Q2 2021 Plexus Corp Earnings Call
Good morning, and welcome to be Plexus Corp Conference call regarding its fiscal second quarter 'twenty 'twenty. One earnings announcement my name is Tiffany and I will be your 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 questions. The conference call is scheduled to last approximately one hour and please note that this conference is being recorded I would now like to turn the call over to Mr. Shawn Harrison plexus, as Vice President of Communications and Investor Relations.
Sean.
Thank you Tiffany and.
Good morning, and thank you for joining us today some of the statements made and information provided during our call today will be forward looking statements as they will not be as they will be not limited or be as they will not be limited to historical facts. The words believe expect intend plan anticipate and similar terms often <unk>.
And if my forward looking statements forward.
Forward looking statements are not guarantees since there are inherent difficulties and 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 and our form 10-K filing for the fiscal year ended October 3rd 2020, as supplemented by our form 10-Q filings and the Safe Harbor and fair to closures disclosure statement in yesterday's press release.
Plexus provides non-GAAP supplemental supplemental information such as ROIC economic return and free cash flow because those measures are used for internal management goals and decision, making because they provide additional insight into financial performance. And addition management uses these and other non-GAAP measures such as adjusted operating income adjust.
Operating margin adjusted net income and adjusted net 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 supplemental information. Please refer to yesterday's press release, and our periodic SEC filings.
We encourage participants on the call. This morning to access the live webcast and supporting materials at plexus website at Www Dot 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 advance to slide three for a discussion of our fiscal second quarter results.
A robust fiscal second quarter results highlight the advantages of our unique value proposition and consistent focus on operational excellence.
We expanded our industry, leading GAAP operating margin to five 8% improving on last quarter's performance by 11 basis points.
This was achieved through our focus on productivity improvements and expense management, along with continued solid performance from our engineering solutions and aftermarket services teams.
The result includes 23 basis points, a restructuring expense and 73 basis points of stock based compensation expense.
And as our best performance and over a decade since 2008 and represents the fourth consecutive quarter of GAAP operating margin in excess of 5%.
We achieved quarterly revenue of $881 million, which was in line with our expectations and at the midpoint of our guidance range.
Our industrial sector exceeded our high expectations entering the quarter led by upside from semiconductor capital equipment customers.
Our healthcare life Sciences sector had an exceptional quarter, we're seeing signs of improving demand for equipment used for elective procedures.
Finally, aerospace and defense underperformed, a forecast primarily due to labor availability late in the quarter as a result of the COVID-19 pandemic.
Through this combination of strong operating performance and in line revenue, we delivered GAAP diluted earnings per share of $1 42.
Including seven and associated with a modest restructuring of our operations in Scotland, and Idaho, and 22 cents of stock based compensation expense.
This result was well above the top end of our guidance range.
And I'm extremely proud of our global plexus team as they continue to deliver outstanding results, while navigating the challenges stemming from COVID-19.
Please advance to slide four.
I will now highlight fiscal second quarter accomplishments that we expect will enable accelerated future revenue growth.
Our team produced another exceptional quarter wins, delivering $284 million from manufacturing revenue when fully ramped into production.
With this result, our trailing four quarter wins was again over $1 billion and hit a new record.
And.
The quarterly wins included six new logos. Another very strong result that enables further growth as these relationships expand.
The wins also consist of a notable aftermarket services engagement.
We continue to make great progress and expanding our capabilities and growing revenue with this higher margin differentiated offering.
In addition to the manufacturing wins, our team delivered its highest level of quarterly engineering wins since fiscal 2019.
Strong engineering wins are generally a leading indicator of accelerating manufacturing growth.
The strong wins result highlights the success of our innovative virtual business development efforts and underscores the market recognition of our strong execution.
Our go to market team continues to be successful and leveraging our reputation as the leader and highly complex products and demanding regulatory environments to produce several consecutive quarters of exceptional results.
In addition, we announced the commencement of construction of our new manufacturing facility and Bangkok, Thailand.
This 400000 square foot facility will be complete and the fiscal third quarter of 2022.
Bangkok is known for its highly skilled work force and established supply chain.
It provides us and additional growth engine and the APAC region to support customers across all three of our market sectors.
Existing customers have already expressed significant interest and the facility and we look forward to welcoming approximately 1800, new plexus team members upon its completion.
Please advance to slide five.
And.
We anticipate a robust performance will continue for the fiscal third quarter based upon incrementally stronger demand, particularly in our healthcare life sciences sector, and our confidence and our ability to consistently execute.
We're seeing broad based strengthening of health care life Sciences demand over the next several quarters led by the startup of recovery for devices related to elective procedures.
These increases more than offset a slowdown and point of care diagnostics orders.
Likewise, as we look beyond the fiscal third quarter, our industrial sector is showing significant broad based demand increases.
Semiconductor capital equipment and communications forecasts are robust.
We believe our aerospace and defense sector revenues, Kraft and forecast should begin to inflect higher.
Taking these factors into consideration, we are guiding fiscal third quarter revenue of 875% to $915 million.
Overall, our customer demand exceeds our guidance, but we are limited and our ability to meet upside due to supply chain constraints.
As a result of expense.
Effective expense control and the efforts of our operations team and driving sustainable productivity gains we are guiding GAAP operating margin and the range of five 1% to five 6%, including 72 basis points of stock based compensation expense.
With this strong operating performance, we anticipate delivering GAAP diluted earnings per share of $1 23.
To $1 38 <unk>.
Including 22 cents of stock based compensation expense.
Our guidance assumes that neither supply chain constraints, nor COVID-19 will materially impact and markets or our operations beyond what is already anticipated.
Next a few thoughts regarding our longer term outlook.
Fiscal 2021 is shaping up to be a solid year with mid single digit revenue growth operating margin, well above 5% and EPS growth potentially above 30%.
Leveraging this foundation, we believe we have a platform to sustain strong revenue growth moving forward through the strengthening in the overall demand environment, including equipment used and elective medical procedures.
And eventual commercial aerospace recovery.
Our ability to support secular growth markets and the acceleration and new program wins.
We're particularly excited about new program ramps related to robotic surgery blood processing and warehouse automation.
Looking beyond fiscal 2021, we are confident these demand catalysts support our growth our goal of achieving 9% to 12% annual revenue growth, while continuing to deliver industry, leading operating performance with operating margins consistently above 5%.
Please advance to slide six.
Prior to concluding my comments I'd like to touch on our long standing cornerstone of our plexus culture, and a critical component to achieving our vision of creating the products that build a better world.
This cornerstone is our environmental social and governance efforts.
It represents our responsibility as a company to our many stakeholders and we reflected through five pillars.
We recognize we must be a responsible employer community partner global citizen and industry Stuart.
And that we are accountable to our stakeholders and the way we govern our company.
We recognize that this responsibility wholly aligns with our commitment to create long term shareholder value.
A key part of our ESG efforts is ensuring that leaders across plexus fully understand these commitments and are accountable engaged and our ESG initiatives.
Our leaders insurer and ESG focus is integrated into our strategy and the way we operate our business.
It is also important that we effectively capture and communicate the positive impacts we pursue just as we communicate our financial results.
Addressing ESG matters is not only the right thing to do but can also result in increased operational efficiencies innovation and expanded team member engagement and retention all of which are critical to realizing our goal of delivering $5 billion and revenue at greater than 5% operating margin by fiscal 2025.
Specific areas of immediate focus are expanding our diversity inclusion efforts, which is a non negotiable aspect of our culture at plexus, and an enabler of our ability to engage and retain top talent.
We're also making capital investments to measure and reduce energy consumption and seeking opportunities to reduce waste to landfill.
When we build new factories, they will leverage green technologies, which is occurring with our new facility in Thailand.
It's not lost on us that in order to fulfill our vision to create the products that build a better world. We must go beyond that and also take action to build a better world.
These actions include treating our people exceptionally well and improving the communities that we touch minimizing our impact on the planet and influencing our business partners to do the same.
As our ESG strategy continues to develop investments occur and milestones are realized we are committed to providing updates on the benefits and value to our team members customers partners and shareholders.
In closing I would like to thank our approximately 19000 plexus team members for not only helping to create the products that build a better world, but for your efforts and building a better world I'm proud of your commitment and accomplishments.
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 second quarter of 2021, as well as our expectations for the fiscal third quarter of 2021.
Revenue within our industrial sector increased 8% for the fiscal second quarter.
The result was better than our expectations of a mid single digit increase.
Greater demand across several subsectors, including semiconductor capital equipment test and measurement and communications contributed to the stronger result.
As we look at the fiscal third quarter demand and the semiconductor capital equipment sub sector remains robust, but supply chain constraints will limit our ability to capture the full potential.
In addition, new program ramps and our industrial equipment sub sector are being offset by two programs that are ramping down this quarter.
The net result is that we anticipate a low single digit decrease for our industrial sector and the fiscal third quarter before and expected return to growth and the fiscal fourth quarter.
Our health care life Sciences sector revenue increased 10% and the fiscal second quarter.
The result exceeded our expectations of a high single digit increase.
<unk> demand for analyzers used to test for Covid and strengthening demand for some elective medical devices were the main contributors to the healthy performance.
Looking at the fiscal third quarter, we see the forecast for elective medical products continuing to improve.
As a result, we anticipate a mid single digit increase for our health care life Sciences sector and the fiscal third quarter.
Revenue and our aerospace and defense sector was down 7% and the fiscal second quarter. The result was meaningfully short of our expectations on a low single digit increase.
Broad softness across the sector combined with labor shortages due to Covid corn teams late in the quarter were the reason for the Miss.
Looking at the fiscal third quarter and market demand, especially in commercial aerospace is not anticipated to start to improve until later this fiscal year.
Therefore, we are forecasting revenue to be flat for aerospace and defense sector and the fiscal third quarter.
Please advance to slide eight for an overview of our wins performance for the fiscal second quarter.
We $1 42, new manufacturing programs that we expect to generate $284 million and annualized revenue when fully ramped into production.
The mix of wins between existing and new customers was well balanced again this quarter with 27 on the wins coming from current customers and <unk> as a result of new relationships.
Included in the 15, new relationships. So the addition of six new logos and the expansion into new groups with nine of our existing customers.
The continued strong wins performance lifted our trailing four quarter wins to another record level and access of $1 billion.
At that magnitude our wins momentum remains very healthy at 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 first fiscal second quarter.
The APAC region recorded its highest quarterly wins and over six years at $130 million.
The region's trail trailing four quarter wins grew 7% to finish at $419 million.
The unique value proposition of our health care Center of excellence in Penang, Malaysia is being recognized by our customers.
70% of the APAC regions wins and the fiscal second quarter are associated with this center of excellence.
The American region's wins and.
And $119 million increased the region's trailing four quarter wins by 8% to $481 million.
Similar to the APAC region are health care Center of excellence, and Guadalajara, Mexico generating robust wins.
Almost 40% of the Americas region's wins were contributed to that center of excellence.
The EMEA region wins of $35 million includes a meaningful program from a new logo, who desires and region manufacturing.
The fiscal second quarter wins performance puts the regions trailing four quarter wins at $144 million.
Please advance to slide 10 for further insight into the manufacturing wins performance by market sector.
On health care Life Sciences team produced a record wins result of $153 million and the fiscal second quarter.
The sector teams impressive wins performance this quarter increased our trailing four quarter wins to one half of $1 billion.
Which is also a new record level.
The industrial sector healthy wins performance continued in the fiscal second quarter with $96 million and new wins.
The team continued to execute on their strategy to expand the sectors customer base by adding two new logos in the quarter.
The aerospace and defense sector captured wins totaling $35 million and the fiscal second quarter.
Included on the winds are two new logos for a growing space and sub sector.
Please advance to slide 11 for further insight into some of the fiscal second quarter wins.
Included in the health care life Science wins as a class III defibrillator that is being that will be deployed and urgent care situations.
The large program is the transfer of production from the customers internal manufacturing to our Penang, Malaysia health care facility.
In addition, the Penang facility will be ramping our single use device that collects tissue samples that are used and the detection of breast cancer.
The health care Life Sciences team also won the manufacturing with next generation diabetes monitor from a current customer.
The production of the new device will be and our Guadalajara, and Mexico facility that specializes in health care products.
Including the industrial wins as another opportunity from our recently added customer who specializes in warehouse automation and.
The automated picking system will be manufactured and our Appleton, Wisconsin facility.
Our industrial team also secured the manufacturing of our next generation distributed architectural cable access product.
We expect to start ramping and the device and our Guadalajara facility later this year.
Included in the aerospace and defense wins as a program with a meaningful new defense customer. The company selected plexus is Boise, Idaho facility because of the site's ability to produce advanced technology assemblies and volume within the United States.
Finally, the aerospace and defense team also on the production on the new device for secure communications.
This new program will be added to the current family of products that we built for this customer and a variety of Romania facility.
Yeah.
We can proceed to slide 12 for highlights of our funnel of qualified manufacturing opportunities.
Our funnel finished the fiscal second quarter at a very robust $3 billion.
Our industrial sector funnel closed the fiscal second quarter at $583 million.
Impacting this.
Sector's funnel was the strong wins performance and our decision to not pursue a large outsourcing opportunity as it would have been dilutive to our operating results.
The team's choice highlights our commitment to profitable revenue growth.
The health care life Sciences sector exceptionally robust wins performance and the fiscal second quarter caused their funnel to dip slightly however.
However, new opportunities with a robotic assisted surgical device and a catheter monitoring system kept the funnel at a very healthy $1 8 billion.
We expect the funnel to continue to support strong wins performance.
Our aerospace and defense sector increased their funnel by $33 million and the fiscal second quarter to finish up $700 million.
The result represents the fourth consecutive quarter of funnel expansion.
Although the aerospace and defense end markets may be muted the business development activity is robust, including a meaningful moves space program that the team added to their funnel during the quarter.
Next I would like to turn to operating performance on slide 13.
The team produced strong GAAP operating margin of five 8% from the fiscal second quarter and outstanding outcome.
Although it takes and the entire organization to generate the result, our operations team and the Americas has steadily increased operational efficiency over the past several quarters.
Their focus on continuous improvement on a meaningful part of the robust fiscal second quarter results.
And our improved contributions is one reason why on operating margin has been above 5% and why we believe it will stay there.
A few final comments when we talk about operational excellence, it's natural to think about the manufacturing process.
However, operational excellence is much broader.
And that manufacture anything if you don't have the materials.
This is global and regional supply chain teams are demonstrating their commitment to operational excellence and a significant way.
And they are leading the organization through a very challenging supply chain environment, enabling our factories to continue to deliver for our customers.
And I want to thank each of them and their dedication and hard work have and will continue to differentiate plexus and the marketplace.
I will now turn the call to Pat for and in depth review of our financial performance and Pat.
Thank you, Steve and good morning, everyone. Our fiscal second quarter results are summarized on slide 14.
Second quarter revenue of $881 million.
It was at the midpoint of our guidance, while gross margin of 10, 3% exceeded the top end of our guidance.
Favorable gross margin resulted from improvements in our Americas region, due to better business mix and operational performance and.
In addition, we experienced lower than anticipated healthcare costs due to a reduction and claims activity.
Selling and administrative expenses of $38 3 million.
We're in line with expectations for the quarter.
Our GAAP operating margin of five 8% was above our guidance due to the improvement in gross margin.
This is our fourth consecutive quarter with operating margin above 5%.
Inclusive and our GAAP operating margin was 73 basis points and stock based compensation expense and 23 basis points of restructuring expense.
Non operating expenses of $4 $3 million were favorable to expectations, primarily due to lower interest expense.
Given the strength of our balance sheet and free cash flow generation, we elected to repay our 364 day term loan early this loan totaled $138 million and was originally due at the end of April.
The early repayment led to lower interest expense for the quarter.
GAAP diluted EPS of $1 42 was above the top end of our guidance range for the reasons already mentioned.
Turning now to our cash flow and balance sheet on slide 15.
We delivered $82 million and cash from operations and spent $7 million on capital expenditures, resulting in significant free cash flow for the quarter of $75 million of results well in excess of our quarterly net income.
During the fiscal second quarter, we purchased approximately 349000 shares of our stock for $29 2 million at an average price of $83 and 39 per share.
At the end of the second quarter, we had approximately $53 million remaining under the $100 million fiscal 2021 authorization.
We expect to repurchase the balance of the authorized amount on a consistent basis throughout the remainder of fiscal 2021, while taking market conditions into consideration.
At quarter end cash total of approximately $295 million sequentially lower by $62 million.
The lower balance was a result of the early repayment of our term loan which was funded with cash and capacity under our revolving credit facility.
With the term loan repayment during the quarter, our total debt was sequentially lower by almost $100 million.
At quarter, and we had $38 million borrowed under our $350 million revolving credit facility.
With our exceptional operating performance, we delivered return on invested capital of 17, 3% sequentially higher by 100 basis points and the highest return and for years.
This result generated economic return of 920 basis points above our weighted average cost of capital, creating considerable shareholder value.
At quarter, and we were pleased with our cash cycle, which came in favorable to our guidance.
With the result of 72 days, our cash cycle was sequentially improved by eight days.
Please turn to slide 16 for details on our cash cycle.
While inventory dollars were essentially flat compared to last quarter inventory days reduced by four.
The improvement and days, primarily related to a higher level of revenue and the fiscal second quarter and continued diligent inventory management.
Adding to the better cash cycle days were modest improvements and both our payable days and customer deposit days.
The dollar value of customer deposits increased by approximately $20 million during the quarter.
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 17.
Fiscal third quarter gross margin is expected to be and the range of nine 5% to 10% at.
And at the midpoint of this guidance gross margin would be sequentially lower primarily due to rise and healthcare costs, representing a return to a more normalized pre pandemic level.
In addition, we expect additional incentive compensation expense linked to the increased revenue and return.
For the fiscal third quarter, we expect SG&A expense and the range of $39 million to $40 million.
At the midpoint of our revenue guidance anticipated SG&A would be four 4% of revenue slightly higher than the fiscal second quarter again increased health care costs and incentive compensation expense are impacting the guidance.
Fiscal third quarter GAAP operating margin is expected to be and the range of five 1% to five 6%, which includes 72 basis points of stock based compensation expense.
A few on their notes for the fiscal third quarter depreciation and amortization expense is expected to be approximately $15 million, which would be slightly lower than the fiscal second quarter.
Non operating expenses are expected to be and the range of three eight to $4 $2 million at the midpoint of this guidance. These expenses would be approximately $250000 below last quarter, primarily due to lower interest expense.
We are estimating an effective tax rate of 12% to 14% and diluted shares outstanding of approximately $29 2 million shares.
Our full year effective tax rate is also expected to be and the range of 12% to 14%, which does not assume any legislative changes.
Our expectation for the balance sheet is at working capital investments will increase compared to the fiscal second quarter.
We expect additional inventory as we increased procurement activity to meet the anticipated higher second half demand.
Based on our revenue forecast, we expect this level of working capital will result in cash cycle days of 77 to 81 days.
At the midpoint of this guidance cash cycle would increased seven days compared to the fiscal second quarter, primarily due to the inventory requirements.
Finally, our capital spending estimate for fiscal 2021 remains and the range of $70 to $85 million, which includes approximately $23 million related to our expansion and Thailand.
For the full year, we continue to expect free cash flow generation of approximately $100 million.
This amount will be dependent on the timing of capital expenditures for Thailand, and working capital investments needed to support the revenue outlook as we enter next year.
With that Tiffany, let's now open the call for questions.
Ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that is star one we'll pause for a moment to compile the Q&A roster.
And your first question comes from the line of Jim Ricchiuti with Needham and company.
Hi, good morning.
Good morning.
Questions.
Just.
I wanted to just focus on the supply chain constraints that youre alluding to and I assume this is all tied to what we've been hearing about for a while now just the chip shortages is that basically.
Representing the bulk of these constraints.
Yes. This is Steve.
If you look across the commodities, we track about 60 commodities as a company and.
It is a pretty widespread challenge I think everybody is facing its not just us and if you look at those 60 commodity theres about 85% of them that we've identified as either.
Increasing or lead time challenges associated with them. So it is a broad based supply chain challenge I think our teams are doing an exceptional job working through it but it's not anything outside of what you've probably heard from other companies and the industry in general.
Got it.
So if we think about what at least we're hearing out there is it doesn't sound like this is going to be resolved anytime soon and.
So I guess, what I'm wondering is is there a potential risk that is.
Remains a headwind in Q4 for you guys at the same time that we're hearing about and.
On the economy that could grow 6% or more and the U S. This year and so and it seems like you've got.
The potential for customers to potentially accelerate.
Activity and so I'm wondering how we should think about that as we think about Q4 and even into early next year.
Yes.
Reasonably comfortable as we look at what our forecast from our customers may have been in terms of our ability to secure supply and produce for them I think I mentioned that last quarter I think one of the things that we were concerned about and we are seeing is customers to start dropping and upside.
Demand within the quarter within lead time.
Getting it is it's more difficult for us to deliver for that and we have.
A fair amount of revenue that we could capture in the quarter, if we could get supply chain. So from my viewpoint, it's more of a about our ability to capture upside than it is on.
Our concern about downside.
The one thing I would add to that too Jim and this is Todd.
As we look to Q4 and as we look to fiscal 'twenty. Two we're bullish about the demand that's out there and our supply chain guys are our work and declare all the challenges that we have out there but.
There is there is solid demand and our ability to execute on the demand that comes in and under more normal circumstances is as strong as ever and the challenge becomes when youre dropping and things.
Inside the quarter or inside the lead time of certain components that are out there right now.
Got it just a final question I'm wondering if you you called out this aftermarket service and engagement and I'm wondering if you could.
Say anything more about that with respect to size type of customer and whether this is maybe an area that you think you're going to be able to further leverage their capabilities.
And then maybe other customers like yes, we're really excited about this one Jim and it's a health care customers, what I'll say I won't get into any details on the product lines, but it's across all three of our regions. It's many different sites.
Significant from a revenue standpoint, so we've talked about aftermarket and our ability and the longer term to be able to grow it to <unk>.
5% to 10% of revenue I think this is a good a good step in that direction.
And this opportunity by itself could.
And could get us to a pretty meaningful level of revenue within aftermarket and especially when you put it on top of the of the book of business, that's already within those within our aftermarket offering.
Got it thanks, thanks for that additional color and congratulations on the quarter guys.
Jim Thank you.
Your next question comes from the line of David Williams with loop capital.
Hey, good morning, and thanks for taking my question.
And.
Congrats on the solid quarter.
My first question really is around some of the shortages were seeing and you provided some color there.
Curious what your thoughts are in terms of how that may be impacting your customer so beyond the manufacturing process, but once it gets to your customers are you do you get a sense that maybe they are facing any shortage issues that may be constraining their ability to sell into their markets.
I would say and typically a lot of and stuff that we're doing is pretty close to a finished good our customers do add value and some areas.
No.
I don't believe that they are getting significant constraints beyond what as long as we're able to deliver I think for the most part they are able to deliver with that said I mean, obviously there are some customers that have.
Secondary things and other products that they add to it but I think the biggest challenge has been more on the electronics and other things at this point.
Okay great.
The other thing I'd add too on that David is we're seeing really strong demand from our semiconductor capital equipment customers of course, because they're the ones who can help the <unk>.
Fabs and the manufacturers.
On the situation that we're in right now.
Sure no that definitely makes good sense.
And I guess the tone from your customers from there. They are in demand are they seeing I guess are you seeing that drop in orders at the same pace you did at previous quarter. How are you thinking about in demand and is that accelerating or what does that pace and like I guess and.
And the demand environment itself is just really strong right now and if we look at what we saw on.
And the out quarters, one quarter ago versus today its completely different.
Particularly within our industrial sector or semiconductor capital equipment and communications are very strong and then and health care, where elective is coming up very rapidly. So we're seeing major demand increases across those two sectors in particular.
Great.
And then lastly from me maybe as the industrial segment is an area that we thought we would see a nice uptick as we kind of got through Covid here and it seems like maybe some of the automation is finally begin becoming a bigger play there.
And your sense in terms of that segment in particular and just the demand that youre seeing now do you think this is something that maybe were in the beginning of a new cycle for some of the industrial especially on automation or do you think this is maybe just a blip and it settles down as we get into next year.
Yes.
And specifically on warehouse and factory automation, and then maybe Steve can provide a little bit more color on the sector overall, but.
And that's one of the areas I'm going to highlight and a bit and my script.
Very excited about a few different program ramps that we have going on and there and we think it is.
It's a huge secular growth market for us and with just outstanding potential, particularly in F. 'twenty two type of event for us.
Not really enough 'twenty one but.
And a major way, but we're very excited about what's happening within warehouse and factory automation.
Yes, I mean, just to reiterate what Todd said I think we've got two things going on one is that we are winning new customers and taking market share in that space and then.
That market space is also set for growth and so you got both things go on and working and the right direction and so as Todd said, we're we're pretty optimistic about that as we get into 'twenty two.
Great. Thanks, so much I appreciate the time guys.
Thank you David.
Your next question comes from the line of Adam Tindle with Raymond James.
Okay. Thanks, and good morning, Todd I, just wanted to start on wins and funnel on another healthy quarter here, maybe you could touch on the composition of the incremental wins from a profitability profile basis, those layer and what sort of kind of growth and operating margin profile on that incremental contribution and then secondly.
<unk> per Steve.
And just kind of on this topic from an operating standpoint recognize these windsor healthy what lanes to the salespeople have to work within and maybe why not expand those lanes given margins are at record levels economic return and so far in excess of cost of capital you talked about passing on a large outsourcing opportunities and so just wanted to ask from operating <unk>.
And point why not expand the lanes and thank you.
Yes, so from a standpoint of the margin profile of the new wins and I would say they fit nicely within our model and what we do is we give our sector leaders the leeway to devil and manage their portfolio as a book of business and and they.
And they know that as they bring and certain new business and it'll be at lower margins as it typically is as it ramps up and particularly with new customers, but then they layer on top of that.
And some better margin business and in essence run a portfolio that meets their targets. So.
So we give them a lot of leeway, but in general they are good at AD targeting business that fits.
And the type of financial model that we want to deliver.
And then I'll take the second part of the sector team to have a pretty significant amount of leeway in terms of what they want to do and for me a couple of examples our healthcare team life Sciences team going after robotic surgery, the industrial team going after automation and warehouse automation and the aerospace and defense sector going after space products and so.
Hey.
They are quite free to go chase, where they believe the future business is going to go as long as it falls in line with our overall plexus strategy on the specific opportunity you talked about and I'm glad you brought it up because to me it really demonstrates the I'd say the discipline that the teams have and this specific example, the customers switching more from a hardware platform to more of a <unk>.
Software platform and Thats, where the industry is going and to be honest with you. That's what I would have probably been a nice revenue pop for the next year or two but we really saw that that end market was getting a bit probably going to be bit more commoditized and the volume products. They need is going to go down and so although we would chase that one.
On it and it would have been margin challenge and the beginning we also believe that it wasn't necessarily the right thing long term either and so.
Sometimes always hard to walk away from revenue and an opportunity but to me, it's really impressive part of what our teams have been able to do.
On the go quite frankly chase the right business and the stuff that isn't right for us They walk away from so I was pretty impressed with their decision.
And then one additional thing I'd add on that is as well Adam.
When we think about our markets and our pricing we believe that at our financial model our markets support the low double digit growth target that we have.
Yes that makes sense and helpful color appreciate it and maybe just a follow up for Pat.
And one of the other and parts of stories that you've driven so far at the company as the Opex trends ratios have improved significantly you've had productivity gains expense management and remember years ago trying to get below 5% operating expense as a percentage of revenue and youre now pushing to the low 4% range just talk about the trajectory from here on.
Opex is the right way to think about the normalized model still mid 4% has.
Has it become lower than that is there additional opportunity just maybe just walk us through the Opex line. Thank you sure. Yes, I think there is opportunity I think we're still going to be operating within this four to four and a half range. So depending on investments, we make and certain quarters.
But I think it does have the ability to trend down and especially if we are driving double digit top line growth, we can really leverage our opex.
Opex expenses.
To see some improvement, but I think add on working within that low fours is probably reasonable going forward.
Understood. Thank you very much.
Thanks, Adam.
Your next question comes from the line of Steven Fox with Fox Advisors.
Hi, good morning.
I guess I had another question just on the component supply situation during the quarter you guys actually reduced inventories, even though things were sort of tightening up so I know you don't speculate on inventory but.
Why werent you able to convince some of your customers to maybe sort of get ahead of the curve. So that you maybe have opportunities to do some upside and then I had to produce some upside and then I had.
Follow up question.
Yes, I would say that some of our customers did get ahead of it we were definitely building inventory for a few customers, especially and semiconductor capital equipment and as Pat talked about the deposits that some of our customers put they were asking us to get ahead of the financial forecast as they saw it coming I would say some other industries specifically like.
The electric procedures and health care life Sciences, it's coming back a little bit quicker than what people thought and so.
There is a question about how quickly they should've brought in inventory and working with them I can tell you that and our aerospace customers. We are having those conversations with some of our aerospace customers now about starting to procure inventory for the eventual return of that market.
No.
It's a case by case situation and we are we.
We are doing that and we're working effectively with customers in many cases other cases it.
It's really about our belief in terms of what their forecasts are going to be so I think we got a good balance and.
And.
We're we're able to do that in terms of inventories of dollar numbers from a dollar standpoint, it's up days were down.
As we.
As we look through the quarter here. So you will see inventories continue to build here for a little bit before we.
And you'll start to bleed them off as the market's clear up a little bit.
Great. That's helpful. And then just on the labor shortages, you mentioned this sort of headwind.
Can you just sort of go into some more details on whether that was your own facilities or are there up or down the supply chain and how you expect that to clear given that.
Other regions outside the U S still seem to be struggling with COVID-19.
Yes.
Was it related to our facilities and basically when we add a number of positive cases and that allowed us to lose some time.
Late in the and the quarter and and I mean generally and.
One of those things that we've been managing through and been managing very effectively the same way and it became an issue. This quarter is because it was so late in the quarter. There wasn't enough time to recover but generally we're able to recover from those without.
Really much of an impact.
Got it thank you so much.
Your next question comes from the line of Matt Sheerin with Stifel.
Just a follow up regarding the supply constraints could you quantify any miss upside opportunity you talked Steve about.
Some headwinds in terms of revenue and semi cap, even though it sounds like customers are and trying to get ahead of it.
Are we talking about like a 5% opportunity missed could you just quantify that.
Sure the the upside that we saw on the fiscal second quarter net customers dropped and there's probably $10 million to $15 million, but as quickly as it got dropped and there was there was no way we are going to realize that what we're looking at for the current fiscal quarter is about 40% to $50 million of demand and we do not have loaded into our financial forecast that if we could.
Materials, we think we could execute on.
Okay, Great and are you seeing and those projects didn't get pushed out.
And as the component constraints ease youll start to see some acceleration there.
Yes, that's a great question I would say that we do believe some on the demand is going to push.
And we do see it building in future quarters.
And one of the conversations we're having with customers is how much of it is perishable and I.
I would say, it's a little early to quantify exactly what that entire $40 million to $50 million going to be realized.
And in future quarters.
Versus how much is perishable, but I guess my message here is that some of that's going to push on what's going to be perishable, but we haven't really been able to quantify it completely yet.
Yes.
Okay, great and on the aerospace side. It sounds like fundamentals are bottoming, there and do you expect sort of a bounce along the bottom here for a couple of three quarters or is there any signs for instance, MRO picking up or any sort of indicators that give you some more confidence that it's going to be.
Faster recovery, yes, so what we.
<unk>.
This quarter to be somewhat.
Around the bottom and then and start to pick up a bit what we're seeing pick up right now is MRO.
As well as business Jets is picking up rather nicely right now.
The next thing to come would be the single Isle, but thats, probably a few quarters out yet and then it could be a long time before we start to see the.
On the multi I'll start to pick up within commercial aerospace.
Okay, and lastly, just a quick housekeeping for Pat regarding.
And how we should be thinking about interest expense and tax rate.
And what you're guiding to for the June quarter.
Guiding on we're modeling flattish in out quarters does that make sense or would be interest expense change based on working capital or other metrics. Yes, I think our interest expense. If you are looking at other income expense that I guide I think we could see that come down.
And our two going into fiscal 'twenty, two with lower interest expense, if we keep the capital structure the way it is.
Tax rate is real uncertainty at this point I think what I can tell you is we're in the same boat as every other company that.
If changes go through our tax expense is going to go up whether it's domestic tax or offshore profit tax on offshore profit. So.
Very similar to other companies there.
Got it okay. Thanks, so much.
Your next question comes from the line of Paul Coster with J P. Morgan.
Hi, This is Paul Chung on for Coster. Thanks for taking my question. So just on competition can you.
Expand on the pricing environment.
Your peers are also seeing pretty strong.
Margin performance just your thoughts on the reasons behind kind of the more favorable pricing environment and your view.
And how do you kind of continue.
Continue to stay disciplined on pricing and your expectations over the year and longer term for the industry.
And in general, there's just a lot more disciplined and the pricing environment and the current environment and there had been maybe previously within our industry. So I think that's that's good for everybody and of course, there's a lot of newer.
And our management teams that are on the various competitors that we have which I think net.
That's factored into it quite a lot and.
And it's been a good environment from a pricing standpoint, but.
And ways, though partly for US too we've tried to stake out differentiated positions were.
Or.
And where perhaps we're not.
It is not solely on price or a price.
Competition, that's going on but it's more of a capabilities competition, that's going on so that's one of the things that works in our favor as well.
And then as.
And we think about post COVID-19.
Do you expect some of your your existing customers to kind of accelerate the shift to outsource manufacturing.
And.
How are those conversations are evolving and then same question for new customers and new logos and then.
Anything you want to call out in Asia, and the particular strength there.
In terms of our customers' outsourcing I think anytime there is a.
The disruption, whether it's COVID-19 or on a recession or something like that I think customers and John will take a look at their sourcing strategies and adjust them and so we are seeing a little bit of an uptick and customers looking at their strategies. The one talk to Todd talked about for aftermarket services is one where the customer looked at it and said hey, we're going to start on sourcing.
I talked about a win.
Where our customers transitioning from internal production to external production and so anytime there's a disruption.
Causes people to see an uptick and those kind of decisions and so.
Wouldnt be surprised if we see a bit more as we go forward.
And in terms of APAC.
Our APAC team just continues to execute really really well.
The strategy that we have over there is working well our expansion and the Thailand.
As to add capacity and southeast Asia is as we see our facilities and Malaysia start to get more full and so I would say, it's kind of steady as it goes and the teams winning as you saw this quarter on record wins.
And so.
We're really satisfied with whats happening over there.
Okay, Great and then lastly.
And for Pat on free cash flow if I can.
Take your guidance for <unk> and there might be.
Maybe slight usage, but.
<unk> has been quite strong for.
Past past two years to hit close to 100 million on average so.
Any thoughts on on the kind of annual free cash flow guide is there some conservatism baked in there. Thanks.
Yes.
Paul some of it is going to depend on timing of capital expenditures for Thailand, We've got 23 million and this year and some of that could push into next year, which would improve our free cash flow, we're going to be procuring and quite a bit for the growth, we expect and fiscal 'twenty, two and I think that will.
Impact, our working capital and increase our investments and that is factored into my number. So I think still around $100 million is reasonable depending on kind of how next year shapes up and we'll know more about that over the next three months.
Okay, great. Thank you.
And welcome Thanks, Paul.
Your next question comes from the line and Jess <unk> with Sidoti <unk> Company.
Hi, Thank you for taking my question and congratulations great quarter and a lot of good questions asked already but I have.
A question on on the Thailand expansion.
And that is ramping and.
You expect the margin to be along with pressure.
And the other parts of your business.
And it can push too.
And make up for a question.
Yes, I think in general the <unk>.
Answers, yes on yet and we don't anticipate our margins to suffer as as the Thailand facilities coming on line.
There's a couple of factors and that too I mean, one and.
Steve and I already mentioned the performance of the APAC team, but our APAC team is an incredibly efficient at launching new facilities and bringing them to corporate level profitability. So we have high confidence and they'll be able to do it in very short order, but we do have other parts of the business that we're investing and right now that we anticipate margins and we'll come up to.
And <unk>.
And in essence payable to offset the Thailand expansion and that includes aftermarket we're not at our target level layer EMEA, we're not at our target level, yet so we have opportunities.
We have opportunities to bring up margins to offset any Thailand and investment.
Okay. Thank you and.
And on it.
And then the managed.
And with have been a bit softer over a couple of quarters. What are you seeing that COVID-19.
Covid related.
Anything else.
Yes.
Don't know if I completely cabo and the manufacturing wins.
<unk> actually been quite strong over the past couple of quarters.
Look back over fiscal 'twenty and into 'twenty one year.
On.
For the most part we've been at $250 million and north of it.
For quite some time and so.
I guess the.
The teams are doing a great job, bringing in the wins that we need to continue to support the growth and if I look at our trailing four quarter wins metric sitting at 30% I mean were well above our 25% goal. So.
And we're actually pretty pleased with the number of wins that we've had.
Okay, I was more on it and to that and.
European and Middle East.
Okay.
For regional color.
And so if original color EMEA is the one if you look at that region.
Our wins have been.
And we're trailing four quarter numbers of 144 million, which is a smaller region for us.
That supports growth it doesn't as Todd highlighted and it doesn't support maybe the corporate growth goals that we want and.
And so that is definitely an area of focus for us to basically to be able to growth.
AD wins, there to basically though is to continue to support our growth there, but we're growing it's just not at the rate that we wanted to but.
Again, we feel comfortable with our strategy there.
Okay. Thank you that was all from me.
At this time and currently showing no further questions in queue I will now turn the call back over to Mr. Todd Kelsey.
Alright, Thank you Tiffany and before closing I'd again like to thank our plexus team members globally.
I want to thank you for your exceptional performance and another excellent quarter and for continuing to work incredibly hard to meet the needs of our customers and I also want to thank everybody who joined our call. Today again, we appreciate your interest and plexus and we appreciate your support.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
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