Plexus Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Plexus Corp Conference Call regarding its Fiscal Second Quarter 2023 Earnings fiscal 2nd quarter. My name is Lee Wei, 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 questions. The conference call is scheduled to last approximately 1 hour.

Operator

And please note that this conference is being recorded. I would now like to turn the call over to Mr. Sean Harrison, Plex's Vice President of Communications and Investor Relations. Sean?

Speaker 1

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 and administrative expense, restructuring and other charges, operating margin, other income and expense, taxes, cash cycle, capital allocation and future business outlook. Forward looking statements are not guarantees since there are inherent difficulties 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 ks filing for the fiscal year ended October 1, 2022, supplemented by our Form 10 Q filings and the Safe Harbor's and Fair Disclosure statement in yesterday's press release.

Speaker 1

We encourage participants on the call this morning to access the live webcast and supporting materials at Plexus' website at www.plexus.com, clicking on Investors at the Joining me today are Todd Kelsey, Chief Executive Officer Steve Frisch, President and Chief Strategy Officer and Pat Germain, Executive Vice President and Chief Financial Officer. Oliver Mihm, our Executive Vice President and Chief Operating Officer is not participating in our call today due to death in the family. Our thoughts are with Oliver and his family. Consistent with prior earnings calls, Todd will provide summary comments before turning the call over to Steve and Pat for further details. Let me now turn the call over to Todd Kelsey.

Speaker 1

Todd?

Speaker 2

Thank you, Sean. Good morning, everyone. Please advance to Slide 3. Our team executed extremely well during our fiscal Q2 amidst ongoing end market volatility and supply chain challenges. We delivered better than projected revenue, profitability and free cash flow.

Speaker 2

We also achieved strong wins performance while significantly expanding the funnel of qualified opportunities, positioning us to sustain robust revenue growth. Finally, through our ESG leadership focused on how we innovate and operate, we furthered our goal of being seen as an employer and partner of choice. Our fiscal 2nd quarter revenue of $1,071,000,000 represented a 21% increase from the fiscal Q2 of 2022 and exceeded the top end of our guidance range. The strong revenue result was driven by increased end of quarter shipments as an outcome of our ability to mitigate supply constraints in our Americas and EMEA regions and better than anticipated performance by our engineering and sustaining services teams. GAAP operating margin of 5.3 percent inclusive of 55 basis points of stock based compensation also exceeded guidance and approached our 5.5% target level.

Speaker 2

We benefited from profitability upside in all regions from a combination of either volume leverage, the performance of our engineering and sustaining services teams and our ongoing focus on improving manufacturing efficiency supported by our efforts to deliver 0 defects. Our GAAP EPS of $1.45 inclusive of $0.21 of stock based compensation expense, also exceeded guidance. Finally, we generated $80,000,000 of 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 Q2. Our go to market team did an outstanding job as it won 31 new manufacturing programs worth $275,000,000 when fully ramped into production, including continued traction and winning business within secular growth markets.

Speaker 2

Concurrently, the team expanded an already record funnel of qualified manufacturing opportunities to $4,200,000,000 an increase of nearly $600,000,000 from our fiscal Q1. Included in this funnel are greater than typical number of large opportunities in each of our market sectors and regions, which we believe positions us sustained strong wins performance and industry leading revenue growth. Please advance to Slide 4. I continue to be proud of how the Plexus team supports each other, our customers and partners and the communities in which we reside. Our 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.

Speaker 2

A unique set of solutions across the product's lifecycle positions Plexus to be the partner of choice in 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 and environmental impact. There are several recent activities I'd like to share that are aligned with our social efforts. During our fiscal second quarter, team members in Malaysia supported local schools and a children's home through a fundraising campaign. Next, our engineering team in Darmstadt, Germany made notable donations to support a local food bank and hospice center.

Speaker 2

Here in Wisconsin, our Women in Network employee resource group, which is focused on empowering 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 Plexus 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 on sustainable solutions. As part of an Earth Day celebration this week, our team in Wisconsin hosted the leadership of Bevy, a provider of smart water dispensers that offer filtered, flavored and sparkling water on demand.

Speaker 2

Thousands of bevy machines, which are manufactured in our Appleton, Wisconsin facility are already in use across North America at leading global corporations, including at Plexus' U. S. Sites. Since installing the machines at our facilities last quarter, Plexus has already saved the equivalent of more than 33,000 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 common sustainability goals, while building a better world.

Speaker 2

Please advance to Slide 5. We are guiding fiscal 3rd quarter revenue of $1,000,000,000 to $1,050,000,000 Non GAAP operating margin of 4.5% to 5%, inclusive of approximately 60 basis points of stock based compensation expense and non GAAP EPS of $1.05 to $1.23 Our non GAAP EPS guidance includes approximately $0.19 of stock based compensation expense, but excludes an estimated $9,000,000 or $0.29 per share of restructuring and other charges. Our guidance is being impacted by our strong late second quarter shipments, supply chain challenges associated with both semiconductor supplier scheduling changes and decommits 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 $100,000,000 As mentioned, we will incur an estimated $9,000,000 of restructuring and other charges. As part of this charge, $4,800,000 is related to personnel reductions, particularly operating expenses, which are expected to result in an annual savings of $9,500,000 The remaining $4,200,000 of other charges associated with the lease write down will result in a $1,500,000 annual savings. While it's regrettable to part with teammates and we thank them for the contributions these actions position Plexus to best realize future success.

Speaker 2

In order to capitalize on our significant pipeline of future growth opportunities, while delivering appropriate returns to our shareholders, we refocused our spending around creating a more efficient and scalable platform. While our Q3 guidance differs from our expectations 90 days ago, Plexus remains positioned to deliver robust revenue growth for fiscal 2023. Our outlook includes sequential revenue growth for our fiscal 4th quarter, barring any unforeseen macroeconomic weakness. We expect to benefit from new program ramps and increased demand across a 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.

Speaker 2

We are nearing the conclusion of our annual strategic planning process, and I'm excited that our 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 $5,000,000,000 revenue with 5.5 percent operating margin by our fiscal 2025. As we project beyond this goal, I have continued confidence in 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 that 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?

Speaker 3

Thank you, Todd. Good morning. I will start on Slide 6 with a review of the fiscal second quarter performance of our market sectors as well as our expectations for the sectors for the fiscal Q3 of 2023. Starting with the industrial sector, revenue declined 7% in the fiscal second quarter. The result was better than our expectations of an approximately 10% decline.

Speaker 3

Our supply chain team was able to improve deliveries of some constrained materials during the quarter. The operations team worked aggressively to convert the materials into finished goods, which partially offset softness in the semi cap sector. As we start the fiscal Q3, we are working closely with our semi cap customers on their mid and long term forecast. In the short term, demand in semi cap continues to be challenged. As a result, we are forecasting a mid single digit decline for the industrial sector for the fiscal Q3.

Speaker 3

As we anticipated, revenue in our Healthcare Life Sciences sector was flat for the fiscal Q2. What was not anticipated was the meaningful mix changes with new program ramps that occurred during the quarter. Although our operations team adjusted well to the volatility achieve a result in line with our expectations for the fiscal Q2, recent customer forecast fluctuations due to continued supply challenges and end market uncertainties are having an impact. We now anticipate a mid single digit decrease for our Healthcare Life Science sector for the fiscal Q3. Our Aerospace and Defense sector increased 8% in the fiscal second quarter.

Speaker 3

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 look to the fiscal Q3, Our team is successfully completing a multi year program. As a result, we expect this mid single digit dip in our revenue for aerospace and defense sector for the fiscal Q3. We expect new program ramps and continued strong demand in commercial aerospace to more than backfill the reduction in the fiscal Q4.

Speaker 3

Please advance to Slide 7 for an overview of our strong wins performance. We won 31 new manufacturing programs during the fiscal second quarter that we expect to generate $275,000,000 in annualized revenue when fully ramped into production. We are pleased that our conversion velocity of the manufacturing funnel In addition, we are anticipating good wins performance in the fiscal Q3. As a result, we expect the trajectory of our wins momentum, which is defined as the trailing 4 quarters of wins divided by the trailing 4 quarters of revenue to trend back towards our historically strong level in the fiscal Q3. Advancing to Slide 8, we can review a few sector and regional highlights of the manufacturing wins for the fiscal Q2.

Speaker 3

Our industrial team led the sectors with 15 new programs wins worth $142,000,000 when fully ramped into production. The Healthcare Life Sciences team won 7 new programs valued at $81,000,000 while the Aerospace and Defense team had a very quarter with 9 new program wins worth $52,000,000 The Americas wins were strong at $132,000,000 with approximately 2 thirds of the total coming from the industrial sector and 1 third from the aerospace and defense sector. The APAC region benefited from dollars 50,000,000 of wins from the Healthcare Life Sciences sector to finish at $71,000,000 Finally, the EMEA region had another impressive wins result of $72,000,000 Robust regional wins from the industrial and healthcare life sciences sectors pushed the EMEA region's trailing 4 quarters of wins to almost $300,000,000 At that level, the trailing 4 quarters of wins is approaching the trailing 4 quarters of revenue for EMEA, which sets the region up for exceptional growth and improved operating performance. Please advance to Slide 9 for highlights of the fiscal second quarter wins. I will start with 2 wins from our industrial sector.

Speaker 3

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 than they were receiving from their current provider. They selected our team in Guadalajara, Mexico as their new partner. The 2nd industrial sector win is a meaningful expansion with a current customer. Based upon our EMEA team's performance with this customer who develops chargers for vehicles, we were selected as our global manufacturing partner.

Speaker 3

Our Healthcare Life Sciences team expanded our market share with the customer who is focused on automation within the pharmaceutical market. The customer's positive experience with our Radia, Romania team gave them confidence we are the right partner to trust with this next generation platform. The Health Care Life Sciences team also expanded our relationship with a customer in the secular growth market of robotic assisted surgery. The platform that will be manufactured by our team in Kelso, Scotland use artificial intelligence to assist doctors with surgical procedures. Finally, our Aerospace and Defense sector won a new logo who provides high end surveillance solutions.

Speaker 3

This one represents the 1st Aerospace and Defense customer for our in Guadalajara, Mexico. As shown on Slide 10, our funnel of qualified manufacturing opportunities expanded to a record level in excess of $4,200,000,000 in the fiscal Q2. The increase of almost $600,000,000 from our fiscal Q1 was a result of all Looking at the potential new programs, the reasons for the additions to the funnel are diverse. Some are new programs, some are market share gain opportunities and a few are 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 Plexus.

Speaker 3

Next, I would like to turn to operating performance on Slide 11. During our fiscal second quarter, customer management operations teams successfully adjusted to the complexities of new program ramps and mix changes to meet our customers' needs. In addition, they capitalized 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 the call to Pat for an in-depth review of our financial performance for the fiscal Q2 as well as more insight into our expectations for the fiscal Q3.

Speaker 3

Pat?

Speaker 4

Thank you, Steve, and good morning, everyone. Our fiscal 2nd quarter results are summarized on Slide 12. Gross margin of 9.6 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 $46,000,000 was slightly unfavorable to guidance, primarily due to higher incentive compensation expense.

Speaker 4

However, as a percentage of revenue, SG and A was 4.3%, which was consistent with expectations. GAAP operating margin of 5.3 percent was also above the top end of our guidance due to the improved gross margin. This result included 55 basis points of stock based compensation expense. Non operating expenses were favorable to expectations as a result of greater than anticipated interest and miscellaneous income. GAAP diluted EPS of 1.45 exceeded our guidance for the factors previously mentioned.

Speaker 4

Turning to our cash flow and balance sheet on Slide 13. We are very pleased with our free cash flow performance this quarter. We delivered $106,000,000 in cash from operations and spent $26,000,000 on capital expenditures generating $80,000,000 in free cash flow. This result was close to double our net income and brings us to positive free cash flow through the 1st 6 months of fiscal 2023. During the quarter, we purchased Approximately 126,000 shares of our stock for $12,400,000 We have approximately $23,000,000 available under the current $50,000,000 authorization and expect to execute repurchases on a consistent basis over the remainder of fiscal 2023.

Speaker 4

Our quarter end balance sheet included cash of $270,000,000 sequentially higher by $22,000,000 due in part to our strong cash flow generation. Total balance sheet debt was $483,000,000 while net debt was $213,000,000 At the end of the quarter, we had $216,000,000 available to borrow under our credit facility. For the fiscal Q2, we delivered return on invested capital of 13.8%, which was 480 basis points above our weighted average cost of capital. Cash cycle at the end of the second quarter was 104 days, favorable to expectations and sequentially improved by 2 days. Please turn to Slide 14 for more details on our cash cycle.

Speaker 4

While gross inventory dollars were essentially flat compared to the fiscal Q1, inventory days increased by 5 due to lower revenue. Primarily offsetting the increase in inventory days was a 3 day increase in customer deposit days. With $532,000,000 in customer deposits, we now have almost 1 third of our gross inventory covered at the end of the quarter. Days and receivables sequentially improved by 5 days, primarily due to the timing of payments and increased activity under our receivables factoring program. As Todd Azare provide the revenue and EPS guidance for the fiscal Q3, I'll review some additional details, which are summarized on Slide 15.

Speaker 4

Fiscal 3rd quarter gross margin is expected to be in the range of 8.9% to 9.3%. At the midpoint, gross margin would be approximately 50 basis points lower than the fiscal Q2. While we plan to see a sequential reduction in our fixed costs, Lower near term revenue is expected to reduce fixed cost leverage, which in turn will impact our gross margin. We expect selling and administrative expenses in the range of $43,500,000 to $44,500,000 sequentially lower primarily due to reduced incentive and the partial quarter benefits from our restructuring initiatives. As a percentage of revenue, Spending will remain consistent with the fiscal 2nd quarter at 4.3%.

Speaker 4

Non operating expenses are expected to be in the range $10,000,000 to $10,500,000 sequentially higher primarily due to lower projected miscellaneous income. Partially offsetting the expense increase is an anticipated reduction in interest expense as our borrowing has reduced with greater free cash flow generation. Our non GAAP effective tax rate for both the fiscal Q3 and full year is expected to be in the range 14% to 16%. Our expectation for the balance sheet is that working capital investments will remain consistent with fiscal 2nd quarter. Based on our revenue forecast, we expect cash cycle days in the range of 106 to 110 days.

Speaker 4

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 Q3. This is before consideration of the $9,000,000 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 $110,000,000 to $130,000,000 which excludes any site additions. Last, we anticipate free cash flow to continue improving as we move through the year, targeting close to $50,000,000 for fiscal 2023.

Speaker 4

With that leeway, let's now open the call for questions.

Speaker 5

Hey, good morning and thanks for letting me ask the question guys.

Speaker 2

Good morning, David.

Speaker 5

Congrats on the solid performance in the quarter. Everything is moving in the right direction, the wins. It sounds like maybe things, as you mentioned, are, I guess, less optimistic than 90 days ago. Can you talk a little bit about the commit you mentioned and maybe just any update on the programs that were paused last Quarter, are those improving or the same or any changes there?

Speaker 2

Yes. So maybe I'll start with the programs and then pass it over to Sean, who will talk a bit more about the supply chain environment. As far as the program ramps we talked about last quarter, From a Plexus standpoint, our updates are complete and successful. There are still some challenges associated with them though that have to do With 3rd party supply and demand, so it is impacting near term demand for the programs. But long term, again, I'd highlight that those Programs continue to have strong demand, so we're very optimistic.

Speaker 2

It's unchanged for the long haul. The other thing I'd note too is we have A number of other large programs that are in the very early stages of ramp right now that we think can have an impact as we move into 24 in particular. And then David, on

Speaker 1

the supply chain, I'll give you a couple of data points to consider. If you think about our challenge with semiconductors, our average semiconductor lead time is still around 300 days. It was down maybe 20 days from 90 days ago, but you're still looking at 9 months on an average Wait time. On the lagging edge semiconductors, which we've spoken about on prior calls, we're still seeing Limited supply, particularly analog products and microcontrollers. You're seeing capacity added in the industry, but what we're seeing is that capacity coming online, particularly on the back end more slowly and we're seeing rescheduling and decommits from some key suppliers as a result.

Speaker 5

Great color. Thanks a lot. And it looks like your program wins moved up nicely sequentially just on a scale of each one dollar value. Can you talk maybe about how you're moving, I guess, the size of each program And that wind funneling, was this an anomaly or do you expect to continue to see larger programs as we move through the year?

Speaker 3

This is Steve. I'll take this one. 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 2 things.

Speaker 3

One is I think the past several quarters were a bit artificially low and compared to maybe 2 years ago. But we also see the size of the programs increasing as they're going into the funnel. So I think both of those phenomena were the recent past they were a little low And the opportunities going into the funnel are bigger is what's driving that gap or that difference.

Speaker 2

One metric that we don't Certainly report David, but we track internally as we look at opportunities that are over $20,000,000 in size And we're far and away at a record level in our funnel right now. So it bodes really well for our win performance as we look forward.

Speaker 5

Okay, great. And just one more quick one, if I may. Just on the semi cap equipment, you said it was maybe a little worse than previous. You talk about what you're seeing there? And do you feel like your previous kind of 10% decline is still a good place to be on the downside?

Speaker 2

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 customers' commentary to us and publicly that they believe we're near a bottom here, at a bottom. So We're expecting that, but we don't necessarily have any projections of any recovery in the semi cap market.

Speaker 5

Thank you.

Speaker 6

All

Operator

right. Thank you so much, Mr. Williams. And your next question comes from the line of Jim Ricchiuti of Needham and Company. Your line is now open.

Speaker 7

Hi, thank you. Good morning. I wanted to pursue the restructuring a bit. Yes. 1st, talk a little bit about how you see the benefits flowing in.

Speaker 7

But I guess I'm also curious if Was this anticipated with the scale up of the new capacity that you're scaling in Thailand? Or did you accelerate the restructuring just because of the overall macro environment than what you're seeing in parts of the business?

Speaker 2

Yes. So Jim, I'll start with some of the rationale behind it and then Pat can talk about the financial aspects of it. But certainly it's always unfortunate and disappointing when you part with team members. So we weren't Looking to do that. But as we look at the macro environment right now, and our operating expenses, They were expanding or set to expand beyond our growth rate, which we didn't like that situation and felt we needed to Address it.

Speaker 2

But on 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 of this really before it became an issue. So by going forward with this, it provides us platform for us to pivot In order to invest in these growth initiatives and increase efficiency, so we're looking at of course, we have our goal of $5,000,000,000 5.5 percent GAAP operating margin by fiscal 2025. We're also we believe that's well in sight and we're looking to What comes beyond that?

Speaker 2

Where do we need to invest to capture those future opportunities? And the one thing I'd add too, you mentioned Thailand, it really has nothing to do with

Speaker 4

Yes. And Jim, from a benefit standpoint, I mentioned guiding down SG and A for the fiscal Q3, about $1,000,000 of that relates to benefits we'll received from the restructuring activities. And then going forward, it's probably a $2,000,000 to $2,500,000 a quarter Benefit that we'll recognize.

Speaker 7

Got it. That's helpful. And if I think about The way you envision the fiscal year 3 months ago, it sounded like Your expectations around the Healthcare Life Science market have been tempered. And Wondering if what you're seeing in that market in terms of Yes, some of the macro headwinds perhaps playing more of a role. Do you see that continuing into Q4?

Speaker 7

Because you did have, I think, a pretty good schedule in terms of the way you were thinking about new product new program ramps In the Healthcare Life Sciences market.

Speaker 3

Yes, this is Steve. I mean, if you look at our wins performance and what we've been able to do with new And Healthcare and Science, we still feel very strong about the potential growth opportunities there. As Todd highlighted in his comment about 3rd party Supply challenges, one of the things we're seeing a bit as we start to clear the backlog of the 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 are now dealing with supply issues elsewhere.

Speaker 3

And so that's causing a few fluctuations for us In terms of what they need from us as they try to adjust to that new dynamic. And so we still feel optimistic about where that sector is. I think it's Just a matter of working through what their supply issues are and then people are starting to adjust inventory a bit. So we also hear a Few concerns about staffing at hospitals and clinics. And so I think our customers are just trying to figure out what the dynamic looks like now that we are able to start shipping More consistent supply to them.

Speaker 2

The one thing I'd add to is we still expect an excellent year for Healthcare Life Sciences in fiscal 2023 With growth on the order of 20% for the sector, give or take.

Speaker 7

Got it. Thanks very much. I'll jump back in the queue.

Operator

Thank you so much, Jim. And your next question comes from the line of Melissa Fairbanks of Raymond James and Associates, your line is now open.

Speaker 6

Hi, guys. Thanks very much. I appreciate the detail on supply. That's really helpful. You did note a benefit from sourcing actions and the ability to meet demand in the quarter.

Speaker 6

Is this still being driven by your own internal initiatives Or is that roughly 20 day reduction in lead times helping? And then on the $100,000,000 in unfulfilled backlog, is that still tied to component constraints? Is this impacting one business segment more than another?

Speaker 1

Good morning, Melissa. It's Sean here. I'll start and I'll Lend the mic to Steve to finish up here. So what we are seeing is 2 aspects. You're 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 role But also our team internally here, we got to give them a lot of credit.

Speaker 1

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 to really understand what are the true lead times product. So there's a lot of innovation going on by our supply chain team that's helping us out and helping us to capture some of these components. I wouldn't say In aggregate, as I said earlier to David's question, those lagging edge semiconductors that we require to meet this unfulfilled backlog are freeing up substantially. Some of the more commoditized components you're seeing, those free up a little bit more quickly.

Speaker 3

Yes, maybe just one small add, which is With those lagging edge semiconductors does affect all of the industry segments that we deal with, but it's obviously product specific in terms of what they use. So it does impact all sectors.

Speaker 2

And on the $100 plus 1,000,000 of unfulfilled backlog that is gated by supply. There's demand for that and it's still again comes back to the lagging edge semiconductors as being the gating items.

Speaker 6

Okay, great. Thanks guys.

Speaker 3

That's across all sectors.

Speaker 6

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?

Speaker 2

Yes, there's essentially a global impact to this. So it Depends on the various different regions. So, the operating expenses come out globally and then anything that has to do with the operations is just Happening as the typical way that they run the business and looking at capacity versus needs.

Speaker 6

Okay, great. Thanks very much. That's all for me.

Operator

Thank you, Melissa. And your next question comes from the line of Matt Chern of Stifel. Your line is now open.

Speaker 8

Yes, thank you. I wanted to drill down a little bit more on your margin guidance. That's a Big step down in both gross margin and operating margin. I know there's some mix issues. There's some negative leverage on the lower volumes, But it seems like a more detrimental margin than normal.

Speaker 8

So could you help us understand the components of that? And as we look to the September quarter, think you said you expect to grow revenue sequentially. Should margins get back to 5% plus or how should we think about that?

Speaker 4

Yes, Matt, this is Pat. Starting with Q3, so guiding down about 50 basis points at the midpoint, We actually do see our fixed costs reducing from Q2 down to Q3 modestly. And so we are seeing the fixed cost leverage really impact us to the tune of about 40 basis points. The other 10 basis points is really related to business customer mix. So a large portion of it is linked to our revenue.

Speaker 4

And as we look to the Q4, I do see our gross margins coming back to the mid-nine percent range. And with that coupled with probably a low 4% SG and A percentage, we can get north of 5% And probably closer to targeting our 5.5 as we exit fiscal 2023.

Speaker 8

Okay, great. Thanks for that. And then just a question, Steve, in your Commentary about new programs in that funnel, you did talk about some customers looking to outsource move from in house manufacturing

Speaker 1

to outsource

Speaker 8

and that's a trend that we've And that's a trend that we've seen, but we've seen that, I guess, slower because of supply chain issues, companies wanting to wait. So Are you starting to see a step up there for any particular reason?

Speaker 3

Yes, I think you're hitting on something there, Matt, which is as the global Supply chain starts to free up a little bit. Customers are starting to reevaluate their strategies where they were just on hold mode for several quarters. And so I do believe that's playing into the increased activity.

Speaker 8

And is that like reshoring or moving from China to other regions, any specific industries?

Speaker 3

It's across the industries. I'd say with Existing programs, we don't see a lot of movement of reshoring with existing programs. I think the cost to move some of these programs is prohibitive. It's definitely a conversation with new opportunities though. A customer that historically may have been in one region It's definitely looking at the impacts of the environment and other things that cost from logistics standpoint And really considering what they think the right strategy is going forward.

Speaker 3

So it's a big conversation on newer opportunities, a little bit less on existing ones.

Speaker 1

Matt, if I may add something. The comment was made earlier about executing well and meeting customer upside. And there's clear Representation of that in the funnel of how we're executing, it's being recognized by existing partners and potential partners as an opportunity for us to benefit from some share gains.

Speaker 7

Got it. Okay. Thanks a lot.

Operator

Thank you so much. And your next question comes from the line of Anja Soderstrom of Sidoti. Your line is now open. Hi, and thank you for taking my questions. Some of them have been addressed already.

Operator

But first, I'm curious, Pat, you mentioned when you noted the CapEx guidance for the year that I exclude Good. Any site additions, are you expecting any further site additions in the near term or?

Speaker 4

Yes. I mean, as we look at our long term growth prospects, I mean, we're going to have 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,

Speaker 2

which would position us for

Operator

future growth. All right. I'm sorry, what's that?

Speaker 4

No, that was it, Anya.

Operator

Okay. Thank you. Thank you, Anja. And our last question comes from the line of Paul Chung of JPMorgan. Your line is now open.

Speaker 9

Hi, thanks for taking my questions. So 3Qs start to hit 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 kind of the next 12 months after very strong previous 12 months? And then How do we think about key variables including pricing benefits you saw, FX, kind of better supply And then overall end market demand seems robust across healthcare and aero kind of offset by semi. So some of those variables would be

Speaker 2

Yes, maybe I'll start with a discussion around the comps, Paul. This is Todd, certainly when we look back to Q4 of F 'twenty two, we delivered a really strong revenue number, which makes for A bit of a difficult comp. 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 backlog, which is there that give us a platform To drive growth, I think the big question is what happens with the broader macroeconomic environment and how does that shake out? So we believe We're positioned for a solid 23. We also believe we're positioned for a solid 24.

Speaker 2

As it sits right now, I'd mentioned we just came out of our planning process and we see the opportunity for another good growth year in 2024. Now with the year over year Growth in Q4, would you see that? I mean that I think depends on the macro environment. But I think as we move into 2024, we'll Again, they begin to show growth. Okay, great.

Speaker 9

And then

Speaker 4

From a component pricing standpoint, I mean, a lot of that peaked last year and we're starting to see that coming down Throughout fiscal 2023.

Speaker 9

Okay, great. And then on cash flow, very strong and much better And previously guided, can you talk about the drivers for the kind of strong performance in the quarter? You saw some benefits from From 3Q pulling into 2Q on better supply and some factoring benefits and but you're seeing cash cycle days kind of up sequentially in 3Q, but how should we think about cash cycle base for 4Q? And I assume the approach $50,000,000 in free cash flow looks very achievable now. Thank you.

Speaker 4

Yes. Obviously, we were really pleased with the Q2 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.

Speaker 4

We were able to secure some additional deposits for aged inventory. So a number of initiatives Help drive the improvement in Q2. As we look to cash cycle days, yes, I'm guiding up 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 staying pretty flat compared to fiscal 2022.

Speaker 4

So going back to fiscal 2022, we were at 100 days. I think we can end around 100 days for fiscal 2023. And what's important to note is that's on a really strong Revenue growth year in 2023 and to be able to maintain working capital dollars at a similar level F 'twenty two, we're really pleased with what we've been able to do around inventory and receivables.

Speaker 9

Great. Thank you so much.

Speaker 3

Thank you

Operator

so much, Paul. And there are no further questions. I would now like to turn the conference back to Sean for closing

Speaker 2

Yes, this is Todd. I'll close-up for the call. First of all, thank you, Leeway. I'd like to thank our shareholders, investors, analysts, our Plexus team members that joined the call this morning. Before concluding, I'd like to leave everyone with a few thoughts that we highlighted on our call.

Speaker 2

First, I remain convinced in our ability to meet our long term growth and profitability targets of 9% to 12 Revenue growth CAGR and 5.5 percent operating margin. We have an exceptional team in industry leading capabilities that are clearly resonating with our customers and potential partners as evidenced by our robust funnel of manufacturing opportunities. 2nd, 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 is 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 Plexus' leadership and ESG as we work to build a better world. Thank you all and have a great day.

Operator

Thank you, presenters, and thank you, ladies and gentlemen, for joining us today. This concludes today's conference call. Thank you for participating, and you may now disconnect.

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Earnings Conference Call
Plexus Q2 2023
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