Q3 2022 Plexus Corp Earnings Call
Okay.
Good morning, and welcome to the Plexus Corp Conference call regarding its fiscal third quarter 2022, earning announcement my name is Tanya 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 calls scheduled.
The last approximately one hour. Please note that this conference is being recorded I would now like to turn the call over to Mr. Shawn Harrison Vice President of Communications and Investor Relations Shawn.
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, including without limitation those regarding revenue gross margin selling and administrative expense operating margin other income and expense taxes cash cycle capital allocation future.
This outlook and the impact of COVID-19 on the company's business and the results of operations.
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 filings for the fiscal year ended October <unk> 2021, supplemented by our Form 10-Q filings and the Safe Harbor and fair disclosure statement in yesterday's press release.
We encourage participants on the call. This morning to access the live webcast and supporting materials at plexus website at Www Dot, Texas Dot com clicking on investors at the top of that page.
Joining me today are Todd Kelsey, Chief Executive Officer, Steve Frisch, President and Chief Strategy Officer, Pat Jermain Executive Vice President and Chief Financial Officer, and Oliver Mihm, Executive Vice President and Chief operating Officer.
As 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.
Thank you Sean good morning, everyone.
Please advance to slide three.
As we establish our fiscal fourth quarter guidance I am pleased that plexus is in position to deliver $1 billion in quarterly revenue, which would be a first for our company.
While understanding that the macroeconomic outlook is uncertain and challenging supply chain conditions remain.
We anticipate further revenue growth and GAAP EPS expansion in fiscal 2023.
Our customers remain bullish for the products, we produce and many report backlogs cover in calendar 2023.
In addition to the strong demand our optimism for continued growth stems from the strength of multiple substantial early stage new program ramps.
Our leading position in the secular growth markets of commercial space warehouse in factory automation and robotic assisted surgery.
Our strong historical wins performance in.
And our commitment to operational excellence, including increasing success in resolving supply constraints.
Okay.
Please advance to slide four for a review of our fiscal third quarter results.
For the quarter, we achieved record revenue of $981 million, a result that exceeded our guidance range of $885 million to $925 million and represented 21% year over year growth.
All three of our market sectors were up sequentially and health care life Sciences, and industrial exceeded our expectations entering the quarter.
This was largely a result of our teams increasing success in mitigating the impact of constrained component supplies through improved processes and the benefit of strong customer partnerships.
We delivered GAAP operating margin of five 1%, a 110 basis point increase from the fiscal second quarter and a result that was above the high end of our guidance range of four 4% to four 9%.
This result was achieved through increased volume leverage a return to normalized operations in Malaysia. Following the COVID-19 related challenges of the previous quarter and the team's success in mitigating the impact of COVID-19 related disruptions in China.
The combination of strong revenue and operating margin led to GAAP diluted earnings per share of $1 33.
Exceeding our guidance range of $1 <unk> to.
The $1 18.
The EPS result included 21 of stock based compensation expense.
Okay.
Our manufacturing and aftermarket services wins totaled $201 million down from our exceptionally strong fiscal second quarter results.
In light of supply chain constraints, some customers delayed new sourcing decisions as they focused on clearing supply issues with legacy programs.
Our funnel of manufacturing opportunities held at a record $3 4 billion and our team is confident we will continue to win our fair share of these programs going forward.
With trailing four quarter wins, holding in excess of $1 billion and sustained strength in the funnel, we are well positioned for future revenue growth and supportive of our 9% to 12% annual goal.
Finally engineering wins remained healthy in the fiscal third quarter.
Please advance to slide five.
We continue to scrutinize customer projections for signs of demand deterioration, but at this time forecast for the program we support remains strong.
Our unfilled backlog remains significant in excess of $100 million.
We are guiding fiscal fourth quarter revenue of $980 million to $1.0 billion to $1 billion, which reflects the success of ongoing new program ramps and customer demand that continues to substantially outpaced supply.
In recognition of our support provided during one of the in process program ramps. We recently received a service Excellence award for our outstanding performance.
Okay.
Incremental investments to support robust customer growth projections supply chain and other inflationary pressures and increased incentive compensation expense are modestly burdening GAAP operating margin, resulting in our fiscal fourth quarter forecast of four 7% to five 2%.
We are addressing inflationary impacts with our customers and believe all of the previously mentioned items, our near term in nature.
We remain focused on achieving our industry, leading GAAP operating margin target of five 5% as we progress through fiscal 2023.
At the guided revenue and operating margin levels, we expect to deliver GAAP diluted earnings per share of $1 19.
To $1 35.
Including 22 cents of stock based compensation expense.
Our EPS guidance is also impacted by greater interest and tax expense as compared to the fiscal third quarter.
And supported the strong growth potential represented by our funnel of opportunities our new facility in Bangkok, Thailand continues to progress according to plan.
We completed qualification builds for our first customer at the site in the fiscal third quarter, we will begin shipping production product and the late fiscal fourth quarter or early fiscal first quarter.
We also have multiple existing programs planned for trip to transition from our Penang campus as well as new business that will launch directly into the site.
We continue to experience strong customer interest and expect the building to be the first of multiple in Thailand. As we further our campus strategy and create a platform to support future growth in our APAC region.
Next a few thoughts regarding our longer term outlook, even when taking a relatively conservative view of customer forecasts.
We anticipate continued revenue growth into fiscal 2023 that will enable expansion and GAAP operating margin and EPS.
Looking at our end markets, our industrial sector demand is strong led by semi cap in communications.
While supply is challenged we continue to make progress as reflected in our fiscal third quarter results through a multi quarter effort focused on alleviating component availability issues by leveraging improved processes and a strong customer partnerships.
Within health care life Sciences, we have stable demand in aggregate and several major program ramps underway that will positively impact the next several quarters.
Finally, within aerospace and defense, while supply chain constraints are muting revenue growth.
We see a strengthening of demand in aerospace as well as significant opportunity with commercial space programs.
In summary, we are well positioned in the desirable end markets with innovative solutions and the right team in place to serve our customers highly complex program needs and further cultivate enduring partnerships.
And the long term, we remain optimistic in our ability to deliver industry, leading financial results, representing a 9% to 12% revenue CAGR five 5% GAAP operating margin and 15% return on invested capital.
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 six with a review of performance by market sector for the fiscal third quarter as well as our expectations for the market sectors for the fourth quarter of fiscal 2022.
The performance across all market sectors was strong in our fiscal third quarter.
Although we still see continued supply chain constraints, especially in higher node lagging edge semiconductors.
Our efforts in early fiscal 2022 to enhance our processes and to obtain longer range forecast from our customers are having a positive impact with our materials pipeline.
Okay.
Reviewing the details by sector I will start with the industrial sector results.
The sector grew revenue by 10% in the fiscal third quarter. The exceptional result was significantly above our expectations of a flat to low single digit increase.
Shipments for 16 of the top 20 customers exceeded forecast, mainly due to better than anticipated material supply.
As we start the fiscal fourth quarter, we are mindful of the broader macro economic uncertainties.
However, customer demand remains robust across most of our industrial sub sectors.
As a result, we expect a low single digit increase in the industrial sector for the fiscal fourth quarter.
At this level of sector, we achieved solid fiscal 2022 revenue growth in the range of 10%.
Our health care by financial sector achieved exceptional growth of 13% in the fiscal third quarter.
The results significantly exceeded our expectations of a mid single digit increase.
And an improved materials pipeline for new program ramps as well as for existing programs enabled stronger than forecasted shipments for 2017 of our top 20 health care life Sciences customers.
Looking ahead, we expect program ramps to drive further growth in this sector.
As a result, we expect a mid single digit increase for our health care life Sciences sector for the fiscal fourth quarter.
Achieving this result with me in the sector sequentially grew all four quarters in fiscal 2022, and they would finish the fiscal year with an outstanding revenue growth in the range of 15%.
Okay.
Our aerospace and defense sector grew 4% in the fiscal third quarter. The result was in line with our expectations of a mid single digit increase.
The demand outlook in commercial aerospace is strong however, the improvements in mid to longer range customer forecasting and the result of material pipelines are not as mature as other sectors.
Such supply constraints are muting growth in the near term and we anticipate a low single digit decline in the aerospace and defense sector for the fiscal fourth quarter.
As we look to fiscal 2023, we expect to be able to capture further demand in commercial aerospace as we realize the improvements we are driving with material planning with our customers.
Please advance to slide seven for an overview of our wins performance.
We $1 47, new manufacturing programs, mostly from existing customers during the fiscal third quarter that.
That we expect to generate $201 million in annualized revenue when fully ramped into production.
The wins result was down compared to the near record wins of $313 million for the fiscal second quarter. However, our trailing four quarter wins of more than $1 billion remains healthy.
Our wins momentum, which is defined as the trailing four quarters of wins divided by the trailing four quarters of revenue at.
At 29% remains above our 25% goal.
And supports our compounded annual growth rate target of 9% to 12%.
Next we can review a few sector and regional highlights of the manufacturing wins for fiscal third quarter on slide eight.
Industrial health care life science sector, each had solid quarterly wins $85 million and $86 million respectively.
Approximately two thirds of industrial sector wins more than one half of the aerospace and defense sector wins and about 40% of the healthcare and life Sciences wins are targeted for the Americas.
This broad demand for our capabilities in the Americas yielded $108 million of total wins in the fiscal third quarter.
The EMEA region strong wins result of $53 million benefited from a strategic opportunity and our health care life science sector.
As well as market share gains with customers in the industrial and aerospace and defense sectors.
The wins in the EMEA region, which all came from existing customers are a direct result of the team's ability to deliver on our commitment to operational excellence and customer service excellence for these customers.
Okay.
Please advance to slide nine for highlights of our fiscal third quarter wins.
Starting with the industrial sector. The wins include a high power inverter that is used in the electrification of heavy equipment.
The product will be added to our portfolio of complex assemblies being built in our Appleton, Wisconsin facility.
In addition, the industrial team continued to expand our engagement with a large semiconductor cap customer.
Although the relationship started a few years ago in United States, our ability to produce complex high quality products around the globe.
Enables further expansion into Mexico, and now into Malaysia.
With the award of 12, New assemblies, we are building subsystems for this customer in all three countries.
Our health care Life Sciences team won two next generation products.
The first is the manufacturing of our point of care life Sciences product that is used in monitoring blood gases.
The second is the production of an ultrasound platform targeted for women's health.
These wins are strategic as we expect to leverage both of them in the future opportunities with these customers.
Included in the aerospace and defense wins is a program that expands our market share with an existing aerospace customer.
The product is a new platform used for Wi Fi communications and commercial aircraft that will be manufactured in Malaysia.
Finally, the aerospace and defense team won the production of a platform use a test secure <unk> communication systems. This program will be produced by our team in EMEA.
We can proceed to slide 10 for highlights of our funnel of qualified manufacturing opportunities.
As we exited the fiscal third quarter, the funnel held at a record level of $3 4 billion.
The health care life Sciences team continue their funnel expansion and exceeded $2 billion for the first time.
New opportunities in diabetes care imaging products and cardiac care all contributed to the growth of the healthcare life Sciences funnel.
Next I would like to turn to operating performance on slide 11.
In the first half of fiscal 2022, we highlighted that we had an organization that is built to support at least $1 billion in quarterly revenue.
With a greater than 5% GAAP operating margin.
I am pleased that with the strong revenue performance in the fiscal third quarter. Our teams captured this revenue potential and generated GAAP operating margin of five 1%.
I'm also pleased that as we guide $1 billion of revenue at our midpoint for the first time, we're also guiding striving GAAP operating margins of four 7% to five 2%.
As we look to fiscal 2023, our teams remain committed to realizing our during goals of revenue CAGR of 9%, 12% and GAAP operating margin of five 5%.
I will now turn the call to Pat for an in depth review of our financial performance pack.
Thank you, Steve and good morning, everyone. Our fiscal third quarter results are summarized on slide 12.
Gross margin of nine 5% was above the top end of our guidance and sequentially higher by 90 basis points.
For the fiscal third quarter, we experienced significant fixed cost leverage as revenue increased 10%, while fixed manufacturing expenses remain consistent with the fiscal second quarter.
Activity improvements across all three of our manufacturing regions also contributed to the better result.
Selling and administrative expense of $44 million was above guidance, primarily due to additional incentive compensation linked to higher revenue and operating performance for the quarter.
As a percentage of revenue SG&A was four 5%, which was consistent with expectations and sequentially lower by 10 basis points.
Inclusive of approximately 60 basis points of stock based compensation expense, we delivered GAAP operating margin of five 1%, which exceeded the top end of our guidance.
Nonoperating expenses were above expectations as a result of foreign exchange losses, and higher factoring expenses.
GAAP diluted EPS of $1 33 was above our guidance due to the strong revenue and operational performance.
Turning to our cash flow and balance sheet on slide 13.
As anticipated for the fiscal third quarter, we made investments in working capital to support our customers' strong demand and as a result of the continued supply chain constraints.
Cash and investments and operations and capital expenditures, both totaled $21 million, creating a $42 million usage of cash for the quarter.
During the quarter, we completed our $50 million share repurchase authorization by purchasing approximately 149000 shares of our stock for $12 million.
Next month, we will review with our board of directors the opportunity for a new authorization.
Our goal remains to return all excess cash to our shareholders.
On June nine we refinanced our senior unsecured credit facility to take advantage of favorable pricing and improve our financial covenants.
In addition, the maximum commitment under the credit facility was expanded from $350 million to $500 million and the maturity of the facility was extended to June 2027.
Our quarter end balance sheet included $278 million of cash sequentially lower by $31 million due in part to working capital investments.
Total balance sheet debt was $435 million, while net debt was approximately $157 million.
We had $260 million available to borrow under our amended credit facility.
Cash cycle at the end of the fiscal third quarter was 102 days consistent with our expectations and sequentially higher by four days.
Please turn to slide 14 for details on our cash cycle.
Sequentially inventory days increased by six the steady increase in days over the past several quarters reflects the continuation of supply chain challenges during a period of robust customer demand.
In addition, we have supported new program ramps, which drove revenue upside for the fiscal third quarter and are anticipated to deliver higher revenue in the fiscal fourth quarter.
We continue to have over 25% of our inventory covered with customer deposits.
Days and receivables sequentially improved by two days, primarily due to the timing of shipments and payments.
As Todd has already provided the revenue and EPS guidance for the fiscal fourth quarter I'll review, some additional details which are summarized on slide 15.
Fiscal fourth quarter gross margin is expected to be in the range of nine to nine 4%.
At the midpoint gross margin would be approximately 30 basis points lower than the fiscal third quarter.
Fortunately this reduction is due to higher variable incentive compensation expense.
We also expect a near term impact on margins due to investments in fixed cost, including our new Thailand facility in order to support our strong growth outlook.
We expect selling and administrative expenses in the range of $42 five to $43 $5 million slightly lower than the fiscal third quarter.
Nonoperating expenses are expected to be in the range of 7% to seven $4 million sequentially higher primarily due to rising interest rates.
Our expectation for the balance sheet as at working capital investments will increase compared to the fiscal third quarter.
Based on our revenue forecast, we expect this level of working capital will result in cash cycle days of 96 to 100 days.
The sequential improvement of four days, primarily due to a reduction in net inventory days.
We anticipate the improved cash cycle will generate breakeven to positive free cash flow for the fiscal fourth quarter.
Finally, we expect capital spending for fiscal 2022 to end in the range of $110 million to $120 million, which includes approximately $40 million for our new Thailand facility.
With that Latanya, let's now open the call for questions.
Certainly as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
Hey, Amit.
And our first question comes from Anja Soderstrom Sidoti Your line is open.
Yes, hi, Thank you for taking my question and congratulations to Greg performance.
I'm just curious and.
You might have touched on it but.
I might have missed.
I missed your commentary about the lower margins for the fourth quarter.
And what gives you confidence in your projections for fiscal 2023.
Yes.
This is Todd I'll start this and then.
Pat is likely going to want to add in some commentary, but if we looked at the fourth quarter and again at the midpoint, we're only guiding down 10 basis points. So it's not much.
But the areas, where we're seeing a little bit of pressure is continued growth investments. So our customer demand remains substantially above what our guidance ranges.
And then we're seeing some level of inflationary pressure on both the labor.
And materials when it's on spot buys that.
We have in place with us and we're working with our customers in particular around the <unk>.
The labor issue and having good success with that so that will.
We view that as a near term issue and the materials are obviously there'll come a time when the supply chain stabilizes.
And then the final area is increased incentive compensation costs because of the.
Improving financial performance that we've had during fiscal 'twenty two.
I'll pass it along the path to talk about the longer term, yes, and just one other comment on Q4. So I had mentioned gross margin is down 30 basis points and we are gaining about 20 basis points of operating expense leverage so to Todd's point, we're down about 10 basis points at our midpoint.
Longer term as we move through fiscal 'twenty three.
With additional revenue and fixed cost leverage I think will be approaching our target of five 5%.
So we do expect to see improvements in margins in fiscal 'twenty three.
Okay.
Okay great.
Helpful.
I think you noted in your in your press release that EMEA.
You gave us on strategic opportunities one customers can you just elaborate on the strategic opportunities.
Yes. This is Steve I'll comment on this one.
The EMEA team has been doing an exceptional job through 2020, one with Covid in terms of driving performance for customers in spite of some of the challenges and thats paying dividends.
They had some pretty significant wins here in.
In the quarter for that team and it's all driven from existing customer relationships, so our ability to deliver.
For these customers in 'twenty, one and in the beginning of 'twenty two we're definitely being recognized the exciting part for US is in all of the wins that I talked about each of them are either new platforms for where these customers are going with our future products and so we're pretty excited about the opportunity of how the team has done to build the relationship with the customers in the fab.
Winning these new platforms.
Kind of a leverage point for us as we move forward. So expecting continued good things out of the team and those customers in EMEA.
Okay. Thank you and then just in general.
We.
So the weaker economy or a potential recession.
Among how has this sentiment.
So the discussions with your customer changed if at all.
In general they havent changed much.
As a customer here and there that we're seeing some impacts from but I would say.
Typical and that's typical in a normal environment that youre going to see up and downs with customers.
There's a number of them that just continued to report very strong demand and as I mentioned in the prepared remarks.
We have several customers that are reporting demand our backlog.
Their products through calendar 2023 so.
So right now in the markets that we serve the demand still remains.
Quite strong.
Okay, and just remind us again your exposure to China.
Hi, Mike.
It.
The Gulf of more severe there yes.
Yes about just a little over 10% of our revenue comes out of China. So it's relatively small impact to China, and we've had no impact from the from any of the Covid Lockdowns.
Okay, Great that was all from me. Thank you.
One moment.
Our next question.
And our next question comes from Steven Fox with Fox Advisors. Your line is open.
Thanks, Good morning, everyone.
First question I, just wanted to get back and talk a little bit about working capital and cash flows. So it sounded like you made some progress on the supply chain front during the quarter, but.
Working capital is still a drag.
A little bit worse on inventory days package, just sort of talk about the path out of this.
Inventory Hull, maybe over the next 12 months, if that's a reasonable target.
And.
Whether there is any momentum coming out of this quarter to start generating positive cash flows again, and then I had a follow up.
Yes, yes, I do see that coming out of this quarter in Q4, we do see positive free cash flow and that is from an improvement in inventory days.
I think as we go through 'twenty three we will see continued improvement.
As I mentioned, Steve we've been pretty successful with securing customer deposits to offset that inventory exposure.
But I do see improvements as we move through 'twenty, three and I do expect.
Strong free cash flow generation in 'twenty three.
Yes, I'll just add this is Oliver I'll add something there I think.
Could you reflect on what's driving that inventory you have a number of dynamics. It can be used to offset supply chain risk it could be used to.
Certainly being driven by extremely long lead time components, and then over that lead time, if our customer forecast berries.
And also in support of new program ramps and so as those lead times could potentially pull back in the future Youll see some some change in that dynamic.
<unk> mentioned, our customers are quite for Iris reciprocating back to us as as with customer deposits up $26 million quarter over quarter.
We are having more success with unlocking supply as you saw with the strong Q3 revenue performance and then lastly, I'll close by noting that we have some internal initiatives.
It gives us optimism that we will be able to drive lower inventory days going forward.
Great. That's helpful and then given that maybe healthcare could be.
Least economically impacted of your business segments.
And I'm, not saying that the others necessarily have to be cyclical, but can you can we maybe step back a little bit and just reset on given all the new wins et cetera and market share gains.
What are the major sort of macro drivers equipment versus personal diagnostics et cetera, et cetera life Sciences.
What are we thinking about in terms of what is the growth behind that health care and where we're at could we still see maybe some capex pressure or or not.
Makes sense.
Yes. So this is Steve <unk>.
Two parts of that one as Todd talked about nine did as well in terms of new program ramps, we do have.
Three of those win some nice new program ramps that are happening and so in spite of kind of the.
Some of the macro economic questions that revenue is growing and so that's what's giving us a one part of the optimism. The second part is we talked to our larger health care life Sciences customers and they talk to their customers.
The the inventory for finished goods and a lot of places still depleted and so.
Even if there is a little bit of a slowdown from a.
End market demand standpoint, the capex spending and I think we've been hearing this a little bit the capex spending still seems like there's going to be.
At a robust robust level to basically backfill some of those challenges that they've had in terms of getting all the equipment they needed over time and so.
We're we're quite optimistic.
In terms of the forecast, we're seeing again as Todd highlighted a lot of customers are talking about demand needs going all the way into.
In the 'twenty three and so.
Secondary markets, especially I can robotics and stuff like that are all still doing quite well.
One thing I'd add to Steve.
If you went back to.
Colin.
Last recession that 22008, 2009 timeframe were heavily dominated by imaging.
Within our health care business, which I think was.
Probably.
Some of the most economically sensitive pieces of equipment because of the investment that's there.
That's a significantly lower piece of our business somewhere around 30% or so of our healthcare sector and if you look at now.
There is a significant more.
Life Sciences within the portfolio Roby.
Robotic assisted surgery.
Thanks, such as neurology, so the portfolio I would say it is much more.
Recession resistant and I think that it was in 2008, 2009 timeframe, which it didn't even perform too badly.
Alright, that's super helpful. Thank you.
Okay.
And our next question will come from Melissa Fairbanks with Raymond James Your line is open.
Hi, guys, great quarter really impressive.
Execution, and I'm really thrilled to see that.
I just had a quick question on the on fulfilled backlog of around $100 million. What are your expectations of when that could be cleared is it something that the Thailand facility will help to ease or is this still just a function of supply constraints.
It's really a function of supply constraints Melissa.
We expect it to continue.
The rollout so even though we had good success in the fiscal third quarter of of clearing supply issues, which resulted in the revenue upside.
We still saw demand that that more or less backfill, what we're able to clear. So it continues to roll at this point and until.
Lead times get to a more normalized level, particularly for those legacy components that Steve had talked about we're going to we're going to see a backlog.
Okay.
Okay great.
And then from a modeling standpoint.
Should we expect depreciation expense to trend now that Thailand are coming on and then.
Maybe one last question after that and then to the extent that you're funding working capital investments with the balance sheet would we eventually get to a more normalized interest expense of that inventory is cleared.
Yes, Melissa this pad sustaining with depreciation we do see that coming up so in 'twenty three.
Yes, I think let me back up in 'twenty, two I think will be around $63 million of depreciation going into 'twenty three I think it will be.
In the low seventies.
So we will see that ticking up.
And then to your point around interest expense.
We are seeing a pretty significant impact from rising interest rates. So that's a large component of the increase.
But to your point as we free up cash.
Through liquidating inventory.
We will be bringing down our revolving borrowing and that will benefit our interest expense. So I think from a modeling standpoint, you want to use something similar to the Q4 fiscal Q4 guide maybe on that lower end of $7 million per quarter, I think that'd be reused.
Overall at this point.
Okay, great. Thanks, very much that's all from me.
Gentlemen.
And our next question comes from Paul Chung of Jpmorgan. Your line is open.
Hi, Thanks for taking my question so.
If you could talk about the kind of revenue boost from.
The new Thailand facility whats the contribution in the September quarter.
And how do we think about contribution in kind of the next couple of quarters as well in 'twenty three and then I guess, the new Opex run rate in Capex levels as we move.
Fiscal year.
<unk> 23 of the facility ramps, but.
I think you also mentioned that you may be expanding the China facility. So any initial guide on Capex for fiscal year 'twenty three would be helpful.
Yes. This is Steve I'll start and then turn it over to Pat for some follow on.
Terms of revenue with customers. So the Thailand facility is kind of as Todd highlighted we successfully passed through our first qualifications with our first product.
For our customer and will begin shipments here in late Q4, beginning of Q1, so from a revenue standpoint, it's minimal at this point however, with that said.
We have several customers and programs that we are looking to transition from our Penang facilities into Thailand, and so as we go through 'twenty three.
We expect by the end of 'twenty three the back half of 'twenty three that that facility is from a revenue standpoint.
Turning to our corporate level were.
It's basically absorbing all the expenses that we have that we're going into the facility. So the 23 will be a growth year for us but.
Again.
The prospects are pretty quick here, which is kind of what's giving us the.
The view on the look we actually have some visibility to what happens in the 'twenty, four and beyond where that facility.
Quite frankly could fill quicker than what would be normal for us and so.
The strategy planning in terms of looking into 'twenty, four 'twenty five and beyond of what we need to do we do see Thailand as being.
Gross location for us we've been very happy with the employees have been able to attract.
The team has been doing an excellent job with its initial execution and so.
A mitigation strategy for southeast Asia, we see it as a perfect place for us to continue to grow patently, we'll turn it over to Union, yes from a P&L perspective Paul.
Starting with fiscal 'twenty two there was about a 10 basis point impact on overall margins from from Thailand investments as we move into 'twenty three in the first half will still.
Be a drag on margins, but as we move into the second half of fiscal 'twenty, three we'll turn that into profitability.
For that facility.
And then I think you may have been asking about overall opex expense and I had guided Q4.
Around 424, 3% and as we move into 'twenty three.
Four 3% of revenue.
Good number to use because we're going to want it still be investing in our people and in our systems and so we will see the dollars increase but I think the additional revenue will.
Keep that percentage around four 3%.
Okay, Great very helpful. And then just on the manufacturing wins, youre still pretty comfortably above that $1 billion level on a trailing four quarters.
It sounds like your visibility into 'twenty three is quite good so any comments around win momentum after kind of record levels.
In the second fiscal quarter.
Yes.
So.
In general we feel really good about the wins in the funnel and I mean, we wanted because we dropped from the.
The large quarter in Q3, we thought it was important to at least address it but we tend to not think of the Windsor is quarterly wins, we tend to look at that trailing four quarters.
And we believe we're positioned well with the size of the funnel to continue to stay above $1 billion and then to drive further momentum as we as we look out into fiscal 'twenty three.
Yeah. This is Steve one thing, it's really important to understand is that we do not incentivize the business development teams to our quarterly wins number.
Because the reality is is that when we win an opportunity. It takes a couple of quarters for it to ramp into revenue and so if we drove the teams to achieving our quarterly wins number we believe that would drive drive bad pricing behavior, and so thats why we really stay focused on and working with the teams on what our trailing four quarter and an annual number kind of it looks like and so.
Again, that's a significant by design reason why we do that.
Understood very helpful. And lastly, you mentioned wins from existing customers time, driving most of the funnel here are you displacing mostly.
In house manufacturing are these more competitive wins in.
As we think about your longer term kind of growth outlook.
Could expand on that dynamic between existing customer expansion versus new customers and how that trends will be very helpful. Thank you.
Sure maybe the second part first if you go back to 2020, one we had a pretty conscious effort to add new logos to our portfolio and we talked about adding I believe the number was like 22.
In fiscal 'twenty, one and we're very pleased with that initiative and what we did.
We are still looking to add new logos, but maybe not to the same extreme and so they've come down a little bit.
But again very purposeful and pleased with the way the strategies being executed.
As we look to what are we winning with customers.
It is a mix of new program ramps and Thats really where the execution by our operations helped significantly we call that the execution dividend because when you execute really well you had a really good chance of winning the next programs and the team is especially like we talked about EMEA. This.
This quarter they are execution through 'twenty two here in the beginning of 'twenty. Two has really helped them drive up their wins performance.
We are taking market share gains with customers I think our execution through COVID-19 is helping us.
And then lastly.
There are customers that are.
Continue to look and talk to us about.
Exiting their existing manufacturing I would say currently that's a little bit lower than what it has maybe been in historical past. However.
With macroeconomic uncertainties, especially the things start to downturn, a little bit those conversations have a tendency to pick back up.
Which could be another opportunity for us and so it's been a mix between the three I wont say theres a trend right now in either one but.
It is an active thing that we continue to manage and we're pretty pleased with way our market sector teams are really kind of driving it today, so as Todd kind of highlighted pretty optimistic in terms of what we look like with our funnel going into 'twenty three.
Great. Thank you so much.
Again, ladies and gentlemen, if you do have a question. Please press star one one on your Touchtone telephone again, Please press star one one for any additional question.
And our next question will come from Matt Sheerin of Stifel One number.
Good morning.
Yes, hi, good morning.
I wanted to just drill a little bit more into you really basically.
Dramatic change in terms of your operations your ability that provide a significant upside in revenue the last two quarters compared to the previous three where you were missing numbers because of the supply constraints. One difference. Obviously is the fact that you've built a lot of inventory, but you also talked.
Commentary about changes in processes.
<unk> is in supply chain strategies, so could you talk a little bit more about what changes have been put into place.
How that strategy plays over the next few quarters.
Sure So one of the things.
Just wanted to bring us back to in some of the quarters that we had challenges they were kind of two fold.
There were some supply challenges, but there was also some pretty significant COVID-19 impacts, particularly around Malaysia, which is a big chunk of our our footprint, but what.
I'd say, we've addressed on the supply issue is we're taking.
An approach that is much more focused around some.
Supply versus demand when we look at what our projections are because we've historically had really good success at regardless of what the demand is meeting that demand and with the current environment being what it is.
That just doesn't occur anymore. So.
So we're taking a much more supply focused approach with our forecasting.
So that's probably step number one step number two is just around the processes that were driving and that.
We're using a lot of automation for instance define components on the open market. We've got some excellent processes in place with our customers to drive longer term forecast put long lead purchase orders in place things such as that to be able to get supply and earlier.
Then the the approach.
We're taking I think has us focused on escalating the right parts as well too so that we're focused on the activities that can drive the most impact so that's why.
In the case of this quarter, we far exceeded our guidance I mean, we're able to.
Two to drive some components that we didnt have a line of sight to as we began the quarter because we were focused on the right things.
Okay, Great and you also mentioned on this call.
Some some constraints are easing.
You talk about areas, where you're still seeing issues.
Types of components, and where youre seeing a little bit better supply.
Yes. This is Oliver.
I'll take that.
Across our commodity based we're not really seeing any segments that are easing.
What a trend too.
I think if there was a glimmer of good news in the whole dynamic I would say, it's not getting worse and the fact that it's been consistent here for the past couple of quarters and then coupled in with the point that Todd made about the pivot we've made internally to ensure success. That's what helps create that that revenue upside in Q3, yes. The one thing I would add.
To that debt.
Probably should have earlier just the efforts of the team.
We've got an excellent team that's working incredibly hard we've added some great talent to it as well so feel really good about the supply chain talent that we have in the organization.
Okay. Thanks for that and I also wanted to talk.
Pat.
The gross margin.
One of the other EMS companies last night talked about some gross margin pressure due to the fact that there's a higher materials pass through because of the component cost inflation and that's just.
One for one pass through which drives up materials as a percentage of Cogs and.
Are you starting to see that at all as an issued patent.
Yes, I mean, we saw some of that last quarter too Matt.
And fortunate for us we've been able to earn through that with productivity improvements and the additional revenue with fixed costs.
Is it 10 to 20 basis points, probably margin impact to us because we're not achieving profit on that inflated price at this point.
But what I'd say is we don't see that having.
Any further negative impact to us moving forward. It's then.
Basically it is what it is and it's factored into our projections, yes, and I said earlier of us moving towards that target of five 5%.
We continue to believe that even in this environment.
Got it Okay and then on the.
The inventory cash deposits that you are getting at 25% of inventory is certainly a nice improvement from what we've seen historically, but youre still financing a lot of that inventory and working capital yourself youre seeing that impact.
Your bottom line through higher interest expense. So is there are there discussions with customers and particularly if these customers want out.
Sort of behaving in a more conservative manner going forward, where they want to carry more inventory or will you have discussions where it may be that number should go up maybe you should be 50% or a higher number.
Matt This is Steve most definitely.
<unk> inventory as well as some of the inflationary costs, we're definitely having conversations with customers that quite frankly, I have never had before in our industry as we were facing these dynamics so yes.
The conversation about what are the right inventory level.
Want to have a higher level entry level Theres a deposit there's also conversations about.
Is there a carrying cost associated with some of this.
So it varies by customer and different discussions, but yes, we are having those conversations.
Okay very helpful. Thanks, so much.
And I am showing no further questions I would now like to turn the conference back to Todd for closing remarks.
Alright, Thank you latoya.
Would also like to thank everybody, who joined our call today. We appreciate your support and your interest in plexus.
Yeah.
This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Yes.