Q2 2023 Plexus Corp. Earnings Call
Good morning, and welcome to the Texas Corp Conference call regarding its physical second quarter of 2023 earnings.
Physical second question.
My name is <unk> and I'll be your operator for today's call.
At this time all participants are in a listen only mode <unk>.
After a brief discussion by management, we will open the conference call for questions.
Conference call is scheduled to last approximately one hour.
Please note that this conference is being recorded I.
I would not like the screen to call over to Mister Shawn Harrison Blacks as Vice President of Communications and Investor Relations Sean.
Thank you.
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 administrative expense restructuring and other charges operating margin other income and expense taxes cash cycle capital allocate.
<unk> a future business outlook.
Forward looking statements are not guarantee since their inherent difficulties predicting future results and actual results could differ materially from those are expressed or fly 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 period the company's periodic SEC filings, particularly the risk factors in her phone 10-K filing for the fiscal year at at October 1st 2022, supplemented by your Form 10-Q filings the safe harbors.
[noise] disclosure statement in yesterday's press release.
We encourage participants on a call. This morning to access the live webcast and supporting materials and flexes. His website at www Dot <unk> dot com clicking on investors at the top of that page.
Joining me today are tied Kelsey Chief Executive Officer, Steve <unk>, President and Chief strategy Officer.
<unk> Executive Vice President and Chief Financial Officer, Oliver Ma'am, our executive Vice President and Chief operating officer is not participating in our call today to a death in the family I.
My thoughts are with Oliver and his family.
Consistent with firings calls tide will provide summary comments before during the call I received a patent for further details let me now turn the call retarded Kelsey.
[noise]. Thank you Sean good morning, everyone. Please advanced to slide three.
Our team executed extremely well during our fiscal second quarter amidst ongoing and market volatility and supply chain challenges.
Leave it delivered better than projected revenue profitability in free cash flow.
We also achieve strong winds performance was significantly expanding the final qualified opportunities positioning us to sustain robust revenue growth.
Finally through R. E. S. G leadership focused on how we innovate and operate we further to our goal of being seen as an employer and partner of choice.
Our fiscal second quarter revenue of $1.071 billion represented 21% increase from the physical second quarter of 2022 and exceeded the top end of our guidance range.
The strong revenue result was driven by increased end of quarters shipments as an outcome of our ability to mitigate supply constraints and our Americas, and a mayor regions and better than anticipated performance by our engineering and sustaining services teams.
Yep operating margin of 5.3% inclusive of 55 basis points of stock based compensation expense.
Also exceeded guidance and approached our 5.5 per cent target level.
We benefited from profitability upside Norwegians from a combination of either valium leverage the performance of our engineering and sustaining services teams in our ongoing focus on improving manufacturing efficiency supported by our efforts to deliver zero defects.
R. K I P. P. S. A one dollar and 45 cents inclusive of 21 sense of stock based compensation expense also exceeded guidance.
Finally, we generated $80 million, a free cash flow for the quarter, representing substantial upside to our expectations as our team continues to implement tools and processes to better forecast and manage customer inventory requirements in light of the ongoing dynamic demand and supply chain environment.
As anticipated our wins performance accelerated during our fiscal second quarter.
Go to market team did an outstanding job is at 131, new manufacturing programs with $275 million when fully ramped into production, including continued traction and winning business within secular growth markets.
Currently the team expanded and already record funnel of qualified manufacturing opportunities to $4.2 billion, an increase of nearly $600 million from our fiscal first quarter.
Included in this final or a greater than typical number of large opportunities in each of our market sectors and regions.
We believe positions us to sustain strong winds performance and industry, leading revenue growth.
Please advanced to slide four.
I continued to be proud of how the flex his team support each other our customers and partners and the communities in which we reside.
A passion for and commitment to environmental social and governance principles allows us to bring innovation to our customers to help them create more sustainable products and further their ESG goals, while we deliver on our vision to help create the products that build a better world.
A unique set of solutions across the product's lifecycle physicians plex us to be the partner of choice and helping our customers create value by designing manufacturing and servicing their products with a focus on sustainability.
As an example, we are continuing to enhance our sustainable product design capabilities by engaging with customers to identify significant opportunities to lessen their products carbon footprint.
Environmental impact.
There are several recent activities I'd like to share that are lined with our social efforts.
During our fiscal second quarter team members in Malaysia supported local schools in a children's home through a fundraising campaign.
Next or engineering team in Darmstadt, Germany made notable donations to support a local food bank in Hospice Center.
Here in Wisconsin are women in network employee resource group, which is focused unempowered women professionally and personally and habitat for humanity are partnering to support a local family through funding and building a home near our global headquarters.
We anticipate this partnership alone will support more than 900 hours of volunteerism by our flex his team members.
These actions display the passion of our global team and our shared values and highlight our ability to accomplish more together.
Finally, the following example represents the powerful collective impact that is possible through partnering with our customers are sustainable solutions.
As part of a nurse Earth day celebration. This week our team in Wisconsin hosted the leadership of <unk>.
A provider of Smartwater dispensers that offer filtered flavored and sparkling water on demand.
Thousands of bevy machines, which are manufactured in her Appleton, Wisconsin facility are already in use across North America at leading global corporations, including at Plexuses U S sites.
Since installing the machines at our facilities last quarter Flex us is already saved the equivalent of more than 33000 plastic water bottles and counting that otherwise would have gone into a landfill.
As we move forward, we will share more examples of how we partner with customers around our shared values advancing comments sustainability goals, while building a better world.
Please advanced to slide five.
We are getting fiscal third quarter revenue of 1.0 billion to $1.05 billion non-GAAP operating margin of 4.5% to 5% inclusive of approximately 60 basis points of stock based compensation expense.
non-GAAP EPS of one dollar and five cents to one dollar and 23 cents.
Or non-GAAP EPS guidance includes approximately 19 cents of stock based compensation expense, but excludes an estimated $9 million or 29 cents per share a restructuring and other charges.
Our guidance as being impacted by our strong late second quarter shipments.
Supply chain challenges associated with both semiconductors suppliers scheduling changes in D commits and a shortage of key assemblies required by our customers to complete the final integration of their products.
Incremental semiconductor capital equipment market weakness and unfulfilled backlog that remains in excess of $100 million.
As mentioned, we will incur an estimated $9 million of restructuring and other charges.
As part of this charge $4 $8 million is related to personnel reductions, particularly operating expenses, which are expected to result in an annual savings of $9.5 million.
The remaining $4 $2 million of other charges associated with a lease right down.
Will result in a 1.5 million dollar annual savings.
Well, it's regrettable depart with teammates and we thank them for their contributions these actions position pluses to best realize future success.
In order to capitalize on a significant pipeline of future growth opportunities, while delivering appropriate returns to our shareholders. We refocused are spending around creating a more efficient and scalable platform.
While our third quarter guidance differs from our expectations 90 days ago flexes remains positioned to deliver robust revenue growth for fiscal 2023.
Our outlook includes sequential revenue growth for our fiscal fourth quarter barring any unforeseen macroeconomic weakness.
We expect to benefit from new program ramps and increased demand across the number of our customers, particularly in our aerospace and defense sector, enabling margin expansion.
Finally, I'd like to spend a few moments looking beyond fiscal 2023.
We are nearing the conclusion of our annual strategic planning process and I'm excited that are innovative innovative solutions and continued focus on quality and on time delivery are creating opportunities to drive robust revenue growth and strong profitability.
Including achieving our target of $5 billion in revenue with five 5% operating margin by our fiscal 2025.
As we project the Oddness goal I have continued confidence and sustaining our industry, leading revenue growth and profitability as our team Leverages, our best in class capabilities and solutions to help our customers create the products the build a better world.
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 the physical second quarter performance of our market sectors as well as our expectations for the sectors for the fiscal third quarter of 2023.
Starting with the industrial sector revenue declined 7% in the physical second quarter.
Salt was better than our expectations of in approximately 10 per cent decline.
Our supply chain team was able to improve delivery for some constrained materials during the quarter.
The operations team to work aggressively to convert the materials into finished goods, which partially offset softness in the stomach sector.
As we start the fiscal third quarter, we are working closely with her stomach yep customers on their mid and long term forecast.
In the short term demand and stomach half continues to be challenged.
As a result, we are forecasting a mid single digit decline for the industrial sector for the fiscal third quarter.
As we anticipated revenue in our health care like science sector was flat for the physical second quarter.
What was not anticipated was the meaningful mixed changes with new program ramps that occurred during the quarter.
Although our operations team adjusted Walter the volatility to achieve a result in line with our expectations for the physical second quarter <unk>.
Recent customer forecast fluctuations due to continued supply challenges and and market uncertainties are having an impact.
We know anticipate amid single digit decrease for our health care like science sector for the fiscal third quarter.
Our aerospace and defense sector increased 8% in the fiscal second quarter the.
The result was above our expectations of a low single digit increase.
Inventory sales supply chain improvements and increased demand all contributed to the stronger result.
As we looked at the fiscal third quarter. Our team has successfully completing a multiyear program.
As a result, we expect us mid single digits, and our revenue for aerospace and defense sector for the fiscal third quarter.
We expect a new program ramps and continued strong demand in commercial aerospace to more than backfill the reduction in the fiscal fourth quarter.
We didn't ask the slide seven for an overview or a strong winds performance.
We won 31, new manufacturing programs during the fiscal second quarter that we expect to generate $275 million, an annualized revenue when fully ramped into production.
We are pleased that our conversion velocity of the manufacturing final increase during the quarter.
In addition, we are anticipating good wins performance in the fiscal third quarter.
As a result, we expected directory of our wins momentum, which is defined as the trailing four quarters of wins divided by the trailing four quarters revenue to.
To trend back towards her historically strong level in the fiscal third quarter.
Advancing the slide eight we can review a few sector and regional highlights of the manufacturing wins for the physical second quarter.
Our industrial team led the sectors with 15, new programs wins with $142 million when fully ramped into production.
The health care life Sciences team, one seven new programs valued at $81 million while.
While the aerospace and defense team had a very good quarter with nine new program wins with $52 million.
The America's wins were strong at $132 million with approximately two thirds of the total coming from the industrial sector and one third from the aerospace and defense sector.
The APEC region benefited from $50 million of wins from a health care of my science, a sector to finish up $71 million.
Finally, they may region had another impressive wins result of $72 million.
Robust regional wins from the industrial and health care life Sciences sectors pushed the EMIR regions trailing four quarters of wins to almost $300 million.
At that level, the trailing four quarters of wins is approaching the trailing four quarters of revenue for Romeo.
Which sets a region up for exceptional growth and improved operating performance.
These advanced a slide nine for highlights of physical second quarter winds.
I will start with two wins from our industrial sector.
The first is an autonomous robot used for inventory management.
This new logo was looking for a company who could deliver a higher level of service and they were receiving from their current provider.
Selected our team in Guadalajara, Mexico as their new partner.
The second industrial sector when is a meaningful expansion with a current customer.
Based upon our May a team's performance with this customer who developed charters for vehicles we.
We were selected as our global manufacturing partner.
Our health care life Sciences team expanded our market share with a customer who is focused on automation within the pharmaceutical market.
The customers positive experience with our audio Romania team gave him confidence we are the right partner to trust with this next generation platform.
The health care Life Sciences team also expanded our relationship with the customer and the secular growth market of robotic assisted surgery.
Platform that will be manufactured by our team and Kelso, Scotland use artificial intelligence to assist doctors with surgical procedures.
Finally, our aerospace and defense sector, one a new logo, who provides high end surveillance solutions.
This one represents the first aerospace and defense customer for our team in Guadalajara, Mexico.
As shown on slide 10, our final unqualified manufacturing opportunities expanded to a record level in excess of $4.2 billion in the physical second quarter.
The increase of almost $600 million from our fiscal first quarter was a result of all three sectors, adding meaningful new opportunities.
Looking at the potential new programs the reasons for the additions to the final our diverse summer new programs summer market share gain opportunities and a few of our customers who are evaluating their internal manufacturing strategy.
One common denominator is that our focus on customer service excellence and operational excellence are key factors in their desire to start or expand a partnership with boxes.
During our fiscal second quarter, our customer management operations teams successfully adjusted to the complexities of new program ramps and mix changes to meet our customers needs.
In addition, the capitalize on the efforts of our supply chain team, who secured additional supply of constrained materials to outperform expectations for several customers.
The close collaboration across the organization resulted in strong GAAP operating margin performance of 5.3%.
I will now turn to call the patent for an in depth review or heart financial performance for the physical second quarter as well as more insight into our expectations for the fiscal third quarter.
Yet.
Thank you Steven good morning, everyone. Our fiscal second quarter results are summarized on slide 12.
Gross margin is nine 6% was above the top end of our guidance and 30 basis points improve on the fiscal first quarter.
We delivered favorable gross margin due to better business mix and operational performance across most of our regions.
This was despite sequential headwinds from slightly lower revenue and the impact from seasonal compensation cost increases.
Selling and administrative expense of $46 million was slightly unfavorable to guidance, primarily due to higher incentives compensation expense. However, as a percentage of revenue SG&A was 4.3%, which is consistent with expectations.
GAAP operating margin of 5.3% was also above the top end of our guidance due to the improved gross margin.
This results included 55 basis points stock based compensation expense.
Non operating expenses were favorable to expectations as a result of greater than anticipated interest in miscellaneous income.
Gap diluted EPS of $1.45 exceeded our guidance for the factors previously mentioned.
Turning to our cash flow and balance sheet on slide 13.
We're very pleased with our free cash flow performance. This quarter, we delivered $106 million in cash from operations and spend $26 million on capital expenditures generating $80 million in free cash flow.
This result was close to double our net income and brings us deposit at free cash flow through the first six months of fiscal 2023.
During the quarter, we purchased approximately 126000 shares of our stock for $12 $4 million.
We have approximately $23 million available under the current $50 million authorization and expect to execute repurchases on a consistent basis over the remainder of fiscal 2023.
Our quarter and balance sheet included cache of $270 million sequentially hired by $22 million due in part to our strong cash flow generation.
Total balance sheet that was $483 million, while net debt was $213 million.
At the end of the quarter, we had $216 million available tomorrow under a credit facility.
For the fiscal second quarter, we delivered return on invested capital of 13.8%, which is 480 basis points above are weighted average cost of capital.
Cash cycle at the end of the second quarter was 104 days favorable to expectations and sequentially improve by two days. Please turn to slide 14 for more details on our cash cycle.
While gross inventory dollars were essentially flat compared to the fiscal first quarter inventory days increased by five due to lower revenue.
Primarily offsetting the increase in inventory days was a three day increase in customer deposit days.
With $532 million in customer deposits, we now have almost one third of our gross inventory covered at the end of the quarter.
As in receivables sequentially improved by five days, primarily due to the timing of payments and increased activity under our receivables factoring program.
As Todd is R. A provided the revenue in EPS guidance for the fiscal third quarter I'll review, some additional details which are summarized on 515.
Fiscal third quarter gross margin is expected to be in the range of $8, 9% to 9.3% at the midpoint gross margin, we'd be approximately 50 basis points lower than the fiscal second quarter.
While we plan to see a sequential reduction in our fixed costs.
Lower near term revenue is expected to reduce fixed costs leverage which in turn will impact our gross margin.
We expect selling and administrative expenses and the range of 43.5% to $44.5 million sequentially, lower primarily due to reduced incentive compensation expense and the partial quarter benefits from our restructuring initiatives.
As a percentage of revenue spending will remain consistent with the fiscal second quarter at 4.3%.
Non operating expenses are expected to be in the range of $10 million to $10.5 million sequentially higher primarily due to lower projected miscellaneous income.
Partially offsetting the expense increase as an anticipated reduction in interest expense as our borrowing has reduced with greater free cash flow generation.
A non-GAAP effective tax rate for those fiscal third quarter and full year is expected to be in the range of 14% to 16%.
Our expectation for the balance sheet is that working capital investments will remain consistent with fiscal second quarter <unk>.
On our revenue forecasts, we expect cash cycle days in the range of 106, two 110 days.
With consistent working capital investments, coupled with capital expenditures to support future revenue growth, we expect breakeven to a slight usage of cash for the fiscal third quarter.
This is before consideration of the $9 million restructuring charge, which is primarily comprised of cash outlays.
A couple of comments on the full year, we continue to expect capital spending in the range of $110 million to $130 million, which excludes any site additions lamb.
Last we anticipate free cash flow to continue improving as we move through the year targeting close to $50 million for fiscal 2023.
With that leeway, let's not open the call for questions.
[noise] [noise] [noise] [noise] [noise] [noise].
[noise] Hey, good morning, and thanks for letting me ask the question guys.
Good morning, David.
Congrats on the solid performance in the quarter at Everything's moving in the right direction the wind it sounds like maybe things.
<unk> I guess less optimistic 90 days ago can you talk a little bit about that Decommit, you mentioned and maybe just the any update on the the programs that were pause last quarter or those improving or the same or any changes there.
Yeah, So maybe I'll start with the with the programs and then pass it over to Shawn Hill talk a bit more about the supply chain environment is.
As far as the program and so we talked about last quarter from a <unk> standpoint are updates are complete and successful there are still some challenges associated with them, though that have to do with third party supply and demand. So it is impacting near term demand for the programs, but long term again at high.
Alight that those programs continue to have strong demand. So we're very optimistic it's unchanged for the long haul. The other thing I know to US we have a number of other large programs that are in the very early stages of ramp right. Now that we think can can have an impact as we move into 524.
In particular.
David on the supply chain I'll I'll give you a couple of data points to consider if you think about our challenges semiconductors are averaged semiconductor lead time is still around 300 days it was down maybe.
Maybe 20 days from 90 days ago, but you're still looking at nine months on an average lead time.
On the lagging edge semiconductors, which we spoken about on prior calls.
We're still seeing.
Limited supply, particularly analogue products and Microcontrollers, you're seeing capacity added in the industry.
But what we're seeing is that capacity coming on line, particularly on the back end more slowly and we're seeing rescheduling an decommit from some key suppliers as a result.
Great color. Thanks, Thanks, a lot and it looks like your program Windsor moved up nicely. So quickly just on a on a scale of each one one dollar value can you top maybe about how you're moving I guess the size of each program and that wind funneling was this an anomaly or do you <unk>.
Expect to continue to see larger programs as we move through the year.
Yeah. This is Steve I'll take just wondering if you go back over the last couple of years, especially in the last year, you'll see our average wins numbers. This quarter was obviously meaningfully higher I would say that there's two things. One is I think the past several quarters were a bit artificially low and you know compared to maybe two years ago.
But we also see the size of the programs increasing as are going into the final. So I think both of those phenomenon, where the recent past there were a little low.
Opportunities going into the final are bigger is what's driving that gap are that different.
And one metric that we don't necessarily report, David but we track internally as we look at opportunities that are over $20 million in size and were far and away at a record level and our final right now so it bodes really well for our wind performance as we look forward.
Okay, Great and just one more equipment, if I may just listening cap equipment. You said it was maybe a little worse than previous can you talk about what you're seeing there and and do you feel like your your previous kind of 10% decline is still a good place to be on the downside yes.
We think the 10% decline is about right and we're kind of right in that area right now, which happened as a result of the further softening.
It does appear based on our our customers commentary to us and publicly that.
They believe we're near a bottom here at a bottom so we're.
We're expecting that but we don't necessarily have any projections of any recovery in the semi cab market.
Thank you.
Alright. Thank.
Thank you so much Mr. Williams and your next question comes from the line <unk> having company.
<unk> is now open.
I think you could good morning, I wanted to.
First talk a little bit about how you see the benefits flowing in but.
I guess I'm also curious if.
Mmm.
Was this anticipated with the scale up with a new capacity that your your your scale.
Thailand or did you accelerate the restructuring just because of the overall macro environment and what you're seeing in parts of the business.
Yeah. So so Jim I'll start with some of the rationale behind it and then add can talk about the financial aspects of it but.
Certainly, it's always unfortunate and disappointing when you're part with team members, so where we weren't looking.
Looking to do that but as we looked at the macro environment right now in our operating expenses. They were they were expanding our set to expand beyond our growth rate, which we didn't like that situation and felt we needed to address it but.
A more positive way to look at this though I mean, we just came through our strategic planning process and we're very optimistic about our future growth opportunities and as we looked at these future growth opportunities. These are areas, where we believe we're going to need to invest to accelerate our growth in the future. So we wanted to get ahead.
Head of this really before it became an issue. So bye bye going forward with this it provides a platform for us to pivot in order to invest in these growth initiatives and increase efficiency. So.
Looking at of course, we have our goal of five $5 billion in 5.5% gap operating margin by physical twenty-five. We're also we believe that's well inside and we're looking to what comes beyond that where do we need to invest to capture those those future opportunities and the one thing I would add to you mentioned, Thailand. It really has nothing to do.
Thailand.
Yeah, and then Jim from a benefit standpoint, I mentioned guiding down SG&A for the.
Fiscal third quarter about $1 million of that relates to the benefits will receive from the restructuring activities and then going forward, it's probably two to two and a half million dollars a quarter benefit that that will recognize.
Got it that's helpful Goodbye.
<unk>.
Your expectations around the health care of life Science market has been tampered and.
Wondering if.
What you're seeing in that market in terms of.
Yeah, some of the macro hit headwinds, perhaps playing more of a role do you see that continuing into Q for because you did have a I think I'm pretty good schedule in terms of the way you were thinking about new products, New program ramps and the health care life Science Martha.
Yeah. This is this is Steve I mean, if you look at our wins performance and what we've been able to do with new opportunities in health care Life Sciences, we still feel very strong about the potential growth opportunities. There is Todd highlighted in his comment about third party supply challenges one of the things. We're we're seeing a bit as we start to clear the backlog of capital equipment, we build.
Some of the other suppliers that may be supplying single use devices or.
Disposable type of products, that's where the supply issues are starting to show up and so as we start to free up and are able to ship our customers now dealing with supply issues elsewhere in so that's causing a few fluctuations for us in terms of what they need for masters I tried to adjust to that new dynamic.
And so.
Don't feel optimistic about where that sector is I think it's just a matter of working through what their supply issues are and people are starting to adjust inventory a bit. So we also hear a few concerns about staffing at hospitals and clinics I'm sorry, I think our customers are just trying to figure out what the the dynamic looks like now that we are able to start shipping.
More consistent supply to them.
The one thing I would add to us we still expect an excellent year for health care life Sciences, and physical twenty-three with growth on the order of 20% for the sector give or take.
Got it. Thanks, thanks, very much I'll jump back in the queue.
Thank you so much channels.
And your next question comes from the line off Vanessa Fairbanks Fame and James and Associates. Your line is now open.
Hi, guys. Thanks, very much I appreciate the detail on supply and that's really helpful. You did know benefit from sourcing actions and the ability to meet demand in the quarter is it still being driven by your own internal initiatives or is that roughly 20 day reduction in lead times, helping and then $100 million an unsealed backlog.
Is that still tied to component constraints is it impacting one business segment more than another.
Good morning, Melissa, it's Shawn here, I'll, I'll start and and I'll.
Then the mic to Steve to finish up here. So what we are seeing is.
Two aspects you are seeing the non kind of lagging edge semiconductors free up as well as other components free up a bit more quickly and that did play a bit of a roll this quarter, but also our our team internally here, we gotta give them a lot of credit.
They're putting in new tools and processes.
To get components in quicker to understand.
Customers forecast, a little bit better to doing some machine learning.
Understand what are the true lead times of products. So there's a lot of innovation going on by our supply chain team, that's helping us out and happy helping us to capture some of these components I wouldn't say an aggregate as I said earlier to David's question. Those lagging it's semiconductors that we require that to need to some fulfilled backlog are freeing up substantially some other more commodity.
Highest components, you're seeing those those free up a little bit more quickly.
Yeah, maybe just once more AD, which is with those lagging at semiconductors does affect all of the industry segments that we deal with but it's obviously product specific in terms of what they use.
It does impact all sectors and on the 100 plus million dollars of unfulfilled backlog that is gated by supply.
There's a demand for that and it's still again it comes back to the legging edge semiconductors as being the gating items.
Okay, great. Thanks, guys that that's super sectors. Okay. Okay. Thanks, maybe as a quick follow up just a little more digging in on the restructuring are you able to offer any detail on the region or the end market, that's being impacted by the restructuring.
Yeah.
Essentially a global impact to this so it's.
Depends on the various different regions. So.
The operating expenses come come out globally, and then anything that has to do with the operations is just happening happening as the typical way that they run the business and looking at capacity versus needs.
Okay great.
Thanks, very much that's all for me.
Thank you Melissa.
And your next question comes from the line I'll Smack <unk>.
Your line is now open.
Yes. Thank you I wanted to drill down a little bit more on your your margin guidance.
Said big step down in both gross margin and operating margin I know there was some mix issues. There's some negative leverage on the lower volumes, but it seems like a more detrimental margin than normal. So could you could you help us understand the.
The components of that and as we look to the September quarter. I think you said you expect to grow.
Revenue sequentially, it should should margins get back to 5% plus or how should we think about that.
Yeah, Matt This is Pat starting with Q3, so guiding down about 50 basis points at the midpoint, we actually do see are fixed costs, reducing from Q2 down to Q3.
Mmm modestly and so we are seeing the the fixed costs leverage really impact us to the tune of about 40 basis points the.
The other 10 basis points is really related to business customer mix.
So a large portion of it is linked to a revenue.
And as we look to the fourth quarter I do see our gross margins coming back to the mid 9% range and with that coupled with.
Probably a low 4% SG&A percentage.
We can get north of 5% and probably closer to.
Targeting are five five as we exit fiscal twenty-three.
Oh, Okay uhm, great. Thanks for that and then.
Just a question Steve in in your car.
Commentary about a new programs and that funnel you did talk about some customers and are looking to outsource smooth from <unk>.
House manufacturing to outsource and and you know that's a trend that.
That we've seen uhm, but we've seen that I guess slower because of supply chain issues companies want HOA. So are you starting to see a step up there in any for any particular reason.
Yeah, I think you're hitting on something there, Matt which is as good global <unk>.
Supply chain starts to free up a little bit customers are starting to reevaluate their strategies, where they were just on hold mode for for several quarters and so I do believe that's playing into the the increased activity.
Is that.
Mm Bye Reshoring are moving from from China to other regions any specific industries.
It's across the industry's I'd say with.
Existing programs, we don't see a lot of movement of Reshoring with existing programs I think the the cost to move some of these programs is prohibitive, it's definitely a conversation with new opportunities, though customer motor stories, we may have been in one region.
Definitely looking at the impacts of the environment and other things that.
Costs from a logistics standpoint, and really considering what they think they're the right strategy going forward. So it's a big conversation on a newer opportunities a little bit less an existing ones.
And Mad if I may add something.
The comment was made earlier about executing well in in meeting customer upside and there's clear representation of that in the final of how we're executing it's being recognized by existing partners and potential partners, it's an opportunity for us to benefit from some share gains.
Got it okay. Thanks a lot.
Thank you so much.
And your next question comes from the line of <unk>, Tom <unk>. Your line is healthy.
Hi, and thank you for taking my questions and some of them have been addressed already but.
First I'm curious.
You mentioned one yet.
Six nine <unk> exclude any site that <unk> are you expecting.
And for those type of defense in the night time.
Yeah, I mean, as we look at our long term growth.
Prospects.
To be thinking about future expansions and what could.
Be something on the Horizon is just simply looking at additional land purchases.
I don't see any site or building.
Acquisitions or.
Construction this year, but looking at potential land acquisition could happen later this fiscal year.
Which was positions.
Alright, I'm, sorry, what was that.
Nope that was it.
Okay. Thank you.
Thank you <unk> and our last question comes from the line of fire J P. Morgan. Your line is now open.
Hi, Thanks for taking my question so.
Three to start to head.
Some of these tougher comps, which kind of extend into March of next year.
Guidance points to kind of modest top line here is that something we should expect over the next 12 months after very strong.
<unk> 12 months and then.
How do we think about key variables, including pricing benefits you saw.
FX kind of better supply and then.
Overall and market demand.
Or bus across healthcare and arrow kind of offset by Sammy So some of those variables will be helpful to have follow up.
Yeah, maybe I'll start with a discussion around like the comps. Paul This is Todd certainly when we look back to Turkey for a F. 22, we delivered a really strong revenue number which makes for a bit of a difficult Cobb now when we look at.
What's in front of US we have a number of new program ramps, we have a significant amount of unfulfilled back.
Backlog, which is there that gives us a platform to drive growth I think the big question is what happens with the broader macroeconomic environment and and how does that shake out. So we believe we're position for a solid twenty-three. We also believe we're position for us us solid <unk>.
Four as it sits right now I mentioned, we just came out of our planning process and and we see the opportunity for another good growth year on 24, now with a year over year growth in queue for would you see that I mean, I think it depends on the macro environment, but I think as we move into 24 will.
Again, b begin to show growth.
Okay, Great and then Oh, sorry from a component pricing standpoint, I mean, a lot of that peak last year, and we're starting to see that coming down throughout fiscal twenty-three.
Okay, Great and then <unk>.
He saw some benefits from.
Three Q pulling into two Q on better supply and some factoring benefits and but you're seeing cash cycle day is kind of up sequentially three Q, but you know how should you think about cash cycle dates for four Q and I assume the.
Approach $50 million in free cash looks very <unk> now thank you.
Yeah, Yeah, obviously, we were really pleased with the queue to results and it came from a number of different areas.
Mainly working capital improvements so we saw better collections on receivables, we did see some additional receivable factoring.
Inventory levels were stable, we were able to secure some additional deposits for aged inventory. So a number of initiatives helped drive the improvement in queue to as we look to cash cycle days, yeah, I'm guiding the days.
A little higher and that's really revenue.
Driven it's not necessarily working capital dollars. If you look at working capital dollars, we're actually same pretty flat.
Compared to fiscal 22, so going back to fiscal 22, we were at 100 days I think we can and around 100 days for fiscal twenty-three and what's important to note is that on a really strong.
Revenue growth year, and 23 and to be able to maintain.
Working capital dollars at a similar level to F. 22, we're we're really pleased with what we've been able to do around inventory and receivables.
Great. Thank you so much.
Thank you so much Paul and there are no further questions I would now like to turn to.
The conference back to shop for closing remarks.
Yeah. This is taito close up for the call first of all thank you leeway I'd like to thank our shareholders investors analysts are flexes team members that joined the call. This morning.
Before concluding I would like to leave everyone with a few thoughts that we highlighted on our call.
First I remain convinced in our ability to meet our long term growth and profitability targets of 9% to 12% revenue growth <unk> and 5.5% operating margin, we have an exceptional team and industry, leading capabilities that are clearly resonating with our customers.
And potential partners as evidenced by a robust funnel of manufacturing opportunities.
Second I'm pleased to see that our team's efforts to develop processes and tools to mitigate the impacts of the challenging supply environment are becoming more evident externally as we've seen by our substantial free cash generation for the quarter.
Finally, I'm encouraged by how we are developing innovative solutions for our customers and engaging with our team members and communities to demonstrate plexuses leadership and ESG as we work to build a better world.
Thank you all and have a great day.
Thank you for centers and thank you, ladies and gentlemen for training US today. This concludes today's conference call. Thank you for speeding and you may now disconnect.
Mmm.
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Yeah.
Okay.
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