wins performance.
Please advance to slide 11 for further insight into some of the fiscal first quarter wins.
Included in the health care life Sciences wins as a class III medical device that is used in the treatment of coronary heart disease.
The device is being designed by our engineering solutions team and will be produced in our Penang, Malaysia of health care centers facilities.
The health care Life Sciences team also won the manufacturing of the existing anesthesia program from a current customer the.
The production of the device will be transferred from a competitor to our facilities in Penang, Malaysia in Guadalajara, Mexico.
Our healthcare facility in Guadalajara will also be producing products for a new health care life Sciences customer.
Was focused on the allergy detection and management.
We expect this product to start ramping this fiscal year.
Included in the industrial wins is a new customer who produces instrumentation used in advanced manufacturing process control.
The family of products will be manufactured in our Shanghai, China facility.
Our industrial team also won the production of another air purification system.
Our team in EMEA is assisting this new customer with the commercialization of the product.
We expect to start ramping the device and our Kelso, Scotland facility later this year.
Included in the aerospace and defense wins are two new drone programs from an existing customer.
These products will be produced in our Penang, Malaysia Aerospace center of excellence facility.
Finally, our aftermarket services team closed the first two opportunities from a health care life Science customer, who has decided to outsource the services portion of their business the.
The first two engagements are in the Americas, and EMEA, but there is potential to expand the relationship into APAC as well.
We can proceed the slide 12 for highlights of our funnel of qualified manufacturing opportunities.
Our sector teams expanded the funnel by an impressive $574 million during the fiscal first quarter.
The 21% growth within the quarter increased the funnel to almost $3 3 billion.
Contributing to the funnel has increased our two opportunities from customers who are shifting their manufacturing strategy from internal production to an outsource model.
Our industrial sector grew $271 million or 57% in the fiscal first quarter to close their funnel at $743 million.
The resource of investments in fiscal 2020, and the team's focus on advancing leads into qualified opportunities are driving the growth.
The health care life Sciences sector significantly expanded their funnel for the second straight quarter.
The team increased the funnel by $262 million in the fiscal first quarter to close at almost $1 9 billion.
Our team's ability to continue to deliver in spite of volatility that COVID-19 has created is being rewarded by our customers providing us additional opportunities.
Our aerospace and defense sector increase the funnel by $42 million in the fiscal first quarter to finish at the $667 million.
Their funnel has now grown to the largest of it has been in four years.
Next I would like to turn to operating performance on slide 13.
As Todd highlighted our team produced strong GAAP operating margin of five 6% in the fiscal first quarter.
Our manufacturing teams focus on operational efficiency provided the foundation for the robust performance.
In the fiscal first quarter two teams built on top of that solid foundation to deliver the outstanding result.
Our aftermarket services team did an exceptional job of aligning investments with revenue growth and on.
The engineering solutions team worked tirelessly through the holiday season to meet customer demand.
Both of these activities contributed to outperforming our original operating margin expectations.
As we look to the fiscal second quarter, we expect our strong operational performance to overcome our typical seasonal headwinds to deliver strong GAAP operating margin in the range of five to five 5%.
The team delivering this result would mark the fourth straight quarter of GAAP operating margin in excess of 5%.
A few final comments I talk regularly about the path of success being relentless focus on operational excellence and customer service excellence.
There will always be opportunities for improvement, but I am proud of the plexus team from pushing themselves and each other to fulfill on these commitments.
Their passion for excellence that produced the strong fiscal first quarter results.
And enabled the healthy fiscal second quarter guidance.
I'd like to thank each of the plexus employees for their dedication to continuous improvement.
In addition to making plexus, a better company you are truly making the world of better place. Thank you.
I'll now turn the call the Pat for an in depth review of our financial performance.
Thank you, Steve and good morning, everyone. Our fiscal first quarter results are summarized on slide 14.
First quarter revenue of $830 million was at the midpoint of our guidance, while the gross margin of nine 5% hit the top end of our guidance.
Better than expected gross margin primarily related to an improvement in business mix and our focus on expense management.
We delivered better performance from our higher value added services, which include engineering and aftermarket services.
Gross margin also improved due to lower than anticipated spending related to health care costs and travel expenses.
Selling and administrative expenses of $32 $4 million were favorable to our guidance and $6 $4 million lower than the fiscal fourth quarter.
The majority of the sequential decline related to a reduction in incentive compensation expense.
In addition, we recovered $2 $3 million of of previously reserved customer receivable.
This recovery had been contemplated in our first quarter guidance.
Our GAAP operating margin of five 6% was above our guidance due to a combination of improved gross margin and lower SG&A spending.
This is the third consecutive quarter with the operating margin above 5%.
Non operating expenses of $5 $2 million or slightly above the expectations as a result of foreign exchange losses.
GAAP diluted EPS of $1 23 was above the top end of our guidance range, primarily due to the strong operational performance.
Turning now to our cash flow on balance sheet on slide 15.
And the anticipated for the fiscal first quarter, we made investments in working capital we.
We delivered $7 million in cash from operations and spent $16 million on capital expenditures, resulting in negative free cash flow of $9 million, which was in line with expectations.
During the fiscal first quarter, we purchased approximately 307000 shares of our stock for $22 8 million at an average.
Average price of $74 16 per share.
We completed the $50 million program authorized in 2019 and commence purchasing shares under our new program authorized last year.
This program totals $100 million in hands of approximately $83 million remaining under it.
We expect to execute the repurchases on a consistent basis throughout the fiscal 2021, while taking market conditions into consideration.
At quarter end cash totaled $357 million sequentially lower by $31 million due in part to our investments in working capital capital expenditures and our expanded share repurchase program.
Total balance sheet debt of $337 million was consistent with last quarter.
At quarter end, we had no outstanding borrowings under our revolving credit facility, therefore, allowing us the full capacity of the $350 million committed facility.
We ended the quarter with the conservative gross debt to EBITDA ratio of one four times slightly improved from last quarter.
With our exceptional operating performance, we delivered return on invested capital of 16, 3% sequentially improved by 230 basis points and the highest return delivered in more than three years.
This result generated economic return of 820 basis points above our weighted average cost of capital, creating substantial shareholder value.
At quarter end, we were pleased with our cash cycle, which came in at the low end of our guidance with the result of 80 days, our cash cycle was sequentially higher by 11 days.
Please turn to slide 16 for details on our cash cycle.
While inventory dollars were essentially flat compared to last quarter inventory days rose by eight.
The increase in days, primarily related to reduced fiscal first quarter revenue.
In addition, we procured inventory toward quarter end as we prepared for higher revenue anticipated in the fiscal second quarter.
Days and receivables were 53 days sequentially higher by five days. The increase was primarily due to a few delays in customer payments and the reduction in receivables sold under our customer of factoring program.
Partially offsetting the higher inventory and receivable days were modest improvement in both of our payable days and customer deposit days.
As Todd has already provided the revenue and EPS guidance for the fiscal second quarter I'll review, some additional details which are summarized on slide 17.
Fiscal second quarter gross margin is expected to be in the range of nine 5% to 10% at the midpoint of this guidance gross margin would be approximately 20 basis points higher than the fiscal first quarter.
Seasonal compensation cost increases as well as the reset of payroll taxes for U S employees will negatively impact gross margin by approximately 50 basis points. However, we expect to more than offset this impact through the continued operational productivity and better leverage of expenses with the anticipated.
Higher revenue.
For the fiscal second quarter, we expect SG&A expense in the range of $38 million to $39 million at the midpoint of our revenue guidance anticipated SG&A would be sequentially higher by approximately $6 million.
As a percentage of revenue SG&A would be four 4%, which is 50 basis points higher than the fiscal first quarter.
Several factors are contributing to the sequential increase in SG&A, including the seasonal compensation headwinds, which total about $1 million.
With improving operational performance, we anticipate higher incentive compensation.
Expense this quarter and as I mentioned earlier last quarter's SG&A benefited from the $2 3 million customer bad debt recovery.
Fiscal second quarter GAAP operating margin is expected to be in the range of five to five 5%, which includes 73 basis points of stock based compensation expense.
A few other notes for the fiscal second quarter depreciation and amortization expense is expected to be approximately $15 million, which is consistent with the fiscal first quarter.
Non operating expenses are expected to be in the range of $4 $6 million to $5 million at the midpoint of this guidance. These expenses would be approximately $400000 lower than last quarter, primarily due to the expectation of the reduced foreign exchange losses.
We are estimating an effective tax rate of 12% to 14% and diluted shares outstanding of approximately $29 5 million shares.
Our expectation for the balance sheet is that working capital investments will remain relatively consistent with the fiscal first quarter.
Based on our revenue forecast, we expect this level of working capital will result in cash cycle days of 74 to 78 days.
At the midpoint of this guidance cash cycle would improved four days compared to the fiscal first quarter.
Finally, our capital spending estimate for fiscal 2021 is expected to be in the range of $70 million to $85 million, which includes approximately $24 million related to our expansion in Thailand.
For the full year, we continue to expect free cash flow generation of approximately of $100 million.
With that Sarah let's now open the call for questions.
Thank you for asking the question you would need to press Star then one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Jim Ricchiuti with Needham <unk> Company. Your line is now.
Hi, Thank you good morning couple.
Couple of questions I was wondering if you might be able to expand on the.
The six new logos Hugh you added if theres any color you can provide either on verticals award.
Type of customer.
Program.
Yes, so Jim this is Todd I'll get us started and I'll have Steve provide some of the details around the <unk>.
The sectors and the opportunities, but the one thing I wanted to highlight about the new program wins that I think is significant and I hope that people take away from this is if you look at our business development approach, it's really the grow with existing customers to find the right customers and then grow with those customers.
And I talked about six new logos and Steve talked about 14, new relationships. So that includes the six logos plus eight new divisions of existing logos. So when you look at this we will get a new logo in we.
Isn't that we potentially add additional divisions and we grow with each of those of the original division of our logo as well as the.
The expanded relationship that we have with the other divisions. So.
One of the point that out and then I want to turn it over to Steve to get into a bit more detail.
Sure Jim in terms of color they were equally split across the sector. So there was too in the industrials two in healthcare life Sciences, and two in aerospace and some of the wins the details that I went into highlighted some of them. The anesthesia program that I talked about in healthcare was one of them.
Device, that's used for advanced manufacturing process control was one of them as well as the air purification system.
And so that gives you a little bit more insight into it was a pretty good mix across all three of the sectors.
Thanks, Thanks for that color and by the way I think you gave some.
Some good color on on how we should be thinking about the second half of the year, but I wanted to go to that debt.
Target that youre talking about for revenue of 9% to 12% growth and clearly last year was impacted.
We by Covid and this year, you've got some moving parts as well, but I'm trying to get a sense.
What's giving you of that confidence about that 9% to 12% revenue growth.
<unk> like.
It's the.
The winds that debt our cash.
Again, it's the question of when do you potentially see that conversion, it's obviously not going on I think happen this year.
Yes, so I think.
Jim Youre right on with your assessment about this year is that the 9% to 12 would be difficult in this year and kind of the wave of characterized.
Characterized it in the release and in the script here is that if you.
You do the math that wouldn't add up to the 9% to 12, but theres a number of things that give us confidence that nine to 12 as are.
A realistic and very achievable goal and first of all from me look backward looking over the period of of 18 to 20, and we were at 10%. So our sectors in our markets have shown that they can support that level of growth.
Then if we look and that includes last year with the pandemic of net that number as well.
As we go through our planning process and we do have a bit of a bottoms up planning our teams again their results support our revenue growth goals, but theres really.
For factors that I think service.
For us as we go into.
Go through fiscal 'twenty, one and end of fiscal 'twenty. Two first of all we of the margin expansion in the sustainable margin expansion, which I think were doing a nice job of showing that that is very achievable.
Second we've got the the <unk>.
Recovery of elective of medical.
Medical equipment used for electric procedures, and we're starting to see the a.
A hint of the sign of that right now, but I wouldn't say it's of recovery by any means so theres great opportunity with that as we move forward and there is also the increase in demand that we expect to see from commercial aerospace as we see travel upticks post the COVID-19 vaccine rollout so.
That may be an early 'twenty two type of event is what we're expecting and then we have the new program ramps and you saw the win success that we've had the over $1 billion trailing four quarter funnel that we have we've talked about some of the exciting new programs that have been long term ramps within our healthcare life Sciences sector.
These all come to fruition in the F. 'twenty tuition type timeframe here. So we've got a number of catalysts that are looking really good for us as we as we get beyond go through fiscal 'twenty, one and get it into fiscal 'twenty two.
Got it.
Just on commercial there could you just remind us.
What thats, representing right now of the <unk>.
Randy maybe just historically what it was then and then I'll jump back in the queue. Thank you.
Yes.
Let me get the number I think it's in the mid <unk> right now, but I'm gonna verify that it's kind.
The low Thirty's is about where it's at right now and it had been probably a little bit over 40% to 45% at one point.
Yes, that's all of plexus of the sector, it's about roughly a third.
Got it thanks, very much and congrats on the quarter.
Thank you.
Thank you. Our next question comes from the line of Adam Tindle with Raymond James Your line is now open.
Okay. Thanks, good morning, and congrats to Sean on Heather Todd.
Todd I just wanted to start with some questions around the second half comments, where revenue is relatively consistent with the fiscal <unk> guide just maybe the biggest drivers of why we would see effectively flat sequential trends in Q3, and Q4, because we normally expected buildup each quarter or see it up sequentially on the <unk>.
<unk> basis, it sounds like towards the end of the quarter medical and industrial.
The recent strength, you've got new customers coming on so what would be the offset that I'm missing to make Q3 and Q4 effectively of below normal seasonality.
I think the issue of Adam is that the visibility is just fairly limited right now so I would say it's more of a situation as we're just not sure or we just don't know and if you think back to a quarter ago. When we had our call. We expected Q2 to be flat to Q1, I mean, obviously, it's not it's up substantially.
Actually on the order of about $50 million. So we saw a lot of upside demand come in particularly around.
The health care and in the industrial sector. So.
As we as our customers brought on forecast that you just brought them up in the near term and not necessarily further out. So I'd say, there's a lot of uncertainty. The us is whether we're going to see something similar as we move through the rest of the year on whether we wont, but based off of the visibility we have right now it looks more like flat at this time.
But I think in some sense of were a little bit of a victim of our success from an execution standpoint, because there are customers still comfortable that they can drop in demand and we will execute on it.
Right, that's understandable and just to clarify does that also mean that operating margin would kind of stick in that five to five 5% range that was guided to Q2.
Yes, it's a little on it's a.
Many of the uncertainty.
Obviously, we're targeting to be above the 5% range, but it's a bit on certain based on the revenue on the leverage that we get so it's a little too early to call that one.
Okay, and just maybe a longer term question you talked about the record over $3 billion funnel talked about committed to the 9% to 12% long term revenue growth just trying to understand.
Does that imply potentially a supersized growth year in fiscal 'twenty, two such that the average of 21 and 'twenty two can be in the 9% to 12% range. So.
So maybe just help the expectations on timing and magnitude of what seems like a pretty big growth uptick upcoming.
Sure. This is Steve ill try to handle that one obviously, you're trying to give guidance of up to 22 would be a bit challenging but looking at the market dynamics of where we're at which gives us some optimism.
As we look at commercial aerospace and we're strong on there we've gained market share.
Talked about the fact that we've been bouncing around the bottom and we see this down and so we see that as a catalyst for growth.
In terms of what could happen into 'twenty, two is thinking of starting to recover.
We've talked about the <unk>.
Elective procedures and health care Life Sciences, we believe we're continuing to take market share, we're winning new logos.
And I think there's a catalyst there to help accelerate some growth as we as things start to recover post COVID-19 and the.
And we've talked from the last couple of calls talking about industrial team in semi cap and with semiconductor capital equipment.
The signals are out there the demand for semiconductor equipment or equipment and devices is only going to increase over time and looking at our forecast and Todd is kind of comments as we see these flattish kind of forecast and then we see the short term drop ins and I think at some point theres a potential for that the turn into real <unk>.
Our cash demand and so.
The the optimism of the of benign to 12% is driven by those types of factors combined with the fact that we continue to win decent amounts of new business and so.
I think there as to why we're optimistic about the growth could it outperformed.
If the economy takes off and all of these things start to recover post COVID-19.
I think there is.
On a real transfer the demand from our customers continues to increase at a pretty good clip with it.
That's helpful. Thank you very much.
Thank you.
Our next question comes from the line of David Williams with New capital. Your line is now open.
Oh, great. Thanks for letting me ask the question and congrats to Sean for the transition.
But first.
First I wanted to ask maybe south of the the Q2 demand and we're seeing any pull in maybe from some of the second half demand.
Or is it is this.
Mainly just the drop in the early demand or in the short term demand.
Yes, the specific go ahead Steve.
Yes, I mean, specifically with the Q2 upside it is upside thats not robbing from future quarters. So our forward looking quarters have stayed consistent and actually have come up a bit and so it is upside demand, it's not stealing from future quarters.
Todd kind of highlighted one of the things. We're looking at is are we going to see this is the trend as we go through Q2 Q3 and Q4, it's just something we're watching.
Okay, Great and then just kind of thinking about the COVID-19 related tailwind the shorter term the non sticky how much of your business on I guess in the healthcare.
Thank you. Thank you for the quarter term tailwind.
Tailwind that could potentially.
The next year.
Yes, so right now theres not a lot beyond testing and point of care testing that I would call of true Covid tailwind, where the demand is up as a result of Covid now we see.
That demand is progressing are continuing at least through calendar 2021, and even our customers are talking about it going.
Beyond that and into 'twenty, two and and one thing to point out two of them and we call them Covid test there is a lot, but what the hours of the testers that that can be used for COVID-19. So they can test many other things as well too, but that's the only thing I would say is a true COVID-19 increase.
In our forecast right now other than the small amount of upside that Steve talked about on the one critical care product.
Great. Thanks for the color and one last if I can just kind of any thoughts you might have on the the transition.
On the political landscape.
Thank you.
Positive.
Right.
Yes so.
I mean, the one thing we're looking at is on the demand side I would say there was the.
Few different opportunities that could come up as a result of the.
Proposed stimulus that's out there.
We have some of heavy equipment business.
Thank some of the the Covid.
Products because of the increase even further from a demand standpoint.
I think it bodes well for semi cap as well to the.
The other thing we're looking at on the other side of the equation is what happens with the tax landscape and does that have any impact.
Great. Thanks, so much the best of luck.
Thank you.
Thank you. Our next question comes from the line of Matt Sheerin with Stifel. Your line is now open.
Yes, thanks, good morning, everyone.
Just a question.
Guarding the the product or the.
The component.
On the supply chain.
Environment right now you talked about inventory days.
Pat.
We're hearing across the board of supply constraints.
Certain of semiconductors, and some passive components are you seeing that yet in all of your customers asking you to build inventory.
Yes, so Matt this is Steve I'll take that one first of all there is a lot of news out there about the automotive market, having shutdown shutdowns due to semi conductor shortages.
Just want to remind everybody we don't do automotive so in terms of our end market impact Theres nothing there now on specifically, what's causing those challenges in automotive is a tightening in semiconductor components.
Components, and we are seeing some of that.
We don't foresee any issues here in the fiscal second quarter from.
From an inventory standpoint, and that we feel pretty comfortable where we're at we do start to see the lead times start to extend.
Pricing pressure here and there so it's definitely real from our perspective.
I feel actually pretty comfortable where we're at.
Definitely have to work harder through these periods, but it's at these times as one of our teams of outperformed and so I'm pretty optimistic in terms of what our teams will be able to do the one part that I get a little nervous on is looking at those forecast as we go into the back half of the year.
If a customer start dropping in big demand, our ability to react and bring things in as really kind of the bigger challenge and so we have been talking to our customers about inventory levels and what we're comfortable storing all keep in mind, our customers are responsible for the inventory levels plexus.
Plexus doesn't speculate so.
From our standpoint, its really just working through with our customers where they need to be and we do have some we do have some customers that have increased raw component inventories.
To be able to respond the upside demand in the back half of the year and so again, it's a mix with each customer, but it is we do see it coming a bit more but I think we're responding appropriately and at this point the teams are handling it really well.
Hi, Matt This is Pat on the balance sheet I just wanted to comment for the second quarter. We do expect a slight build in inventory dollars to the tune of about $20 million, but I had guided the <unk>.
Midpoint of our cash cycle of being down compared to the fiscal first quarter and some of Thats driven by inventory days, just because of the increase in revenue we expect in the second quarter.
Got it got it okay. Thanks for that and then I did want of follow up on the previous questions just regarding your guidance for the <unk>.
Next quarter and then for the year.
As you said a little bit different than you saw a quarter ago, but when I went on the numbers the <unk>.
Revenue I don't think consensus for fiscal 'twenty, one is kind of changed much.
And youre going to be looking at obviously tougher comps at the back half when you had a really really strong last September quarter. It sounds like the setup for 2022 as Adam indicated.
Is good I guess my question is.
Should we start thinking about a return to that 9% to 11% the revenue growth target and in terms of margins I know that in the past when you've had some really big ramp ups of quarter to quarter, there's been some cost and some some margin headwinds. So how should we think about growth versus the.
Margin in the mix of the business, Yes, I think that day.
I'll start with 22, and then Theres a couple of other topics I wanted to hit as.
As well, but certainly too early to talk about 'twenty, two and give any sort of of guide our color, but I think of setting up to be of really good year.
When you look at the.
The factors in the catalyst that I talked about earlier I think that's quite good.
And then kind of backing up to 'twenty, one I mean, I would say well, while it's not 9% to 12, but it doesn't it still sets up to be of pretty good year of.
The growth year from a revenue standpoint, but the EPS leverage I mean, you start to do.
The math on that looks pretty good so I think thats a compelling story for.
For fiscal 'twenty one.
And Matt.
You mentioned margin headwinds with transitions, we always have those transitions going on so I wouldn't say that's necessarily impacting margins. We do have the Thailand facility, that's kind of be.
Ramping up and it typically takes a few quarters before a new site reaches corporate averages.
And then the other.
Item, we're watching is travel expenses, they've been obviously very depressed and we expect some return at some point, but I don't think we'll get back to the levels. We were at pre Covid. So.
Monitoring that that could be a slight headwind for us.
Okay, Great and just last quick question just regarding costs pad you didn't call out of Covid related costs.
Is that just sort of embedded in your in your model now or do you see any changes there.
So for the first quarter it was around $2 million. So it's starting to taper down we do expect expenses in the latter quarters, probably to the tune of $1 2 million in the half.
When you look year over year last year fiscal 'twenty, we had about $10 million. This year, we would think thats about $6 million, so about $4 million lower there.
On another area of cost are health care costs internal.
We're depressed with last year with elective procedures being down we expect those to be up and net pretty much offsets the benefit we're seeing from the COVID-19.
Expense reduction, we expect healthcare cost to be up about $4 million. This year. So net net those are pretty flat. Okay. That's helpful. Okay. Thanks, a lot.
Sure.
Thank you. Our next question comes from the line of Steven Fox with Fox Advisors. Your line is now open.
Thanks. Good morning, just two questions from me if I could first one on the final expansion you mentioned some decisions by some customers to move to outsourcing could you just expand on what drove that decision.
Whether it was something that was already in the works or maybe the if there was the change in thinking due to circumstances and then I had a follow up.
Yes. This is Steve in some of these challenging times I think customers do question their supply chain strategies more on so I think the the conversations we're having right now are things that customers were considering but I think the COVID-19 situation is pushing them to to move a little bit quicker. So.
Not a big.
The strategic shift on the <unk>.
Strategic shift on their part, but I think the timing of Covid of just helping expedite things.
And those ships would be done with.
Yeah.
Their current facilities would be utilized by the customer you'd be outsourcing into your existing facilities like the strategy around their.
Their own plant and equipment is what.
Yes, they would exit their facilities and we would do that one of two ways. One is the either to this move the facility entirely at the moment that the exited or do what we call of managed and places where we'd manage it for 18 months 24 months of and then transfer it.
Under a rare circumstance if there is of strategic.
The alignment would we consider of facility, yes, but that would be under a very strategic decision.
Thank you and then just on the.
The new logo wins can you just talk about the competitive environment around the six six wins how much of it was.
Just sort of where you guys play versus <unk>.
Maybe seeing competition from smaller large.
EMS providers.
Yes, the competitive environment is about the same I mean, we run into the big guys. All the time and there is always smaller players involved as well and so I don't think with these situations or with Covid, there's been a big fundamental shift.
In the.
In the competitive landscape, although we are seeing a little bit more I would say pricing.
Diligence and a little bit discipline, and so that's the refreshing to see.
Thank you.
Thank you.
Our next question comes from the line of Paul Coster with Jpmorgan. Your line is now open.
Yeah, a couple of quick ones it sounds like the.
Sales in the Biz Dev team are working pretty well in the virtual world do you see that changing as we come out back in the pandemic.
Are you going to get back into the mode or do you think you've found the new way of developing the business without the expense.
The quick follow on.
Thank you.
Certainly our business development people, Paul or looking to get out on the road and looking to get out in front of customers I'm going to be candid on looking to get out in front of customers more of myself.
So I think youre going to see travel go up but I do also think that there is a.
I don't think it's going to go up quite to the same level that it had been in the past I think people are feeling.
Understanding that.
There are there are things that can get done virtually it can be effective virtually.
Our branding and communications team just did the excellent job of creating a great virtual business development environment that I think is really unique thats, helping us, but there's still nothing like having a customer on your site.
To see it firsthand so so.
So I am sure certain that there'll be more movement once it becomes a better environment.
With the vaccine rollout and such.
And then as the earnings.
Yes.
Is there anything in the change in the administration in Washington DC.
Do you see the.
Changes anything for you.
Yes, when we talked about theirs.
Maybe I'll talk about markets and then Pat can talk a little bit more about other factors, but markets. There's a few and I think it kind of comes back to what happens around the stimulus on Where's the focus of where dollars are spent so I think.
Our heavy equipment business, and our industrial sector could benefit our energy business and our industrial sector could benefit.
I think the COVID-19, particularly around test.
Could benefit from a market standpoint.
The semi cap is potentially.
Only going to get stronger so maybe I'll pass it off the pad two for some comments sure I mean from a tax perspective, Paul we're watching it closely obviously there has been discussion around increasing the corporate rate and also the offshore earnings tax rate, which would impact us, but we'd want to understand if theres any potential Craig.
<unk> that could mitigate some of that increase our tax team is closely monitoring. It. So we'll just have to see where it falls in a priority with the new administration.
Got it thank you very much.
Thank you.
Our next question comes from the line of sort of strong with Sidoti <unk> Company. Your line is now open.
Hi, Thank you for taking my question of congrats on that on a great quarter and congrats Shannon Heather.
A lot of good questions asked already.
But I just wanted to get a sense more of your revenue guidance for the second half the space sort of going to be in line with the <unk>.
The second quarter expectation does that assume.
The elective still stays sort of ask the presto that could be as the price upside in the second half of that comes back GAAP more friendly.
Yes, it does I mean, basically it looks at the environment as being more or less of what it.
What it is today per.
<unk> Zealand, maybe call it a little softer than what we're seeing for the fiscal second quarter, because we saw a lot of drop in upside demand that impacted the second quarter of that.
Isn't necessarily impact Q3, and Q4 at this point so.
So theres a lot of potential I think for for opportunities within the second half of it's just our visibility says it's flat to Q2, right now more or less.
Okay. Thank you and I think of.
The debate about the gross margin and ramping on your new projects might be pressing that the close to your guidance. You took quite you had a good performance this quarter on the guidance for the second quarter to the.
Remain relatively high so how should we think about that going forward.
Yes.
Go ahead, Pat Yes, I was going to say as Todd said I mean, we're from the operating margin standpoint, we've been really pleased with the last three quarters.
So hitting 5% or above would be our target.
<unk> expenses were kind of monitoring on.
<unk> would be travel expenses and health care costs.
Those are things that could be potential headwinds for us but.
Trying to achieve that 5% of our above would be our target.
And we don't see really of significant drag from new program ramps in the future.
Somewhat always ramping new programs and I think the leverage we can get from the other business can offset the.
The cost of the inefficiencies of new program ramps.
Okay. Thank you and then lastly in the arm in the SaaS. This quarter, you alluded to some issues with ramping new programs.
Causing the shortfall there can you just elaborate on that and.
Tucker Todd Thats kind of in the coming quarter.
Sure the space program I mentioned had some delays on the ramp on that as you can imagine programs that are going in the outer space. There's a lot of stringent requirements and from a manufacturing process standpoint.
We're working with the customer on some strengthening of those requirements on it slowed down production. We believe we've worked through those.
<unk> alignment with the customer on what the requirements are and so I went to expect that the impact of going forward.
Okay. Thank you that's all from me. Thank you.
Thank you.
There are no further questions at this time I would now like the turn the call back to Mr. Todd Kelsey CEO for closing remarks.
Alright, Thank you Sarah.
The just start by giving a shout out to our plexus team members globally in and thank them for all of their hard work and continued to perform exceptionally well despite challenging circumstances that are around us today and again. Thank you to everybody who joined our call today. We certainly appreciate your support and your interest in plexus.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
The one have a great day.
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