All right, welcome back after lunch. I'm Melissa Fairbanks. I'm analog semiconductors and IT supply chain analyst here at Raymond James. We are happy to have the team from Plexus with us here today. So we've got CEO Todd Kelsey, CFO Pat Jermain, and Shawn Harrison, VP of Communications and IR. So I don't know if you have some introductory remarks, just a quick intro if you want to jump right into the Q&A.
Yeah, sure. So what I could do, Melissa-
Mm
is just provide a brief overview on Plexus.
Perfect
... for those people that are new to Plexus. So, first of all, thanks, Melissa, for having us today, and thank you everybody for being here. It's great to see the big crowd here. Wasn't quite so sure after lunch. So Plexus, we're a company of about $4.2 billion in annual revenue. We're headquartered in Neenah, Wisconsin. We have 19 global Manufacturing and Sustaining Services locations and six product development design centers globally. So that's basically us from a more of a footprint standpoint. When I think about Plexus, our team is united by our vision, which is to help create the products that build a better world.
This aligns well with our mission, which we view as our competitive differentiation within our space, which is to be the leader in highly complex products demanding regulatory environments. When you think about those two statements, they line up well to the sectors that we serve. Those sectors would be Aerospace / Defense, Healthcare / Life Sciences, and Industrial, which includes Semiconductor Capital Equipment. When you think about Plexus, we do life-sustaining healthcare devices, typically finished devices for clinical or hospital settings. We're also engaged in industrial automation and control systems, Semiconductor Capital Equipment, and electronics for mission-critical aerospace programs.
Okay, perfect. I think it gives you a pretty unique landscape or competitive advantage compared to some of like, maybe some of the broader EMS guys that you have relatively narrow focus but at the very high end of each of those markets. So I do want to talk mostly about, you know, longer-term trends, longer-term expectations.
Right.
But I think it would be really helpful to maybe do a quick review of December quarter, what you're seeing in March quarter, end market trends. You know, we've seen kind of this rolling correction going on.
It's good for you to be back here.
So, Pat will start-
Yeah.
And then I'll jump into some end market discussion.
Yeah, I can start with the numbers. Q1 revenue came in just below our guidance range at $983 million. We had late quarter weakness in Healthcare/ L ife Sciences, broadband communication, that's part of our Industrial sector. Due to some loss in leverage, operating margin came in at 4.6%, EPS $1.04. As we look to Q2, we believe that's a revenue trough. Our guidance is $930 million-$970 million, reflects a full quarter of softness in those areas I mentioned before. Non-GAAP operating margin of 4%-4.4% and non-GAAP EPS of $0.80-$0.95.
On a GAAP basis, we do expect to take some charges in the fiscal second quarter, which will drive about $20 million of annualized savings, as we start the third quarter and going forward.
Yeah, so I'll jump in a bit to end markets. So when we think about our various end markets in our sectors, that they've been going through post-pandemic and with, call it the fiscal stimulus and other things that are occurring in the broader macro environment, I would say a rolling recession at different points. So if we think about Aerospace / Defense, that was the first to go right after the pandemic, when aerospace travel dropped really fast. We're in a period of very high demand, though, right now within that market sector. So we finished our fiscal 2023 with 17% growth within our Aerospace / Defense market sector, and we expect to exceed that in fiscal 2024. So very strong demand.
There's a significant amount of unfulfilled backlog that we have as well too, as we're driving additional components in to be able to fulfill that demand. So significant amount of upside in there. The market's very strong. When we think about the next market, that dip would be our semi-cap space within Industrial. So roughly 18 months ago or so, we saw semi-cap start to come down. That troughed about two to three quarters ago, and we're seeing somewhat of a, I'd call it a modest uptick at this point in the market. Still not strong, but modest. And I think we're really well positioned for substantial growth in that market as it turns, because from fiscal 2015 to fiscal 2022, we had a 30% annual revenue CAGR within that space.
When you think about our 2023, we were down just over 10% on a market that was down 20%-25%. We've continued to gain share, and we're basically front end to back end and a good balance between logic and memory. So as that market starts to turn, we think we're well positioned for some exceptional growth within the semi-cap space. Within Industrial, the one spot that's been weak for us right now, and I would say is in one of those troughs, is our Communications business. It's not a substantial chunk of our revenue. It's a little over 10% of our Industrial space, but it's been quite weak, and, and we're... Our space where we play is in the cable infrastructure market. So think of the DOCSIS transition, that's where we play.
So we expect at some point that to recover again when those end customers start to purchase, but a bit weak right now. And the other one that's been down for us is Healthcare. Well, first of all, back to Industrial. So the remainder of Industrial has been relatively stable with some puts and takes. We're getting some nice growth out of new program ramps within green energy and electric vehicle electrification, fast charging, so seeing some nice growth, and we'll get a growth year out of our Industrial sector this fiscal year. But the sector that's down for us in a pretty significant way is Healthcare / Life Sciences sector right now. We're expecting to be down in the double digits.
Now, that's after two years of straight growth in the high teens and a long-term growth CAGR that's in the low teens within that space. But what we're seeing is an inventory correction amongst the OEMs there. So, while their demand may be modestly up this year, it's a bit of an over-inventory situation kind of across the board, as projections were a bit high, as volumes ramped up post-pandemic when we started to see return to elective procedures and such. We're also facing a bit of a headwind from components that were purchased above market value or market price in the preceding two years, so that's about a 500 basis point headwind to growth. So, we're seeing a little bit of a challenged market at the moment.
We believe it's getting around the bottom right now, and it but we're well positioned for strong growth, again, back into those teens and above range as we move through this, 'cause we continue to win an enormous amount of work in the space, and we continue to take share within that market sector.
Thanks. That was a really great overview. You touched on this just a little bit, but supply chain constraints have been an issue for you, like for everyone over the past few years. It's been interesting that even as some of your end markets are starting to see this inventory correction, you're still under shipping demand in some of the end markets. So are you starting to see any sort of easing in supply, maybe getting closer to that point where you're going to be able to ship?
Yeah, so, I'll answer that, Melissa. I think yes and no. So within our commercial Aerospace business, you know, a lot of this is tied to, you know, products maybe designed 10 or 15 years ago, lagging edge semiconductors, where, you know, we're still struggling to get those components to meet the upside in demand that we're seeing, and that doesn't look like it'll abate at least this fiscal year, maybe into the end of the calendar year. You know, our average semiconductor lead time is still around six months. You know, that's down from 12 months, you know, more than a year ago, so, you know, progress is being made. The challenge is it's still 2x, you know, what we'd normally like to see.
And so we're doing a lot internally just to, you know, better manage to that dynamic in case we don't see, you know, back to the normal, you know, three-month time frame. But don't really expect that at least this fiscal year either.
I think you've characterized that as about $100 million a quarter or annual? Under shipping.
Yeah, we didn't quantify it last quarter-
Okay
... but, you know, previously, it's probably still within that range, and it's mostly commercial Aerospace.
Okay, excellent. Great. So maybe moving on to the longer-term outlook, you've got a really good funnel of opportunities. You've got a really good runway of new program wins, you know, that are probably set to carry you for several years. Maybe just touch on the fiscal 25 target model that you've set out.
Yeah. So, maybe I'll touch on that and then just talk a bit about our growth, our growth projections. So one of the things... I mean, we've talked previously a lot about targeting $5 billion in revenue, 5.5% GAAP operating margin. Now, we saw a little bit of a revenue hiccup, as Pat mentioned, in recent quarters. So I think the $5 billion is a, I mean, it's a bit of an unrealistic target for fiscal 2025 right now-
Mm-hmm. Sure
... just given the realities of where we're at today, short of a very strong economic recovery. But one of the things we're committed towards is this 5.5% GAAP operating margin as we exit the fiscal year. So that was one of the reasons we put in place the restructuring that we did this past quarter. That was to rightsize our capacity to basically look at some of the things that we were doing that we felt were non-strategic, that we could better invest in other areas in the future. So that, as Pat mentioned, is about a $5 million quarterly impact for us. So as we think about progressing forward, Pat talked about Q2 being a revenue trough. We also expect it to be a margin trough.
We've talked about that we believe we'll expand margins on the order to 30-50 basis points over the next two quarters, which position us well to move towards that 5.5% GAAP operating margin as we exit fiscal 2025. One thing I wanted to note, too, our target growth rate, organic growth rate, is 9%-12%. Over our past five fiscal years, we've averaged 8%, so that's 250 basis points above our industry and 2x-3x most of our competitive base. So, we continue to outgrow the market as well, too.
So I think the progress to the margin target is a really important topic. Can we maybe discuss the impact of mix on your margin expansion story? So even with revenue down pretty meaningfully since the peak levels in 2022, the operating margins have held up solidly above 4%. I think this is probably well above prior trough levels as well. So what are the mechanics to drive further margin expansion longer term?
Sure.
Is it mix? Is it volume? Is it-
Yep. Well, let me take a step back, and where we ended fiscal 2023 was at 5.2%.
Mm-hmm.
So coming into 2024, we did see a path to the target of 5.5%. We had our Thailand facility is getting to break even. It was about a 20 basis point drag for us in fiscal 2023, so we saw overcoming that in 2024.
... Todd had mentioned the component inflation that elevated revenue but came at no margin. And so as that starts to dissipate, we'll have a margin tailwind there, too, of probably 10-15 basis points. So we saw a path to getting there, and if you go back in fiscal 2023 and even before, we had six straight quarters of 5% or above operating margin. So we saw it in our vision with the short-term pullback in revenue. Obviously, we've lost some leverage. We also have merit increases going into effect January first, which always impacts our March quarter.
But as we look to end fiscal 2024, as Todd talked about, we see improvements in margin from the restructuring activities we're doing, productivity improvements to earn through those merit increases, our Thailand facility becoming more profitable, and then engineering, which has been a little underutilized in the last couple quarters, becoming more utilized. All of that gets us to probably 5% or above as we end 2024. Moving into 2025, we gain some additional leverage with revenue recovering, and specifically in certain areas. So you talked about mix. Mix of where we're seeing that revenue in Europe, which was underutilized in the past. We've had a lot of wins in that region over the last 12 months. That's gonna really drive profitability, engineering services, and our Sustaining Services, our Aftermarket Services.
As we grow that business, both engineering and Aftermarket come at double the corporate average margins, that can really drive profitability. From a sector perspective, we're pretty happy with the composition of our sectors and how they're playing out right now. That probably would not drive that much of a margin, improvement at this point.
Okay. You, you mentioned the Thailand facility. I know, you know, you've made some investments around the world to kind of build up your, your geographic footprint with the, the programs that you have coming online. Is the existing footprint enough to support that $5 billion in revenue, or will we be looking at incremental capacity expansion?
Yeah, it would really depend on where that growth comes from. I mean, right now, we do have footprint that could handle $5 billion. We've got capacity in Mexico, capacity in Thailand, but as I mentioned before, we've seen a lot of wins in Europe-
Mm-hmm.
-that will probably force us to look for expansion in Europe in the next 12-18 months.
Okay. We get asked about this quite a bit, but nearshoring and onshoring trends in EMS-
Yeah.
Is this something that you've seen drive some of your program wins?
Yeah.
Or is this really, you know, you're in highly regulated industries that you've probably been nearshoring and onshoring for all, forever?
Well, there's a bit of a trend, I would say, but it's more from the standpoint of new programs.
Mm-hmm.
So the idea of, like, onshoring existing programs where supply chain's established, doesn't really occur. It's just, especially in the high mix, higher complexity type products and markets that we service. So, once the supply chain's established, it's quite costly to move it. But the idea of sourcing new programs in region for region is a very real phenomenon. We're seeing that, Pat talked about Europe and the explosive growth that we're getting in Europe. That's certainly a major factor for that growth in Europe, is the look at in region for region. It's had an impact on Mexico as well, too. Certainly, we're seeing in the Asia region, the semi-cap business just continue to explode there, which again, is more in region in that case.
Okay. So maybe talking about some of the competitive dynamics in the industry. We get asked quite a lot about competitive pressures from low-cost geographies. You know, this has been an existential threat across the industry for a long time. I think, you know, your business mix is pretty well differentiated there, but maybe address what you're seeing in terms of competition.
Yeah, well, I think in general, the competitive market's been, and the pricing within our space has been pretty rational over the course of several years, maybe five, six, seven years right now. So, we like that when that occurs, and we think we compete really well from a value standpoint. So, when we go in, we look to provide the highest value solution for our customers, focus very heavily on quality and delivery, and that tends to make the difference. So we track very closely our win rates, and we win significantly more than we lose when we go head-to-head. So, we feel really good about the position we're in in the competitive space right now.
How much of your business is single-sourced, either within a specific customer-
Yeah.
or on a specific program?
Yeah, so it's unusual, although not unheard of, that a customer would be single-sourced to us for all of their business. What's typical, though, is typically programs are single-sourced. So a customer may have a couple of different suppliers that it uses for different types of programs, trying to specialize in what they're best at. But when it's a program, it's typically sole-sourced on a program basis. There's only maybe a handful of programs I can think of where we actually are in a dual source type situation where us and a competitor internal may have some of the volume.
I assume it's pretty... Once you lock in a program, it's pretty difficult for customers to move.
Yeah.
Especially because you're doing highly regulated and higher complexity products.
Right. I mean, it's very hard when you have FDA registration on certain healthcare products, that becomes incredibly difficult to move. Aerospace is hard to move because of some of the qualification requirements. But, I mean, the biggest thing in where we focus, I mean, we rarely lose business because we focus very heavily on quality and delivery, and providing superior performance. So, when you do that, these programs are challenging, so customers really don't wanna move them unless they have a strong reason to do so.
I think it's important to highlight, though, that because of your end market exposure, you're not competing on price. You know, that's another kind of misconception-
Correct.
about EMS and contract manufacturing, you know, on a different level. But you're winning on capabilities and your abilities.
Correct. Yeah, I think, Healthcare is a good example. If I, you know, think about how we, how we win on capabilities, but we have nearly 40 years of experience in Healthcare. We've been doing Class II programs for close to the whole 40. We've been engaged in Class III or life-sustaining FDA programs for, for well over 20 years. We've, we've had Manufacturing in Asia of Class III programs for over 15 years. That's pretty much a decade before anybody else was doing it. So you think about the regulatory expertise that we have in a market like that, there's value in that, and, there's reasons that when you have these complex products, that customers think of Plexus as, as the place to go to.
Yeah, I Healthcare / Life Science is probably a perfect example of this, but how does your ESG strategy help differentiate the company? I know that you've done some sustainability, some, you know, reuse, recycling of, of products.
Yeah. So I, I think one of the areas where we differentiate the most is in the services that we can provide our customers. So, we can provide them services that help them achieve their sustainability goals, and it's on really two fronts. One is through our engineering and Product Development that we have. We, of course, are designed for the environment. We also have life cycle analysis, where we basically analyze a product and a bill of materials, and are able to provide solutions that drive better sustainability for that product. And then when you look at the other end of the product life cycle or the value stream, our Sustaining Services or Aftermarket business, that's all about keeping products in the marketplace.
So we're refurbing products, we're reconditioning them, we're doing in-warranty, out-of-warranty type service. We've even done part harvesting, recycling, you name it, to try to keep products into the market longer, which I think is gonna become a more and more important piece to the business as we move forward. Now, if I think about some of the other practices that we have going on, on the ESG front, I mean, social efforts are really important to us. We've been a member of the Responsible Business Alliance for as a charter member, which is all about ethical labor standards, so that's been over a decade now, very strong in diversity and inclusion. We push very hard around charitable giving and volunteer time off.
So we give over $1 million annually through our charitable foundation. Our employees globally have donated 19,000 hours this past year through our volunteer time off program to charities of their choice. And then when we think about environmental, we're driving hard to reduce our energy consumption throughout our business, and we've had goals the last three years of 5% or greater energy intensity reduction throughout our facilities. We achieved 12% in fiscal 2022, 9% in fiscal 2023. We're well on track for fiscal 2024. We've also added waste intensity reduction as one of the key metrics that we're driving improvement on this year as well, too.
Not to bring up, you know, the buzzword of the year, but AI. I think that you guys are using AI internally to help drive some of those efficiencies, and maybe discuss how you're using that.
Yeah, I'll speak to it in the, on a few fronts. So one of our challenges in, you know, the supply chain is how can we get smarter? And so internally, a team at Plexus took five years of supplier lead time data, put it into a machine learning program, and realized that if, you know, the, for example, if a lead time was 20 weeks, it was showing up as 16 weeks. And we were able to kind of roll these out through all our sites globally and see about a 30% improvement in actual delivery times relative to what our suppliers were telling us.
We're doing the same thing on forecasting, and so taking five years worth of data and seeing, you know, the further out you get from the day, you know, the forecasts become less accurate, and being able to, you know, push back on supplier forecast if they're over-driving us, just to, you know, ensure that, you know, we're using our capital as efficiently as possible. You know, from a customer perspective, we're seeing some acceleration on Healthcare / Life Sciences side in terms of, you know, just being able to develop the algorithms more quickly, and so it would bring products to market more quickly, and we would help, you know, launch those products, you know, from that basis.
Otherwise, a lot of it's just enablement for us in terms of, you know, what we do within semi- cap, you know, how we support the memory market, as well. And so, you know, as we see, you know, those continue to ramp, we'll be a beneficiary through kind of the indirect support.
Okay, great. I'm gonna pause here. Any questions in the audience? All right, we'll move on. Capital return strategy is always a big, popular topic here. So-
Mm-hmm.
Maybe talk about what your priorities for cash use are?
Sure.
You've had pretty good, you know, free cash flow over the years-
Yep.
just talk about what those priorities are.
Yep. Probably number one is capital investment to support our growth. When you think about it, capital expenditures as a percentage of revenue, it's, it's averaging 2.5%-3%, and I think that's a good range for us. It, it can be a bit lumpy at times if we're adding new footprint. We talked about expansion efforts we may need in the next 12-18 months, either in Europe or Asia, so that's a possibility. So that's really number one, but we obviously want to be returning any excess cash to shareholders. And back in January, we announced a new $50 million share repurchase program that we want to execute this fiscal year. So we're executing upon that. And then probably the last area is around debt.
We saw our debt increase in 2021, 2022 with supply chain constraints, further investments in inventory. And part of that investment in inventory, we were fortunate to offset with customer deposits against that gross inventory, so that lessened our overall working capital requirements. But as our debt balance increased, we've got a lot of focus now on reducing inventory, improving our cash cycle days, and as we do that, I'd like to see a reduction in our debt balances. Obviously, interest expense at the rates right now is impacting our income statement. So kind of those three, Melissa, probably capital investments, number one, shareholder returns, and then some de-levering of the balance sheet.
Excuse me. In terms of some of those, those internal investment opportunities, how much is being driven toward internal or organic growth or development of capabilities, or are there opportunities for M&A?
Yeah, so we're primarily, and we've historically been focused as an organic growth company. What I'd say with regards to M&A, I mean, we consider it on occasion to either expand capabilities or perhaps enter a new geography where we feel it's significant that we are. It hasn't historically cleared the hurdles that we've had when we've gone down the evaluation path. I mean, a good example would be our Aftermarket Services. As we expanded those capabilities, we looked at a make versus buy, and decided to make in that case. Same holds true with our single-use device strategy within our healthcare markets, we ended up making there.
Now, one of the things with regards to M&A within our space, I mean, M&A as a revenue growth strategy tends to not be very effective within our space and our industry because there's significant revenue dyssynergies that occur when one company buys another within that space. So I think you're not really gonna go see us active in that way to essentially aggregate revenue.
Okay. I think we've got a question.
That's right.
Historically, you guys probably grown in a year, so a lot of it in this space. But we've seen, you know, larger competitors now kind of catch up and potentially see times from a margin basis, partially on kind of benefit of scale, partially on the benefit of, you know, kind of copy what you guys- But help me understand kind of your margin progression, you know, do you need scale, kind of ties into the question on acquisitions. Do you need scale, or can you drive your margins or returns back to industry-leading on your own?
Yeah.
Maybe help us understand that.
Yeah, I don't-
I know that's a really big-
Yeah, it's not a need for significantly more scale. And if you think back to, and one of the things I'd want to remind everybody of is that we tend to report GAAP where everybody else reports a non-GAAP. So you can think of that as being about a 70-80 basis point difference within our margins that we'd be higher if we excluded stock comp out of our numbers that we tend to report. But, from a GAAP basis, we were 5.2% in 2023. So we're at... You know, when you think about that and adding 70-80 basis points, we're right around 6%, which is a very good, healthy industry-leading margin.
Now, we have a little bit of a blip that's going on right now, in the couple of quarters that we're in. Part of that's driven by the softening within Healthcare. Part of it is somewhat related to softening within engineering, which, as that fills back up and it's highly levered business, it can move margins in the tens of basis points, and so it can move rather rapidly. So we believe we're positioned, as you know, Pat talked about earlier, we're positioned well, to get to 5%+ as we exit this year and really drive towards that 5.5% in 2025. And you know, that's really just better utilizing our assets that we have, you know, driving better revenue through those.
So, we think we're pretty well positioned to continue to be industry leading. Now, the fact that the competitors are improving their margins, I mean, I think that's great from my standpoint. I mean, like to see a healthy neighborhood here, and it helps from the competitive pricing standpoint, but we want to continue to maintain a differential between us, though.
I mean, is there opportunity to go 6%+?
Give me a date. Come on, lock it down.
Well, over the long term, perhaps.
Yes.
Over the long term, perhaps. I mean, we don't see 5.5% as being the, you know, a ceiling by any stretch, 'cause in that model, we still have certain assets that are underutilized, for instance. There's still areas where we're investing, like Sustaining Services, so there's opportunity to continue to drive margins up.
How does your desire to grow also impact that 5% target? Like, is that... If, if you want to continue to grow, you're going down, I guess.
Yeah, it has an impact because, I mean, the least profitable period of a program is right when it starts. I mean, especially if it's a new relationship, as you're figuring out how to do business together. So, the fact that we believe we're gonna grow in the double-digit range, I mean, that'll naturally push down margins a bit and keep a little bit of a ceiling on it.
But we did do, I mean, we did do 5.2% last year, you know, six quarters above 5%, all while adding, you know, significant new logos-
Mm-hmm.
You know, ramping new programs. So, you know, it's part of a steady state of business.
Yeah.
I think we just have some underutilization right now that is, that is a drag.
Okay. I think we've got to finish up, but we are heading downstairs for a breakout session. Any other questions? Just follow us down. Thanks, everyone. Thanks very much, guys.
Thank you.
Thanks, Melissa.
Thanks, Melissa.