Q1 2024 Plexus Corp Earnings Call
Okay.
Good morning.
Alcon instead of purchase Corp conference call regarding its fiscal first quarter 'twenty 'twenty four earnings announcement.
My name is Livia and I'll 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 your questions.
The conference call scheduled to approximately one hour.
Please note that this conference call is being recorded.
I'd now like to turn the call over to Mr. Shawn Harrison.
Vice President of Investor Relations.
Thank you Olivia good morning, everyone 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 and future business outlook.
Looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in the forward looking statements.
For a list of factors that could cause actual results to differ materially from those discussed please refer to the company's periodic SEC filings, particularly the risk factors in our Form 10-K filing for the fiscal year ended September 32023, the safe Harbor and fair disclosure statement in our press release.
We encourage participants on the call. This morning to access the live webcast and supporting materials at Texas' website at Www Dot flexes 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 <unk> Executive Vice President Chief Financial Officer, and Oliver Mihm, Executive Vice President and Chief operating Officer.
With todays earnings call Todd will provide summary comments before turning the call over to Oliver and Pat for further details.
I'll now turn the call over to Todd Kelsey Todd.
Thank you Sean good morning, everyone.
Please advance to slide three.
There were many positives during our fiscal first quarter.
These included strong quarterly wins across our market sectors totaling $261 million.
Sean: Including the addition of two new exciting health care life Sciences logos.
Robust expansion of our funnel of qualified manufacturing opportunities, which now exceeds $4 billion.
When combined with a total available market exceeding $240 billion.
This supports our expectation of continued industry, leading revenue growth with a targeted CAGR of 9% to 12%.
Ongoing advancement of our sustainable and responsible business practices, along with numerous efforts by our team members to help create a better world and positively impact our communities.
You have the quarter had its challenges primarily associated with further demand softening in the health care life sciences sector, and certain sub sectors of the industrial market.
The resulting revenue decline has created inefficiencies across our organization, which we are addressing as we remain focused on delivering five 5% GAAP operating margin in fiscal 2025.
These actions will be discussed in more detail later in the call.
Please advance to slide four for a review of our fiscal first quarter results.
Yes.
We delivered fiscal first quarter revenue of $983 million GAAP operating margin of four 6%, including 54 basis points of stock based compensation expense.
GAAP EPS of $1 <unk>.
Including <unk> 19 of stock based compensation expense.
These results met the update David guidance provided on January 16th 2024, and reflected the impact of significant negative operating leverage as demand weakened late during the fiscal first quarter limiting our ability to appropriately adjust expenses.
Please advance to slide five.
Our go to market organization is leveraging the current environment to create significant opportunity for future growth.
We won 30, new manufacturing programs were $261 million annually when fully ramped into production led by continued strength from our health care life Sciences market sector as well as strong performance from our industrial market sector.
Concurrently we expanded our funnel of qualified manufacturing opportunities by more than $300 million.
The prior quarter to greater than $4 billion.
The funnel increase was highlighted by a large expansion and opportunities in our aerospace and defense and healthcare life Sciences market sectors.
Our aerospace and defense funnel is at an all time high positioning us for continued strong growth in the sector.
Okay.
Please advance to slide six.
I am proud of how our plexus team continues to innovate and operate to advance our sustainable and responsible business practices.
Sean: During the quarter <unk> joined the UN global compact a voluntary leadership platform for the development implementation and disclosure of socially responsible business practices.
Further we said fiscal 2020 for sustainability goals, including an additional 5% energy intensity reduction globally as well as <unk>.
5% waste intensity reduction.
I'd also like to highlight some well deserved recognition for our team members as they create a better plexus and a better world positively impacting our communities.
The Malaysia chapter of HR Asia selected <unk> as one of the best companies to work for in Asia for a remarkable third time.
In addition, they presented plexus, the HR Asia diversity equity and inclusion award.
Texas was selected by the <unk> Chamber of Commerce in Wisconsin as in 2023 large company of the year.
Our neenah operations site hosted more than 80 high schoolers and supportive of smart drills rock event that connected mentors from a variety of stem related careers inspiring these students to pursue a career in stem.
Sean: And finally insight magazine named Pat Jermain, Wisconsin Public company CFO of the year for 2023.
Pat Congratulations and thank you for your leadership and commitment to fostering the growth and development of our company and our team.
Please advance to slide seven.
For the fiscal second quarter, we continue to see healthy commercial aerospace orders inclusive of unfulfilled customer demand.
Slowly rebounding semiconductor capital equipment demand aided by share gains.
In an ongoing tailwind from new industrial program ramps.
However, the near term demand weakness and inventory corrections from the health care life Sciences market sector and certain sub sectors of the industrial market are greater than previously anticipated, creating numerous inefficiencies across our business.
While the move to outsourcing continues as highlighted by a robust funnel of qualified manufacturing opportunities.
We are seeing some slowness in customer decision, making on new product development projects, particularly in the healthcare life Sciences market sector, which is creating challenges for our engineering team.
Yes.
As a result, we are guiding fiscal second quarter revenue of $930 million to $970 million non-GAAP operating margin of 4.0 to four 4% inclusive of approximately 72 basis points of stock based compensation expense.
And non-GAAP EPS of <unk> 80 to 95.
Inclusive of <unk> 25, a stock based compensation expense.
Our GAAP EPS guidance of 48 to <unk> 63.
Also includes approximately $10 million or <unk> 32 of restructuring charges.
We expect to complete the associated restructuring actions by our fiscal third quarter and believe they will result in approximately $20 million of annualized cost savings.
While we anticipate some cost leverage and margin benefit from these actions during the fiscal second quarter typical seasonal cost headwinds and other investments, which Pat will discuss later in the call coupled with our lower revenue forecast were more than offset the immediate benefit.
While I continue to challenge our team to deliver $5 billion in annual revenue with five 5% GAAP operating margin by our fiscal 2025.
<unk> 5 billion in that timeframe has become more challenging given current market dynamics.
As a result, we are implementing several strategic actions leading to the restructuring charge to enable better scalability create greater efficiency and align our cost structure to position plexus for future investments and long term growth.
Okay.
We are right sizing in areas, where we have excess capacity, which includes personnel reductions.
While these actions are necessary to position <unk> for future success. They are incredibly difficult for all of us given the personal effect to our valued plexus team members.
In addition, we are actively managing discretionary spending including implementing a temporary salary reduction for our executive leadership team.
We understand that we cannot control the demand environment, but we can ensure that we continue to evolve in order to deliver great operational efficiency supporting the industry, leading returns that our shareholders value and expect.
Yes.
We anticipate the second quarter of fiscal 2024 will represent a revenue trough and are expecting sequential revenue growth with our operating margin expansion of 30 to 50 basis points during each of the fiscal third and fourth quarters.
We expect to deliver operating improvements, resulting from the restructuring actions increased manufacturing revenue and improved utilization within engineering and remain committed to delivering five 5% GAAP operating margin in fiscal 2025.
Please advance to slide eight.
Finally, as we look forward I remain confident that <unk> will deliver then exceed $5 billion in annual revenue, while also achieving superior returns for our shareholders.
Sean: We see tremendous runway for continued organic growth in excess of the industry without any substantial shifts to our target market sector as a strategy.
Even with some of our markets still recovering post Covid. We grew revenue at an approximately 8% CAGR during the last five fiscal years ended September 2023.
This performance is 25 basis points in excess of the industry and in many cases more than two or three times the growth rate of our competitors.
As detailed on this slide our market sector leaders estimate there is a greater than $420 billion total addressable market that is directly aligned to the customers and products that fit our strategy and our mission to be the leader in markets, featuring highly complex products and demanding regulatory environments.
This addressable market is approximately 40% outsourced today, creating a $240 billion opportunity and future outsourcing perplexes supporting our 9% to 12% revenue CAGR goal.
As an organization, we continue to evolve in order to sustain our success.
We are focused on driving efficiencies and creating scale, while accelerating the pace of change.
Our talented plexus team is at the heart of our strategy, creating trust with our customers, while delivering customer service excellence and exceptional results.
We continue to advance our operations to ensure our organic revenue growth remains well in excess of our peers in line with our 9% to 12% goal and that we pushed to deliver at least five 5% GAAP operating margin more consistent and greater free cash generation and the industry, leading returns that our shareholders value and expect.
I will now turn the call over to Oliver for additional analysis of the performance of our market sectors.
Oliver.
Thank you Todd good morning.
I will begin with a review of the fiscal first quarter performance of each of our market sectors, our expectations for each sector for the fiscal second quarter and some directional sector commentary for fiscal 2024.
I will also review the annualized revenue contribution of our wins performance for each market sector and region and then provide an overview of our funnel of qualified manufacturing opportunities.
Oliver: Starting with the industrial sector on slide nine revenue increased 4% sequentially in the fiscal first quarter.
Oliver: This result was below our expectation of a high single digit increase.
Softer end market demand across some markets sub sectors contributed to the weaker result.
As we start the fiscal second quarter, we are experiencing forecast likeness of customers burn down inventory, most notably within the communication sub sector.
Offset in part by strength in Green energy and an incremental increase in semi cap.
This will result in a low single digit decline for the industrial sector for the fiscal second quarter.
The industrial market sector had strong wins in the fiscal first quarter of $125 million.
Wins were balanced across our sub sectors, including semi cap.
New programs include a follow on commercial vehicle charging platform that will be produced in our Appleton, Wisconsin facility.
We also expanded our portfolio with the newer semi cap customer to include engagement from the Americas region with a complex mechanical assembly that will be produced in our Guadalajara, Mexico campus. We're now engaged with this customer from all three of our regions.
One additional highlight from the quarter is an assessment that our engineering team is performing on a product that our customer is currently designing.
Call. It a lifecycle assessment these high value AD engagements examine and measure the environmental impact of our product throughout its lifecycle.
By identifying improvement opportunities early and then helping to solution than <unk> is able to partner with our customers to create products that build a better world.
Looking ahead, we anticipate mid single digit revenue growth for our industrial market sector for our fiscal 2024, a result of a continued gradual rebound in semi cap demand.
Tailwind from our support of Green energy markets.
Set by a greater than forecast headwind from a technology transition within the communications market.
Please advance to slide 10.
Revenue in our health care life Sciences sector was down 15% sequentially for the fiscal first quarter, which was below our expectation of a low double digit decrease.
Market weakness inventory corrections customer design modifications and supplier issues drove that drove the decline.
In the near term, we see soft demand as our customers continued to decrease inventory levels.
That result is that we anticipate our health care life Sciences sector to see a mid single digit decrease for the fiscal second quarter.
Health care life Science Science's sector wins for the fiscal first quarter totaled $113 million and marked the fourth consecutive quarterly increase.
This is also the strongest quarter of wins since the second quarter of fiscal 2022.
Our wins included programs with two new customers, we have been awarded the production of a drug delivery device and an aesthetic laser therapy system.
Both products will be produced in our Penang Malaysia campus.
Our fiscal first quarter wins also in conclude included a competitive market share gain due to the exceptional operational performance of our team and our RIDEA Romania.
Looking at the health care life Sciences market sector for fiscal 2024, with some inventory corrections of lingering into our second fiscal half approximately five percentage point growth headwind from the year over year reduction of components procured at above historical market prices, we anticipate year over year revenue decline in the teens.
Advancing to slide 11, our aerospace and defense sector increased 6% sequentially in the fiscal first quarter strengthening modestly and meeting our expectation of a mid single digit increase.
While unfulfilled customer demand remains our supply chain team continues to improve component deliveries to support robust underlying commercial aerospace demand.
As we look to the fiscal second quarter temporary declines due to new customer program ramp delays in defense and space are partially offset by continued robustness within commercial aerospace.
As a result, we expect a low single digit decline for the aerospace and defense sector.
Our fiscal first quarter wins for the aerospace and defense sector were $23 million.
We want to strategic defense programs with our current customer both of which will be produced in our Boise Idaho facility.
We also won an unmanned aerial program that will be produced in our Penang Malaysia campus.
Lastly, our Neenah, Wisconsin facility won a program that reflects the continuation of multiple awards over the past year for design validation and production work related to our space program, including systems for power management control and guidance.
For fiscal 2020 for aerospace and defense demand remains generally robust and is supported by an ongoing backlog.
As a result, we expect revenue growth for fiscal 'twenty 'twenty four exceeding the high teens growth witnessed in fiscal 2023.
Advancing to slide 12, we can review the regional highlights for the manufacturing wins for the fiscal first quarter.
Oliver: The Americas wins were robust at $139 million and included the second consecutive quarter with a substantial win from our newer top 10 medical OEM for our Guadalajara, Mexico campus.
The APAC regions first fiscal quarter wins of $86 million reflected a marked increase in contribution from the healthcare life sciences sector with over half of the region's wins from that sector.
The region also continued trend of strong wins performance from the industrial sector, including meaningful wins from two of our existing semi cap customers.
The EMEA regions wins first quarter wins of $36 million adds to the $280 million of wins from fiscal 2023 supporting the region's continued robust revenue growth outlook and improved profitability forecast.
Please advance to slide 13 for a review of our funnel of qualified manufacturing opportunities.
Despite the strong wins performance the total funnel increased to over $4 billion as all regions saw meaningful increases in their funnel.
This $4 billion result is our second largest reported funnel.
Given the strength of their wins performance, the industrial sector funnel dipped slightly to $914 million allow.
Aligned with our sector strategy the opportunities reflected in our funnel are balanced across a variety of markets.
Additions to the funnel from both customers and targets in our semi cap sub sector helped to backfill the wins.
The health care life Sciences sector funnel saw a sizable increase to $2 $2 billion more than offsetting the impact of this quarters strong wins performance.
The strength of wins and the increasing funnel of qualified manufacturing opportunities provide optimism for future growth within the health care life Sciences sector.
The aerospace.
Space and defense sector grew the funnel to a record high of $923 million nearly doubling the funnel from Q1 F 'twenty three.
This was supported in part by growth with new targets. In addition to brokered opportunities from our current customers.
Oliver: Lastly, the funnel of opportunities for our engineering services saw increases across all market sectors and at a record high.
While there has been delaying decision, making particularly with very engineering customers in the healthcare life Sciences sector, the funnel strength furthers, our optimism for future growth and significantly improved performance.
I will now turn the call to Pat for an in depth review of our financial performance. Thank you Oliver and good morning, everyone. Our fiscal first quarter results are summarized on slide 14.
Patrick J. Jermain: With revenue below our original guidance gross margin of 9% came in slightly lower than expected.
Reduced fixed cost leverage and unfavorable mix led to the gross margin result.
Selling and administrative expense of $43 million was within our guidance range as a percentage of revenue SG&A was four 4%, which was slightly above expectations given the late quarter decline in demand.
Patrick J. Jermain: GAAP operating margin of four 6% was below our original guidance due to the loss of leverage within gross margin and SG&A expenses.
Nonoperating expenses of $10 $3 million were consistent with expectations.
GAAP diluted EPS of $1 four was below the original guidance due to the factors previously mentioned along with a slightly unfavorable tax rate.
While we continue to measure our performance against GAAP metrics next quarter, we will begin sharing non-GAAP operating margin and EPS exclusive of stock based compensation expense for easier comparability to peers.
Turning to our cash flow and balance sheet on slide 15.
We used $3 million of cash to support our operations and spent $29 million on capital expenditures.
<unk> negative free cash flow of $32 million for the fiscal first quarter.
This result was favorable to initial expectations.
As we intentionally delayed a portion of capital spending to more evenly spread out cash payments throughout fiscal 2024.
With the fiscal first quarter typically requiring investments within operations, we did not repurchase any of our stock under the existing authorization.
However, as announced last week, our board approved a new $50 million share repurchase authorization, bringing the total available amount to approximately $56 million.
<unk> next week, we plan to begin purchasing shares under these authorizations, while taking market conditions into consideration.
We plan to fund investments in operations and share repurchases with our strong and liquid balance sheet.
We ended the fiscal first quarter with a cash balance of $232 million and total debt of $443 million.
We had $257 million available to borrow under our credit facility and a conservative gross debt to EBITDA ratio of less than one seven times.
For the fiscal first quarter, we delivered return on invested capital was 10, 3%, which was 210 basis points above our weighted average cost of capital.
Cash cycle ended the fiscal first quarter at 95 days sequentially higher by eight days.
Please turn to slide 16 for details on our cash cycle.
The majority of the cash cycle increase came from inventory days, primarily due to lower revenue while days increased by seven gross inventory dollars were only modestly higher by $13 million compared to the prior quarter and were favorable to expectations.
We continue to be encouraged by the work our supply chain and regional teams are doing to drive reductions in inventory, while facing challenges with customer forecast reductions and there is still constrained component environment.
As Todd has already provided the revenue and EPS guidance for the fiscal second quarter I'll review, some additional details which are summarized on slide 17.
Patrick J. Jermain: Fiscal second quarter gross margin is expected to be in the range of eight 8% to nine 2% at the midpoint gross margin would be consistent with fiscal first quarter.
This quarter gross margin will be burdened approximately 60 basis points by seasonal compensation cost increases and the reset of payroll taxes for U S employees.
We plan to earn through this margin headwind with productivity improvements across all three of our manufacturing regions, along with a portion of that savings recognized from our restructuring efforts.
We expect selling and administrative expenses in the range of $46 five to $47 $5 million, which represents a modest increase year over year sequentially SG&A is higher primarily due to the seasonal compensation headwinds and investments in essential solutions to support our business.
Non operating expenses are anticipated to be in the range of 10, 5% to $11 million fairly consistent with fiscal first quarter.
Our non-GAAP effective tax rate for both the fiscal second quarter and fiscal year is expected to be in the range of 15% to 17%.
Our expectation for the balance sheet as at working capital investments will increase slightly compared to the fiscal first quarter.
Based on our revenue forecast, we expect this level of working capital will result in cash cycle days in the range of 99 to 103 days.
At the midpoint this would be sequentially higher by six days, primarily due to inventory requirements and anticipated advanced payments returned to customers.
Patrick J. Jermain: With modest working capital investments, coupled with our restructuring activities and higher capital spending to support anticipated future revenue growth.
We expect a usage of cash for the fiscal second quarter.
A few comments on the full year, we have reduced our expected capital spending by $10 million to now be in the range of $100 million to $120 million.
We are projecting slightly higher working capital investments compared to the prior year to fund growth expectations in the second half of fiscal 2024.
With this said, we believe products' gross inventory and advance payments from customers will be at levels lower than the past two fiscal year ends.
Also we expect to deliver improved free cash flow as we move through fiscal 2024, ending the year with up to $50 million.
With that Livia, let's now open the call for questions.
Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone and wait for your name to be announced to.
The press Star one again, please standby will be compile the Q&A roster.
Okay.
Now first question coming from the line of David Williams with Benchmark Company. Your line is open.
Hey, good morning, gentlemen, thanks for the time this morning.
Sure. Thanks, David.
So a lot to get through here, but just I guess firstly.
If you kind of think about the softness in the industrial segment, which isn't really surprising but can.
Can you kind of give us a sense of how your customers tone has been and and kind of parse through maybe the inventory versus the demand side and how much of this is really burned down versus just more cautious outlook in the future quarters.
Yes, So I think I will start David and talk a bit about our different markets and what we're seeing and then pass it off to the rest of the team to talk about inventory as it relates to demand.
David: It's really interesting our markets there is a bit of I would call it.
Our rolling progression across our markets post pandemic and stimulus as to when they have shown strength in when they've shown weakness and so it varies a lot by sector. So if you look at aerospace and defense, which I'd say is the furthest along.
<unk> had lots of struggles post pandemic is very much in a boom cycle right now and performing incredibly well.
As Oliver had mentioned.
Coming off a high teens growth year, and we expect to do better than that in fiscal 'twenty. Four so really strong growth supported by a strong funnel.
If you transition over to industrial there's there's a couple of differ.
The spaces within industrial that need to be considered the first being semi cap and of course, we saw semi cap dropped precipitously a little over a year ago.
Hit the bottom in our Q4 of fiscal 'twenty, three and as I would call. It a climb upwards, although very modest at this point and a lot of it driven by share gain so we're seeing growth there, but some of the other markets in industrial are struggling right now, particularly communications and that's where we're seeing the biggest near term.
David: Headwind, we believe that to be a transitory situation as new technology is has worked into the market and then finally, there's health care life Sciences, and I'd say again, we view this as transitory too, but we must say that down cycle has been a lot and thats right in the down cycle now we would have to say that's a lot deeper.
Other than we have historically witnessed within our healthcare life Sciences space and there's a few.
A few reasons why that's occurring one is that the inventory corrections are certain device, making Oems have overshot their demand. There's also the impact of components that were purchased last year at above market prices that are back to more normalized levels. This year and so that's having an impact as well.
David: Also some delays in program ramps as a result of customer design issues or supply chain.
Supplier issues I would say on those components. So it's very different by market, but right now because of the near term impact in both healthcare and communications that is having an outsized impact on our business.
So I'll pass it over to.
I think: Sure I mean specific to the industrial sector, because I think that's where we started right. So we do see some general inventory burdened down but as Todd noted, it's really focused on the communication and sub sector and as we look across the rest of that sector. I think I'd say signs for optimism I think we see some incremental improvement here ahead of us in test and measurement.
We've got some nice tailwind and green energy, although admittedly coming off of a smaller base, but that provides a bit of a tailwind and then Todd also mentioned our semi cap sub sector.
One additional data point I will note. There is if we look at our F. 'twenty four outlook for semi cap that held flat quarter over quarter. So I think another data point that suggests signs for optimism in that sub sector.
Great. Thanks for the color there.
And then maybe secondly on the restructuring and you think about some of the reductions that you're making how do you. How do you think about that in terms of the second half rebound and and just maybe if you could walk through some of the changes or the restructurings that youre, making where those are and what we should expect in terms of demand or excuse me up.
Todd P. Kelsey: Of impact to the year.
Our capabilities. Thank you.
Yes, so I mean I want to start David by saying that we don't take actions like this lightly given the impact on our team members and the communities that were a part of.
But we do have and we've talked about having a playbook to protect our profitability. So we want to ensure that we're positioning ourselves for this five 5% GAAP operating margin target that we have and we believe that's what we're doing so what we're doing is we're taking a look at areas, where we can enable better scalability to create greater efficiencies.
Align our cost structures to position us for future investments. So that primarily involves I'd call. It right sizing capacity and mostly across our operations. It hit manufacturing services, an engineering when we talked about engineering being light due to health care that is having a pretty substantial.
Drag on our operating margin performance given the the ratio of cost.
The essence at the cost of within engineering is relatively fixed so we think we're putting in place opportunities to better position our company for the future.
As we go forward on this and when we talked about.
About what it does to the second half in the second half rebound as I mentioned in the prepared script. So we look at it as being about $20 million annualized cost savings or about $5 million per quarter. So you can think of it as once we get these fully implemented and moving forward somewhere in the order of 50 basis point impact.
Thanks, so much.
Absolutely.
Thank you.
Todd P. Kelsey: Our next question.
Todd P. Kelsey: And our next question coming from the line of Melissa Fairbanks with Raymond James Your line is now open.
Melissa Fairbanks: Hey, guys. Thanks, very much good morning.
First of all I just wanted to say, thanks for giving US a framework for the full year revenue segment revenue at.
That's super helpful.
To start I've got a quick one for Oliver I pretty much asked the same question every quarter could we get an update on our lead times.
Oliver: Last quarter I think you noted even though lead times are coming down they were still running at about twice the normal range have we gotten any closer to normalization there.
Yes, Thanks, Melissa happy to answer that so similar to the message from last quarter commodities broadly showing stability.
I think when we talked about this last quarter, we said that as you noted just over six months.
We've moved from essentially 'twenty three to 'twenty two weeks across our broader commodity base. So just an incremental improvement there.
As I reflect on the whole dynamic for us I'll say that our shortages and the challenge spots are less semi conductor focused so a couple of quarters ago that was really just in the semiconductor slice of our supply chain and now includes an element of passes as well so that I view that as a as a.
Melissa Fairbanks: A further step towards normalization.
Within semiconductor.
We came from 200 days down to 188 days, so just running a bit over six months.
And then within semiconductor as we've talked about historically still see and high end semiconductor with lagging edge technology, we still see tight inventory and the occasional unexpected decommit and then generally no stock on the open market to help address that.
Melissa Fairbanks: Okay, Great. That's very helpful. Maybe steps I think.
Melissa Fairbanks: As a win for everyone.
So I just wanted to follow up on the last question about the restructuring actions you are taking maybe a little bit less delicately. So.
Todd I think you explained there is some consolidation or optimization across some of your facilities.
Is there a factor of if their business you expected to win and had capacity dedicated to it but now maybe that's no longer an opportunity. So youre recycling some of those businesses.
No theres nothing really none of that Melissa it's really more of a softening in markets that we're seeing.
Now as we've talked about in engineering, we're seeing some delays in decision, making and such which is is causing us to pause there, but when we look at manufacturing our services. It's just general market softening and it really relates primarily to our health care life Sciences market sector.
Okay, Great. That's great news, that's all for me for now thanks, guys.
Melissa Fairbanks: Okay.
Yes.
Melissa Fairbanks: Thank you.
And our next question coming from the line of Matt Sheerin with Stifel. Your line is open.
Yes. Thank you good morning.
Just a few questions for me one just in terms of top line and your expectations for sequential growth.
In the subsequent.
Subsequent quarters in the back half of 'twenty four.
I guess my question is.
Has your visibility improved confidence improve given that looking at the last six quarters or so I think there is at least three quarters were.
There had been top line issues more headwinds in the quarter for various reasons right. So I guess the question is.
Has that confidence or visibility improved.
Melissa Fairbanks: And how.
Okay.
Yes, so Steve is going to take this question Matt.
Steve: I think as Todd talked about in terms of just kind of seeing these rolling changes coming through the different sectors. I think it kind of follows that same philosophy, where our confidence in the future forecast it really kind of varies a bit by sector and subsectors. So specifically like aerospace and defense much more confident in what we're seeing from the aerospace and defense.
Steve: Customers in terms of what their demand looks like as well as our confidence in supply chain. So as all of our kind of gave a little bit of guidance. There I'd say, we're more comfort level there that we see as Todd highlighted in the industrial sector stabilization in the semi cap market. So as we're starting to talk to customers about their back half 'twenty four forecasted into 25 gaming.
Confidence that those things will come to reality and basically working with them to make sure we can achieve that.
A little bit of volatility like the communication sector Todd talked about.
Todd: We've seen a few surprises there, but more focused on.
Technology changes in a little bit of shift there obviously going through this health care life Sciences Challenge now again ultimate long term look very confident when you look at where the Windsor at in the funnel, which is indicative of our customers are really kind of trying to reevaluate their sourcing strategies are we did have a few customers come out and announce.
Todd: Their plans to closed facilities and consolidate for us that's a good thing we talked about our funnel increasing those larger increases are coming from opportunities like that so.
There may be a little bit of volatility here in this quarter in terms of where we're seeing those forecast, but as we look to the future would you expect as those inventory corrections kind of burn through.
Real potential for those sub sectors to take off.
Okay. Thanks, Thats Super helpful.
In terms of that inventory burn at customers.
In those sectors.
Todd: Are you getting you have a sense from customers or how long that's going to take in in terms of like forward orders are you seeing signs.
I don't know is eight to 12 weeks out that things are improving.
Yes, we're looking at a customer by customer and actually product by product and it does vary some products for example, with things that supported Covid.
Some of the laboratory test equipment their inventory levels are a bit higher and we will take a little bit longer to burn through.
Other things more related to.
Melissa Fairbanks: Surgical platforms or other related electric procedures.
We're showing more copper goes will rebound more quickly. So we are going through the analysis kind of product by product and it does vary a bit but.
Again, our confidence level it will come back it's not a.
It's not really a product issue, it's just really more of a inventory problem.
One of the things I would add to Mike or Matt is when we look at the.
And our outlook and the outlook for the back half of the year and we're taking it from a very conservative point of view, but we have a number of of program ramps that are well underway that are going to continue to provide additional revenue in the back half of the year. We've got the supply chain improvement that Oliver talked about and that leads right into the unfulfilled.
Demand that we still have out there so.
So you're looking at this conservatively, we have we have confidence that we're going to see the sequential improvement that I talked about one other revenue component related component that I. Just wanted to hit on quickly is I want to correct. A statement that I made in the prepared remarks, when I talked about our growth rate I talked about is having.
An 8% CAGR over our last fiscal year's which is accurate.
Oliver: But that is a 250 basis point.
Spread above the industry average so not the 25 that I had mentioned earlier.
Oliver: Got it okay. Thank you.
On the communication side could you remind us like what.
Sub sectors or industries, because I know you don't play in mobile networks or base stations anymore right. It's mostly.
Other areas.
Yes, it's really it's really broadband infrastructure that we're talking about there Matt got it yes.
Okay, and that weakness or you're seeing across your vendor base or customer base.
Melissa Fairbanks: Yes, yes, and I will note that we are well correct well represented.
Melissa Fairbanks: On in that technology space and so as there is an expected technology upgrade here in the future and so when that does manifest we're going to enjoy the growth as part of that.
Okay, Great and just a couple of quick questions for Pat if I can.
Pat in terms of your expectations for margin expansion in the back half of 'twenty four.
Patrick J. Jermain: Obviously gross margins should expand but in terms of SG&A you talked about some near term expenses.
Expenses, but does that go down.
In Q3 or because of cost and others is that guidance kind of be at those elevated levels.
Yes, I think we will see improvement in the percentage as we get to the back half of the year. The dollars I think it will stay relatively consistent Matt so from a percentage standpoint, what I'm guiding Q2 at is about four 9% of revenue and that is up from Q1.
Really three main components to that the seasonal compensation cost increases is about 1 million and a half we've got some higher stock based compensation.
Based on the roll off of some prior awards and then as I mentioned, some it system related investments.
And a host of things we're doing there around collaboration tools cyber security upgrade to manufacturing systems. So thats driving the dollar increase and I do think that will stay pretty consistent throughout.
The rest of the year, but from a percentage standpoint.
Where we're targeting the targeting is around four 5% of revenue. So some leverage improvement as we see top line growth in the back half of the year.
Okay. Okay, great. That's it for me thanks, so much.
Okay.
Thank you.
Our next question coming from the line of Andrew.
Joseph <unk> with Sidoti Your line is now open.
Yes, hi, Thank you for taking my questions.
First of all Pat did you you mentioned that you expect the capex to come down for the year on year.
Sure.
Justin.
Yes, previously we had $110 million to $130 million. So we brought it down $10 million and some of that is just because of growth investments that are being delayed a bit were being really mindful and prudent about the capital spending this year.
Justin: Okay. Thank you and.
Hello have you mentioned.
Larger opportunities coming in thank you.
<unk> talked about.
They are related to previous opportunities.
Melissa Fairbanks: Yes. So we are still seeing a larger number of large opportunities in our funnel than we had seen historically.
So that that impulse.
Speaking of risks.
You don't win these larger opportunities.
No I think it actually creates more opportunity for us to have strong wins performance because of that.
Yes.
Just a bit Sean just as.
Maybe a little bit of clarification, we go head to head on a program versus competitors on <unk>.
Sean: Average were winning two thirds of the time and so our win ratio. When we go into this qualified funnel of opportunities is quite high whether that's a small program or one of these larger programs.
Okay. Thank you.
Sean: And also lastly.
It's just a hard with some.
Airplanes lately and go on having some issues it's Scott.
Scott any risks to you at all.
Scott: Yes, so the answer from a risk standpoint is no we.
We do supply Boeing and we have.
I would call it a reasonable we don't supply Boeing directly, but we do supply into Boeing and we do have content on the 737 and the 737 Max.
But and I saw today that the FAA announced that they're going to allow Boeing to go back into production that.
The rate that they've been at historically, so that would have minimal impact to us, but even if production had been shut down.
I'd call it a negligible impact to our overall revenue.
So it's pretty insignificant to us.
Okay. Thank you and you also mentioned so communication seems to be.
A headwind for you.
Hearing Dan Thompson determine when that could potentially come back.
Yes, I'll offer that as we went into a quarter ago, we thought that that technology upgrade and the bounce back there was going to be early to mid 'twenty. Four so we're now taking a more conservative view.
As it being a little bit further out but the exact timeframe.
Hesitate to call the ball for that.
Okay. Thank you that was alchemy.
Okay.
Thank you.
Question coming from the line of Jim.
<unk> with Needham <unk> Company. Your line is open.
Scott: Thank you.
Just wanted to go back to some of the commentary on the market sectors.
If we look at where they are.
Biggest wildcards are in terms of the improvement.
That you are anticipating in the fiscal second half would you say, it's more on the health care life science portion of the business.
Yes, I would say, Jim we're not looking at the markets improving to get the recovery or the growth in revenue that we're projecting it's more based off of program ramps and activity. That's already underway. So any market improvement whether that come from healthcare comms or further a further increase in semi.
Cap demand.
Would be upside to what our projections are.
And I guess.
We are thinking about it is if there is some potential there is potential for negative surprises, where you don't necessarily see progress.
Overall in the second half.
Which sector might carry the biggest risk.
And Thats why I was asking the question.
Yes.
Probably I mean, you probably have to think about industrial is.
Further degradation to healthcare, but it seems that that's come down.
Scott: A pretty tremendous amount already that there it should be at a bottom or close to it.
Melissa Fairbanks: Got it.
On the A&D side.
You seem to be suggesting that even with.
There's been a little bit of it sounds like some program activity slipping on the defense space side, you're still seeing.
Pretty confident that that shows hell.
<unk> growth for the year as a whole with the continued growth that you're seeing in commercial air is that fair to say.
Yes that is fair to say and specifically to hit that defense and space headwinds that I mentioned that we're experiencing in Q2 and that is a short term headwind. So thats nothing systemic that we're talking about there.
Melissa Fairbanks: As an example, with one of the program ramps are doing is actually a bit of a good story here. We were doing printed circuit board assemblies for our customer and we are performing so well on the ramp is that hey, we want you to how higher level Assembly until we took a pause while they could take over the rest of that business as well so.
Melissa Fairbanks: Temporary headwinds and we do not expect that to persist and then as we talked about previously strong underlying commercial aerospace demand.
Melissa Fairbanks: Yes.
I'd add Jim.
Our aerospace and defense sector, we break it down into four sub sectors Aerospace defense commercial space and security and all of them are showing.
Melissa Fairbanks: Reasonable year over year growth.
Melissa Fairbanks: In fiscal 'twenty four.
Got it. Thank you thanks for that additional color and then finally.
Yeah.
Melissa Fairbanks: You talked about the 555% GAAP operating margin in fiscal 'twenty five that youre.
To protecting that does that.
Melissa Fairbanks: Require if we see.
Melissa Fairbanks:
In the past you've talked about.
Melissa Fairbanks: $5 billion of revenue it sounds like Youre, suggesting you get to those targets, even with the restructuring and the cost actions that youre doing.
Melissa Fairbanks: Even if revenues are not at that level is that or am I misinterpreting, what you said.
No I don't think you are Jim I mean, what.
But we'd like to get to the $5 billion in revenue, but obviously with the current dynamics in.
The current results and guide that that would take a pretty substantial market improvement to be able to do that but we can control the operating performance and the operating margin Thats part of the reason for US looking at the restructuring actions as well as some other activities as we believe that thats.
Melissa Fairbanks: Level of performance that we needed to deliver.
But basically from the.
The actions you're taking.
Necessarily anticipate.
Anything additional that you have to consider to get give.
Given the current state of the businesses.
Melissa Fairbanks: No. We don't believe so I mean, obviously, we will need to get some additional revenue growth. So we get leverage but it really comes down to the restructuring actions better utilization within our engineering team and then some manufacturing leverage.
Melissa Fairbanks: Okay.
Thanks, a lot.
Absolutely.
Thank you.
Our next question.
And I see we have a follow up question from David Williams from Benchmark. Your line is open.
Hey, guys. Thanks for taking the follow up first I missed this earlier, but I wanted to say congratulations to Pat.
On the CFO of the year, certainly well deserved, but I think we would all agree to that so so congratulations there. Thanks David.
Yes of course.
And then secondly, just wanted to ask real quickly on the previous Unverified List addition that you guys were included on is was there any impact from that and anything longer term. We should think about here any further risk or just any color around that would be helpful. I think.
Yes so.
Melissa Fairbanks: We've been able to recover through I would call. It a heroic efforts from our supply chain team and our our APAC team in the region. So we don't believe there'll be any impact to our fiscal Q2, although it.
Melissa Fairbanks: Wasn't easy, but what I would say is that the addition to the list wasn't there wasn't mirror merited excuse me.
It reflected more of a communications issue and a delay in our routine verification of a shipment to our Xiamen facility.
Melissa Fairbanks: Quick removal from the list, which I think was probably like record speed reflects these facts. So I would like to call out, though the bureau of industry and security within the department of Commerce and their strong partnership on this to resolve this so was very happy with the response that we were able to get.
Melissa Fairbanks: And I would just like to reiterate we have a strong compliance program and we remain committed to.
So all laws as well as our strong partnership with the eyes. So nothing additional and we're happy that this is behind us.
Thanks for giving that clear quickly.
And then just secondly, regionally it looks like Americas was down quite a bit is there anything specific maybe to that area and is it fair to assume that maybe the more heavily levered to the health care industry or anything maybe just around Americas that drove the sequential and year over year decline. Thank you.
Yes, so I think you've already you've already hit it there David I think that as we look at the Americas region and the.
The exposure relative to health care life Sciences, as well as the communication sub sector.
And that result, and as those sectors come back, we'll see the Americas region come back with that.
Thanks again.
Thank you.
And I assume <unk> Q I have a follow up from Matt Sheerin.
With Stifel.
Sharon Your line is now thank you.
Melissa Fairbanks: So my follow up is on the inventory situation Pat you talked about the total inventory days at 161, I know, but I didn't get the.
<unk> or the number of days backed by customer deposits could you give us that number and you also mentioned you expected those deposits to come down right.
We just want their cashback given lead times are getting back to more normal so what does that percentage look like and how does that.
Impact your cash flows over the next few quarters that that percentage comes down.
Yes, Matt that is a really good point, because we do have to look at it on a net basis, because I expect significant reduction in gross inventory dollars year over year, it could be upwards of $100 million, but we will see a significant portion of the advanced payments being returned as well as we burn.
Down that inventory so.
To give you just some examples of what happened from a days perspective from Q4 to Q1 days of customer deposits came down to we would expect.
They're coming down quite a bit in the back half of this year. So when you look at it on a net net basis, our cash cycle.
We ended at 87 days in fiscal 'twenty, three I expect improvement in 'twenty four.
In the low eighties on a net net basis, so much greater reduction in inventory, but also a reduction in the advance payments as well.
Got it.
Melissa Fairbanks: As a percentage do you expect those advanced payments to come down.
As a percentage of gross revenue.
Melissa Fairbanks: Sure.
Melissa Fairbanks: Of inventory yes.
Let me just sum it and now it's about over 30% rate.
Right right.
To return those upon liquidating the inventory so.
It would probably be around that low 30% range.
Okay.
Melissa Fairbanks: It's not going to change it's just the.
Just the growth the number is going to change which is lower.
Melissa Fairbanks: Yes.
Got it.
Okay.
Okay.
That's it for me thank you.
Okay.
Melissa Fairbanks: Thank you.
That concludes our Q&A session I will now turn the call back over to Mr. Todd Kelsey for any closing remarks.
Alright, Thank you Olivia.
Todd P. Kelsey: I'd like to thank our shareholders investors analysts as well as our plexus team members that joined the call. This morning.
In closing I want to say that as I look forward I remain very confident in our future and it's our exceptional plexus team that provides the basis for this view they continue to differentiate plexus in the market and with our customers where we're the leaders in the markets featuring highly complex products and demanding regulatory environments.
When we look at this differentiated performance and coupled with the street strategically aligned large available markets in which we participate and our commitment to delivering superior operating results I'm optimistic that we'll continue to outgrow our industry and deliver the strong returns our shareholders expect.
Thank you all and have a great day.
Ladies and gentlemen, good luck <unk> conference for today. Thank you for your participation you may now disconnect.
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