Plexus Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 12 speakers on the call.

Operator

And welcome to the Plexus Corp. Conference Call regarding its Fiscal Third Quarter 2023 Earnings Announcement. My name is Benny, and I will be your operator for today's call. At this time, all participants are in a listen only mode. After a brief discussion by management, we will open the conference call for questions.

Operator

The conference call is scheduled to last approximately an hour. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Sean Harrison, Plexus' Vice President of Communications and Investor Relations. Sean?

Speaker 1

Thanks, Benny. Good morning and thank you for joining us today. Some of the statements made and information provided during our call today will be forward looking statements, including without limitation, Those regarding revenue, gross margin, selling and administrative expense, operating margin, other income and expense, taxes, cash cycle, capital allocation and future business outlook. Forward 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 ks filing for the fiscal year ended October 1, 2022 is supplemented by our Form 10 Q filings and the Safe Harbor 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 top of that page. Joining me today are Todd Kelsey, Chief Executive Officer Steve Frisch, President and Chief Strategy Officer Pat Germain, Executive Vice President and Chief Financial Officer and Oliver Mihb, Executive Vice President and Chief Operating Officer. Consistent with prior earnings calls, Todd will provide summary comments before turning the call over to Steve and Pat for further details. Let me now turn the call over to Todd Kelsey. Todd?

Speaker 2

Thank you, Sean. Good morning, everyone. Please advance to Slide 3. I'm pleased with the performance of our global Plexus team in the fiscal Q3, including their ability to support future growth opportunities and deliver strong results while navigating a volatile demand and supply chain environment. Fiscal third quarter revenue of $1,020,000,000 Met guidance amidst a number of crosscurrents within the period.

Speaker 2

Markets were mixed with certain subsectors seeing demand strengthen, Some seeing demand seemingly bottom and others beginning to show near term weakness due to a variety of factors. Simultaneously, while we are seeing further modest improvement in component availability, certain lagging edge semiconductor lead times remain quite elevated and we undershipped demand by more than $100,000,000 once again this quarter. For the quarter, we delivered GAAP operating margin of 2.8% with GAAP EPS of $0.56 per share, including $0.14 per share of stock based compensation expense and $0.76 per share related to an arbitration decision and non recurring restructuring charges. Adjusted operating margin of 5.0 percent, which included 37 basis points of stock based compensation expense, met the high end of our guidance range. The team's ability to mitigate supply chain challenges along with improvements in manufacturing efficiency and better than anticipated performance from our engineering team contributed to the strong result.

Speaker 2

The fiscal Q3 represented our 5th consecutive quarter with operating margin exceeding 5%. Non GAAP EPS of $1.32 per share inclusive of $0.14 of stock based compensation expense exceeded guidance benefiting from the team's focus on operational excellence and lower than forecasted taxes. Our go to market team once again did an outstanding job in the fiscal Q3, winning 30 new manufacturing programs worth a record $321,000,000 when fully ramped into production. Several of the program wins represented competitive share takeaways. We have exceeded $300,000,000 in quarterly new program wins twice during the last 6 quarters, demonstrating the strength of our strategy and customer confidence in our value proposition.

Speaker 2

At the same time, we maintained a robust funnel of qualified manufacturing opportunities at $4,000,000,000 This funnel again includes a greater than typical number of large opportunities in each of our market sectors, which we believe continues to position us well to maintain strong manufacturing wins momentum. Finally, new engineering program wins and the funnel of qualified engineering opportunities expanded versus the prior quarter, both positive leading indicators of future manufacturing wins. Please advance to Slide 4. Late in our fiscal Q3, we released our inaugural sustainability report, which highlighted the responsible and sustainable business practices that have long been ingrained in our culture and are core to our vision to help create the products that build a better world. I encourage everyone joining today's call to review the report found on our sustainability webpage.

Speaker 2

A few of our team's fiscal 2022 accomplishments highlighted in the report include achieving an 11.9% energy intensity reduction Plexus manufacturing sites, launching a 3rd employee resource group, donating in excess of $1,000,000 globally through the Plexus Charitable Foundation, completing a 3rd party materiality assessment to understand stakeholder needs and enhancing our cyber incident response preparedness. We have many more efforts underway during fiscal 2023, including delivering more than 40 environmentally focused projects, adding 2 additional employee resource groups and enhancing our volunteer time off and charitable matching programs. During fiscal 2022, We also formally deployed our differentiated suite of sustainability oriented product lifecycle solutions, which is driving expanded customer engagement. A core component of these solutions is our life cycle assessment capabilities. Through a consultative partnership with our customers, We developed a strategic roadmap of emissions reduction opportunities and in some cases cost reduction opportunities throughout the lifecycle of a product, including the design, manufacture, use, servicing and end of life.

Speaker 2

We add substantial value to the process through our team's deep understanding of our customers' markets, supply chains and products. Further, our team's expertise in product development, product commercialization, supply chain solutions and sustaining services are unique in helping Plexus partner with our customers to act upon the opportunities identified through the lifecycle assessment, Ultimately creating products with improved sustainability. As we strive to build a better world, we realize the significant opportunity that exists to help our customers deliver more responsible sustainable products to the market. We have completed assessments with 5 customers to date and are actively pursuing or engaged in 20 additional opportunities across our product lifecycle solutions. Please advance to Slide 5.

Speaker 2

We are guiding fiscal 4th quarter revenue of $1,000,000,000 to $1,040,000,000 GAAP operating margin of 4.7% to 5.2%, inclusive of approximately 53 basis points of stock based compensation expense And GAAP EPS of $1.18 to $1.36 Our GAAP EPS guidance includes approximately $0.19 of stock based compensation I'm proud that given this guidance, we expect to finish fiscal 2023 With revenue growth exceeding 10% for the 2nd consecutive year and adjusted operating margin exceeding 5%, a meaningful increase from fiscal 2022. Within the fiscal Q4, we expect to continue to benefit from increasingly robust commercial aerospace demand and ongoing new program ramps. These positives are being offset by incremental weakness in semiconductor capital equipment, a market which seems to be finding a bottom, Modest softening in some of our industrial markets and ongoing supply chain challenges including those of our customers. The flatter demand dynamic is negatively affecting cost absorption at some of our sites. Finally, I'd like to provide a look into early fiscal 2024.

Speaker 2

We see the current demand and supply chain dynamics holding steady as we enter fiscal 2024. We expect to follow this with accelerating revenue and profitability growth as a result of stabilizing demand in certain markets, Increasing new program ramp momentum and lessening supply chain challenges. The latter includes continued technology enhancements our team is bringing to supply chain management and further gradual improvements in lagging edge semiconductor availability, creating the opportunity to reduce The ongoing unfulfilled backlog of customer demand. As a result, we remain confident in achieving our goal of $5,000,000,000 in revenue with 5.5 percent GAAP operating margin by our fiscal 2025. I also have continued confidence that Plexus is well positioned to deliver industry leading revenue growth and profitability over the long term.

Speaker 2

Our best in class capabilities, Focus on operational excellence and unique solutions to address the lifecycle of our customers' products are resonating loudly, as evidenced by our program wins momentum, competitive share gains and ongoing robust funnel of opportunities. I'll 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 Q3 performance of our market sectors as well as our expectations for the sectors for the fiscal Q4 of 2023. Starting with the industrial sector, revenue declined 3% in the fiscal Q3. The result was better than our expectation of a mid single digit decline.

Speaker 3

Improvements in supply chain, especially for our test and measurement subsector contributed to the stronger result. As we start this quarter, we are experiencing short term forecast lateness with some test and measurement and communication customers, leading to a forecast for a mid single digit decline for the industrial sector for the fiscal Q4. Even with the slight decline this quarter, Ongoing program ramps will mitigate the double digit decline we are seeing in our Summit Cat business to keep the industrial sector flat for fiscal 2023. As we anticipated, revenue in our Healthcare Life Sciences sector was down 7% for the fiscal Q3. Continued supply chain challenges and modest end market softness were the main reasons for the decline.

Speaker 3

In the near term, the forecast fluctuations are relatively balanced. The net result is that we anticipate our Healthcare Life Sciences sector to be flat for the fiscal Q4. For the full year of fiscal 2023, Healthcare Life Sciences sector is on track for an increase in the range of 20%. Our Aerospace and Defense sector decreased 1% in the fiscal third quarter. The result beat our expectations of a mid single digit decrease.

Speaker 3

Our supply chain team's ability to improve deliveries with constrained components drove the stronger result. As we look to the fiscal Q4, commercial aerospace demand remains robust and the actions that our teams have taken to improve material flow are creating positive impacts. As a result, we expect meaningful expansion of shipments with our top 6 aerospace and defense customers. The combined growth should yield an approximately 10% increase for Aerospace and Defense Sector for the fiscal Q4. The strong finish to the year would put the fiscal 2023 growth for our Aerospace and Defense Sector in the high teens.

Speaker 3

Please advance to Slide 7 for an overview of the exceptional wins performance of our market sector teams. We won 30 new manufacturing programs during the fiscal Q3 that we expect to generate a record $321,000,000 in annualized revenue when ramped into production. Our wins benefited from an increase in strategic sourcing decisions by our customers. We were pleased to be selected by several customers as their partner of choice as they made decisions to either outsource their internal manufacturing or to consolidate their supply base. As a result of the strong wins, the trajectory of our wins momentum, which is defined as the trailing 4 quarter of wins divided by the trailing 4 quarters of revenue is trending back towards its historically strong level.

Speaker 3

Please advance to Slide 8. We can review a few sector and regional highlights of the manufacturing wins for the fiscal Q3. Our industrial team led the sectors with 18 new program wins worth $193,000,000 when fully ramped into production. The Healthcare Life Sciences team won 7 new programs valued at $90,000,000 while the Aerospace and Defense team had a very good quarter with 5 new program wins worth 38,000,000 The Americas wins were exceptional at almost $200,000,000 Our facility in Guadalajara were recipients of several of the strategic sourcing decisions As we anticipate $160,000,000 of these America wins to be fulfilled by our team in Mexico. The APAC region benefited from strong wins from the industrial team as most of the $58,000,000 of regional wins came from this sector.

Speaker 3

Finally, the EMEA region had another impressive wins result of $64,000,000 With the region's trailing 4 quarter wins now surpassing $300,000,000 We have high expectations for meaningful growth in fiscal 2024. Please advance to Slide 9 for highlights of the fiscal Q3 wins. I will start with 3 wins from our industrial sector. All three are examples of existing customers who are rewarding our teams for delivering customer service excellence and operational excellence on current programs. The first one is from a long term communications customer.

Speaker 3

They have decided to consolidate a meaningful portion of their products from their internal manufacturing into our Guadalajara, Mexico facilities. We will start ramping some of these programs this quarter. The second example is from a semi cap customer who recognized our team's performance in Penang, Malaysia by expanding our relationship to include high level sub assembly production. The 3rd example is very similar. A customer focused on electrical vehicle rapid charging That we produced printed circuit board assemblies for in Aradia, Romania has awarded us the production of the finished product.

Speaker 3

The Healthcare Life Sciences team won a meaningful portfolio of programs from a new logo who produces defibrillators. A new customer selected our Guadalajara, Mexico location in which to consolidate their production. We will start ramping some of these programs this quarter. Finally, our Aerospace and Defense sector grew our market share with an existing Aerospace customer. Given our performance with our current programs, They have decided to transfer to Plexus a meaningful portion of the business from one of our competitors.

Speaker 3

We expect to start the qualification process for these new assemblies in our Neenah, Wisconsin manufacturing In early fiscal 2024. As shown on Slide 10, our funnel of qualified manufacturing opportunities Finished at a robust $4,000,000,000 in the fiscal Q3. Further evidence that our customers are considering larger more strategic sourcing decisions is supported by the new opportunities That were added to the funnel in the fiscal Q3. The new potential programs include the outsourcing of internal manufacturing as well as Supply based consolidation efforts. We are confident that our focus on customer service excellence and operational excellence Have us well positioned to be our customers' partner of choice.

Speaker 3

A strong funnel and satisfied customers are key ingredients for maintaining robust wins performance. Next, I'd like to turn to operating performance on Slide 11. During our fiscal Q3, our supply chain team and operations teams Once again demonstrated their commitment to finding solutions by adjusting to changes in customer forecast. They also drove supply of constrained materials and converted those materials into finished goods In addition, our engineering team outperformed expectations. The extra effort by the entire organization non GAAP operating margin performance of 5%, a result that was at the high end of our expectations and represents the 5th quarter in a row of operating margins above 5%.

Speaker 3

I will now turn the call to Pat for an end up review of our financial performance. Pat?

Speaker 4

Thank you, Steve, and good morning, everyone. Our fiscal Q3 results are summarized on Slide 12. While revenue came in at our midpoint, gross margin of 9.2% was towards the top end of our guidance. Better performance from our higher value added services along with improved contribution margin in our APAC and EMEA regions drove the healthier than expected gross margin. Selling and administrative expense of $42,300,000 was favorable to guidance primarily due to lower stock based compensation expense.

Speaker 4

As a percentage of revenue, SG and A was 4.1%, which was favorable to expectations and sequentially lower by 20 basis points. Non GAAP operating margin of 5%, which excludes 220 basis points of restructuring and other charges was at the high end of our guidance due to the improved gross margin and lower SG and A expense. This result also included 37 basis points of stock based compensation expense. Non operating expenses were slightly unfavorable to expectations as a result of greater than anticipated foreign exchange losses. Non GAAP diluted EPS of $1.32 which excludes $0.76 of restructuring and other charges exceeded our guidance due to the factors previously mentioned.

Speaker 4

Also contributing to the EPS improvement was lower than expected tax expense due to discrete tax items recorded during the quarter. Turning to our cash flow and balance sheet on Slide 13. Relative to our initial expectations, we were pleased with our free cash flow performance this quarter. We delivered $18,800,000 in cash from operations And spent $30,300,000 on capital expenditures, resulting in fiscal 3rd quarter cash outflow of $11,500,000 This result included $20,300,000 in payments related to one time non recurring charges. During the quarter, we purchased approximately 150,000 shares of our stock for $13,500,000 We have approximately $9,000,000 remaining under the current authorization and expect to purchase this amount during our fiscal Q4.

Speaker 4

Next month, we'll be reviewing with our Board of Directors our plans for a new program once the current authorization is completed. We believe Plexus is well positioned with a strong balance sheet. At quarter end, cash totaled $254,000,000 while total debt was $492,000,000 We also had over $200,000,000 available to borrow under our credit Facility and a conservative gross debt to EBITDA ratio of 1.8 times. For the fiscal Q3, we delivered return on invested capital of 15.5 percent, which was 4.50 basis points above our weighted average cost of capital. Cash cycle at the end of the 3rd quarter was 111 days, slightly above expectations and sequentially higher by 7 days.

Speaker 4

Please turn to Slide 14 for details on our cash cycle. We were encouraged to see our supply chain and regional teams drive Sequential reduction in gross inventory dollars. Despite the dollar improvement, inventory days sequentially increased by 5, primarily due to lower revenue. More than offsetting the increase in inventory days was a 7 day increase in customer deposit days. With over $580,000,000 in customer deposits, we now have over 35% of our gross inventory covered at the end of the quarter.

Speaker 4

Days in receivables sequentially increased by 7 days, primarily due to reduced activity under our receivables factoring program and changes in customer payment terms. As Todd has already provided the revenue and EPS guidance For the fiscal Q4, I'll review some additional details, which are summarized on Slide 15. Fiscal 4th quarter gross margin is expected to be in the range of 8.9% to 9.3%. At the midpoint, gross margin would be slightly lower than the fiscal 3rd quarter. While our Bangkok facility is still impacting margins, we are seeing a steady improvement in earnings as we ramp new business in the site and expect continued improvement as we move to positive returns in fiscal 2024.

Speaker 4

We expect selling and administrative expenses in the range of $42,000,000 to $43,000,000 essentially flat with the fiscal Q3. Non operating expenses are anticipated to be in the range of $9,000,000 to $9,500,000 sequentially improved due to certain insurance benefits and the expected reduction in foreign exchange losses. Our effective tax rate for the fiscal 4th quarter is expected to be in the range of 13% to Our expectation for the balance sheet is that working capital investments will modestly improve compared to the fiscal Q3. Based on our revenue forecast, we expect this level of working capital will result in cash cycle days in the range of 106 to 110 days, a sequential improvement of 3 days at the midpoint. We anticipate the improved cash cycle will generate free cash Well, in the range of $10,000,000 to $30,000,000 for the fiscal Q4, delivering positive free cash flow for fiscal 2023.

Speaker 4

Last, we expect capital spending for the fiscal year to be in the range of $115,000,000 to $125,000,000 slightly lower than previous guidance. With that, Benny, let's now open the call for questions.

Operator

Please standby while we compile the Q and A roster. Our first question comes from the line of David Williams of The Benchmark Company. Your line is now open.

Speaker 5

Hey, good afternoon or good morning and thanks for letting me jump on with the question.

Speaker 2

Good morning, David.

Speaker 5

Good morning. Yes, I guess first, on the funnel, understanding there's lots of puts and takes there, but it looks like this is the first time over the last maybe 7 quarters that We've seen that kind of come down, but it was up pretty big last quarter. Is this really just a function of some of that being pulled through or anything else that we should be thinking about in terms of the funnel?

Speaker 2

I think David, you can certainly look at the program wins and say that there was It had an impact on the funnel, but I'd still say at $4,000,000,000 it's the 2nd largest funnel we've ever had in the history of the company. So We're feeling really good and view it as very much a robust funnel.

Speaker 3

Yes. If you look at the beginning of fiscal 2023, we came in at like a $3,400,000,000 funnel Starting the year, so the prospect of finishing the year at something in the $4,000,000,000 range to Todd's comment makes us feel pretty good about where we're at.

Speaker 2

One of the things I'd add to is what we report to you is our qualified funnel. We also have an early stage And that's actually at a record level right now. We're not going to say what that is, but there's quite a bit that's percolating in the background as well.

Speaker 5

Okay, Great. Thanks for the color there. And then maybe just on the incremental weakness that you talked about in the semi cap equipment. I think you previously mentioned Some of your customers were requesting more inventory held, maybe for some upside demand that comes in. Are you seeing a strength change Strategy or just maybe any color around the semi cap equipment weakness that you're seeing?

Speaker 3

Yes. As we talked about throughout the year here, we've definitely seen it come down. I mean in Todd's comment, we see some signs of it being bouncing around the bottom. So from our perspective, we are managing the inventories tightly with our customers. They all basically are talking about When it comes back, they want to make sure they have the right inventory levels and mix of products available and ready.

Speaker 3

So we are working with them to optimize that. A little early to predict exactly when the strengthening will happen, but I think the focus now is people talking about when it returns versus managing the downside, they're talking about more being ready for the upside.

Speaker 2

A little bit of additional color that I'd add on semi cap as well, David, We're really excited about when semi cap recovers. And if you look at our past history from 2015 to 2022, we had a 30 CAGR within semi cap. During this downturn period, we've outperformed the market through share gains And we're really excited that when the market does recover, we think we're going to have some substantial growth within that semi cap subsector.

Speaker 5

Great. Thanks for that color. And just one more if I might here. You've just been upbeat about the healthcare opportunity and That's been trending very nicely. It was a bit lower I think this quarter than we had anticipated.

Speaker 5

Anything noteworthy here that or any updates maybe on the pause and Ram

Speaker 3

I wouldn't read too much into it. I think we did talk about 1 customer in a Program ramps, a couple of program ramps that were a little bit slower than what we anticipated. Part of that was driven by the customers end market supply chains. In other words, there's Disposables or single use devices that they need for the product that they were having difficulty getting. So that's definitely muted a little bit of our growth.

Speaker 5

But I

Speaker 3

wouldn't read too much into it. A little bit of volatility in a I'd say as people adjust their inventories and people are predicting what they need as we go into fiscal 20 But again, we're very optimistic yet in terms of where Healthcare Life Sciences are for us.

Speaker 5

Thanks. Appreciate the color and congrats on the progress.

Speaker 4

Thanks.

Operator

Thank you. One moment please for the next question. The next question comes from the line of Melissa Fairbanks of Raymond James and Associates. Your line is now open.

Speaker 6

Hey, guys. Thanks very much. Good morning. Just kind of digging in a little bit more on the industrial, It would be helpful if you could give us a little more detail where you're seeing the weakness outside of semi cap? And is it safe to assume that these are just push outs or delays by your customers?

Speaker 6

And then maybe if you could give us an updated revenue split between semi cap and the rest of industrial?

Speaker 2

Yes. So, Melissa, The 2 subsectors that we're seeing the softness on within industrial space is test and measurement as well as communications. I think certainly in the latter, what we're seeing is a technology switch over there. So we view that more as a pause. Test and measurement is slightly softer Right now, but we do view that as recovering later.

Speaker 2

As we look at semi cap, it's About a little over a third, maybe 40% of our industrial sector. So it puts us kind of in The higher teens or mid to upper teens range from overall Plexus revenue.

Speaker 6

Okay, great. Thanks. And then just on inventory, that's one of my favorite topics. It's interesting to see the days of inventory covered by customer deposits increased again. I was wondering if you could give us an update what you're seeing in component hotspots, if it's still the same usual suspects, Pricing of some of those components and if we can expect to see overall inventories continue to decline?

Speaker 7

Yes, Melissa, this is Oliver. Good morning. I'll hit that. From an overall supply chain perspective, I'd really break it down to Three lines, three stories. First is broadly across our commodity base, we are seeing normalization of lead times.

Speaker 7

Pricing tends to follow that. We see some suppliers trying to build inventory. And so just in general, the trend there continues to make incremental progress. In terms of our challenge spots, We still see constraints in both custom engineered components and electrical mechanical commodities. And then As Todd earlier mentioned, within lagging edge semiconductors, you get into the lower volume specialized components really just from a handful of key suppliers.

Speaker 7

We're still seeing quite completed lead times, unexpected decommission essentially 0 inventory on the other market to enable pull in recovery. So that's one of the areas that We are working on and we are working with the suppliers to improve that dynamic. And then the 3rd piece I'd talk to and this is also alluded to a little bit earlier It is when our customers sometimes have supply chain challenges. And in certain instances, we actually will engage with them to help them solve that as a partner. And I can think of one specific example of that's going on right now.

Speaker 4

And then, Melissa, from an inventory dollars Where we think we can get to, for Q4, I was guiding cash cycle at the midpoint of $108,000,000 which would be a 3 day reduction from Q3, a lot of that's related to inventory. Now there is some return of deposits that we're anticipating in the 4th quarter, But we do expect dollars to reduce in the fiscal Q4. And then going into fiscal 2024, I think there is a lot of opportunity based on some of the comments Oliver made to see further reductions in both dollars and inventory days.

Speaker 7

Yes, maybe just to build

Speaker 2

on that. We do continue

Speaker 7

to make investments in both tools and processes relative to how our materials operations performs. And one piece of innovation that we've now deployed across all of our AMER manufacturing sites is building machine learning and predictive analytics Our planning algorithms and so this is going to switch back to your question. This essentially enables us to optimize material positioning, so think working capital relative to our customer demand And it creates a more feasible production plan for our customers. Really if you take a step back that predictive analytics creates for us a more accurate feed or Capture of true supply and availability. So as I open with, we now have that in place across all of our AMER manufacturing plates and are now deploying that globally.

Speaker 6

That's fantastic. Thanks for all the detail. Very, very helpful. I'll get back in the queue. Thank you.

Speaker 2

Thanks.

Operator

Thank you. One moment please for the next question. The next question comes from the line of Steven Fox of Fox Advisors LLC. Your line is now open.

Speaker 8

Hey, good morning guys. I had two questions if I could. First of all, if I'm understanding what you said about beyond this Quarter for the early part of next fiscal year, it sounds like it's going to start off kind of flattish with September quarter levels. And I would assume that usually you would have seen a little bit more growth into the end of the year. Am I reading those Comments right and if you could just sort of maybe put a little more color around what you're seeing generally after this quarter?

Speaker 2

Yes. I think your interpretation there is accurate, Steve. And what I'd say is, when we look at Q1, we view it as It looks pretty similar to Q4 right now. I think as we get into Q2, we could begin to see some growth now. But remember again that that's that quarter is typically A big challenge from a margin standpoint as we have seasonal cost increases and then we see some strong acceleration as we get into the second Half of the fiscal year as we see a bit more stabilization in markets, we make continued progress on new program ramps.

Speaker 2

We have a couple of very large ones that are in Right now, a couple of them that Steve alluded to, and then the supply chain continues to see incremental improvement. So we'd expect that to continue over the second half of the year.

Speaker 8

And the reason Q1 is flat with Q4 is basically end markets, I guess? Or is there any kind of churn within your business?

Speaker 2

It's basically the demand dynamics that we referenced in the call. So the continued softness in semiconductor capital equipment, The near term softness in the industrial markets and then continuing to work through the supply chain. So those are The nearer term dynamics that are offsetting some of the positives that we have within the markets. Now if we saw the supply chain Improve more rapidly than we expect or semi cap effect gets a more rapid recovery as maybe some are starting to suggest it could, we would See upside from what we're projecting here.

Speaker 8

Got it. And then just as a follow-up, you mentioned some competitive takeaways In the new win category, I was wondering, I'm assuming it's across different types of products, but is there any sort of common thread to why maybe you're taking Business from competitors more recently.

Speaker 3

Yes, this is Steve. I guess I'm not surprised by what our customers are doing. As you came through COVID and you have supply challenges, everybody was focused on deliveries, Just trying to get product. And now that those are starting to soften and basically people are getting a little bit less worried about can I get my product? Now they're starting to focus on who is the best provider of it.

Speaker 3

So we kind of saw this building through the tail end of COVID here And as the funnel of opportunity started to increase, we were having more strategic conversations with our customers about what their long term supply plan is going to be post COVID. And I'm really proud of our team's ability both from a supply chain and operations standpoint, how they're able to deliver through COVID. And I think we're getting rewarded for So, I do expect the next couple of quarters to continue to see these kind of opportunities come into the funnel and be part of the wins.

Speaker 2

The one thing I'd add to Steve's comment there is it's broad based across our market sectors. We saw takeaways in each of our market sectors.

Speaker 8

Great. That's very helpful. Thank you very much.

Operator

Thank you. One moment please for the next question. The next question comes from the line of Matt Sheerin from Stifel. Your line is now open.

Speaker 9

Yes, thanks. Good morning. I wanted to follow-up on Steve's question regarding your outlook For the December quarter and beyond and how that plays into your $5,000,000,000 target for fiscal 'twenty five because it looks like Based on what you said, for Q1 and Q2, you're going to be flat to down year on year. It looks like you're going to have to grow at least mid to high single digits in order to unless 25% is a double digit growth year. So Trying to figure out how we bridge to that $5,000,000,000 number given that you're going to be

Speaker 7

flat to down in the

Speaker 9

first half of fiscal twenty twenty four.

Speaker 2

Yes. So what I'd say Matt is when we look at overall fiscal 2024, the 9% to 12% goal that we have will be difficult. We expect growth in it and reasonable growth, but to get to that range might be a bit challenged. But You should see the revenue accelerate to levels that make the $5,000,000,000 achievable as we're into 2025. So that's the way we look at it.

Speaker 9

Okay. Okay. Thank you. And then just

Speaker 5

back to the yes, go ahead.

Speaker 2

Yes, again, Matt, it's based off of the programs that are ramping and already won.

Speaker 9

Okay. And is that skewed more toward the defense and healthcare spaces?

Speaker 2

No, across all three sectors.

Speaker 9

Okay. And then on the supply issues, you talked about that 100,000,000 Caller number where you were unable to ship. Is that sort of the number that we're looking at for the next couple Quarters are will you work that down, that backlog, as Oliver talked about some of the supply constraints easing?

Speaker 2

Yes, it's coming down and it's come down from what it was 3 or 4 quarters ago and we would expect to see continue to see it reduce As we move through fiscal 2024 in particular.

Speaker 9

Okay. Okay. Thank you.

Operator

The next question comes from the line of Anja Soderstrom of Sidoti. Your line is now open.

Speaker 10

Hi, and thank you for taking my question. So I'm just curious for Commercial Aerospace, it seems like that's picking up for you again after being a bit challenged. How much of that strength is due to backlog work through versus new growth?

Speaker 3

Yes, this is Stephen. I'll start here. The demand from the commercial aerospace customers has been quite strong for a period of time here. The challenge was is coming through COVID, the pipelining of materials wasn't as sophisticated as some of the other sectors. And A few quarters ago, we talked about the fact that we were really working with our customers hard to come up with a better plan for forecasting and getting a pipeline of materials slowing.

Speaker 3

The teams have been able to do that. And so what you're seeing here is our ability to basically continue to meet kind of our backlog of demand. With that said, our team just returned from the Paris Air Show. And if you read through some of the press orders being up and demand being up, it looks like in addition to The backlog that we have, it looks like going forward, there could also be additional strengthening in demand. So feeling pretty optimistic about where commercial airspace is going to be for us in 2024.

Speaker 10

Okay. Thank you. And also you seem pretty confident in your $5,000,000,000 target. What's the biggest risk to reaching that?

Speaker 2

I'd say the biggest risk would be the macro environment and if things go south from a macro standpoint

Operator

All right, one moment please for our next question. Okay, Actually, it's the last question. Last question comes from Chris Grenga of Needham and Company. Your line is now open.

Speaker 11

Hi, good morning. The EMEA region has been demonstrating strength in particular in wins. I was just wondering if you could expand on What you're seeing there, what's been contributing to that strength?

Speaker 9

I think

Speaker 3

it's a market that we've continued to invest in over the years. I would say A few years ago, we kind of got to critical mass in our manufacturing facilities as well as investing in the team. And they're just having really good success with the value proposition. So our value proposition is well based both everything from the engineering standpoint with our design centers there All the way through manufacturing and we added services there about 18 months ago. And so from that standpoint, it's a great value proposition.

Speaker 3

We do believe and we are seeing suppliers or customers, I should say, in that market that are looking to bring things back from Asia To Europe, a little bit more regionalization and localization. We're benefiting from that. So I think a combination of those couple of things is again, it's Going really well as you see the wins number is exceeding really kind of our annual revenue number. So our expectation for growth for that region are Quite large as we look to 2024.

Speaker 11

Great. And with the new program wins with those 30 wins, How many or to what extent did those wins begin as engineering wins? And I guess what I'm trying to get to is How is the engineering as you ramp up the number of engineering wins, how is that being Flow through into the new program wins.

Speaker 10

Yes. I don't know that we have

Speaker 2

a breakdown for this quarter. I mean, typically, On the order of about a third of our manufacturing wins tend to be heavily engineering centric previously.

Speaker 3

Yes, just going to the date here again, Todd, so we don't have the numbers here in front of us. The wins this quarter were dominated a bit by the strategic sourcing decisions, where it's more of a consolidation of supply base or Competitive takeaways. So there's probably a few left this quarter that were driven by engineering. But again, I don't have that data in front of me either.

Speaker 11

Thank you.

Speaker 3

You're welcome.

Operator

Thank you. At this point, I would now like to turn the conference back to our CEO, Mr. Todd Kelsey for closing remarks.

Speaker 2

All right. Thank you, Benny. I'd like to thank everybody, the shareholders, investors, analysts and our Plexus team members who joined us today on the call. As always, we appreciate your interest in Plexus and wish you all a very great day.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now

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Earnings Conference Call
Plexus Q3 2023
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