Earnings Call: Q3 2021

Jul 22, 2021

Good morning, and welcome to the Plexus Corp. Conference Call regarding its fiscal Third Quarter 2021 Earnings Announcement. My name is Rens, 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. 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? 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 as they will not be limited to historical facts. 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 3, 2020, as supplemented by our Form 10 Q filings in the Safe Harbor and Fair Disclosure statement in yesterday's press release. Plexus provides non GAAP supplemental information such as ROIC, economic return and free cash flow because those measures are used internal management goals and decision making because they provide additional insight into financial performance. In addition, management uses these and other non GAAP measures provide a better understanding of core performance for purposes of period to period comparisons. For a full reconciliation of non GAAP supplemental information, Please refer to yesterday's press release and our periodic SEC filings. We encourage participants on the call this morning to access the live webcast supporting materials at Plexus' website at www.plexus.com, clicking on Investors at the top of that page. Joining me today are Todd Kelsey, President and Chief Executive Officer Steve Frisch, Executive Vice President and Chief Operating Officer Pat Germain, Executive Vice President and Chief Financial Officer. Consistent with prior earnings calls, Todd will provide summary comments before turning the call over to Steve impact for further details. Let me now turn the call over to Todd Kelsey. Todd? Thank you, Sean. Good morning, everyone. Please advance to Slide 3 for a discussion of our fiscal 3rd quarter results. We delivered fiscal 3rd quarter revenue $814,000,000 GAAP operating margin of 4.5 percent and GAAP EPS of $0.95 revenue met the high end of our revised expectation provided at the June 8 Stifel Conference. This result was primarily due to the resilience and outstanding efforts of our team members in Penang, Malaysia amidst the challenging conditions created by government mandated workforce reductions in response to the COVID-nineteen pandemic. Our team worked tirelessly to meet the needs of our customers, while Navigating the Required Workforce Restrictions. GAAP operating margin and EPS significantly exceeded our updated outlook as a result of the better than anticipated revenue performance of our Penang operations and outstanding contribution from our engineering solutions team The team delivered record operating margin in the quarter. The GAAP EPS result included $0.04 due to a modest restructuring in our Americas region $0.21 of stock based compensation expense. I'm extremely proud of our global Plexus team Next, I'll highlight fiscal third quarter business development accomplishments that we expect will enable accelerated future revenue growth. Our team produced another exceptional quarter of wins delivering approximately $275,000,000 of manufacturing revenue when fully ramped into production, Bringing our trailing 4 quarter wins to a record $1,100,000,000 The quarterly wins included 5 new logos, another very strong result that enables further growth as these relationships expand. Our teams have added 17 new logos this fiscal year, highlighting our increasing differentiation in markets featuring highly complex products and demanding regulatory requirements. Within the wins were several aftermarket services opportunities, including an expansion of the notable new relationship highlighted last quarter. One of these AMS opportunities ramps very rapidly and should contribute to fiscal 2022 Q1 results. Given the pace of the ramp, we'll be making sizable near term investments. Our engineering solutions team had another outstanding wins quarter exceeding last quarter's excellent results. Engineering is not only accretive to our operating performance, strong engineering wins are generally a leading indicator of accelerating manufacturing growth. The efforts of our go to market team in leveraging our reputation for delivering customer service excellence positioning Plexus for strong growth across all of our service offerings. The wins performance is not only noteworthy because of its magnitude, But also due to the alignment of the new business to our strategy. Please advance to Slide 4. Our team members in Penang demonstrated extraordinary resilience and tenacity as the Malaysian government implemented numerous actions and restrictions to combat a sharp rise in COVID-nineteen infections that began midway through our fiscal Q3. We were able to continue our operations given our status as an essential manufacturer, but for the final 6 weeks of the quarter, we 60% of workforce capacity, while also managing through strict protocols focused on ensuring social distancing for our team members at our sites. Despite the challenging situation, our APAC leadership team found opportunities to support our customers by operating more efficiently initially anticipated upon the announcement of the workforce reductions, driving revenue toward the high end of the expectations we provided during our June 8 update. Our team also proactively engaged the Malaysian government and Ministry of Health with the goal of creating a vaccination center For our team members, customers, suppliers and other local manufacturers. Plexus, along with 2 other manufacturers in Penang, In the Malaysian government, which supplied the vaccines, our team began their COVID-nineteen vaccination clinic on July 14, administering approximately 1500 doses daily. Our clinic, which received outstanding positive feedback from the Malaysian Ministry of Health, is scheduled to provide nearly 17,000 first doses call by this upcoming Sunday. 2nd doses are anticipated by late August, aligning with the Malaysian government's goal broad vaccination availability by the end of summer. We anticipate over 85 percent of our Penang team members will be vaccinated. While vaccination is an important step In supporting our team members in our local community in Penang, COVID-nineteen infections remain elevated in the near term in Malaysia. As a result, we expect restrictions on the community and manufacturers to sustain throughout our fiscal Q4. During the 1st 2 weeks of our fiscal Q4, the prior reductions continued to limit Plexus to approximately 60% of workforce capacity. In mid July, the government subsequently eased the reductions applicable to Plexus, allowing our team to operate at 80% of workforce capacity. This workforce level, when combined with operational efficiencies, should allow our operations to function at near normal output capacity within the fiscal Q4. We anticipate vaccination efforts throughout the country, inclusive of our clinic, will support an eventual easing of restrictions, Allowing Plexus to return to typical workforce capacity levels and to better support the ongoing strong growth outlooks of our customers. Please advance to Slide 5. As we look to the fiscal Q4, demand remains very robust, particularly within our Healthcare Life Sciences and Industrial Market sectors. When coupled with the improved output of our Penang operations, We are guiding a sizable sequential improvement in revenue and are establishing a range of $875,000,000 to $915,000,000 While we are practical in our revenue guidance given the current dynamics, should we overcome the workforce limitations at our Penang operations We're guiding GAAP operating margin in the range of 4.8% to 5.2%, including 70 basis points of stock based compensation expense. At these revenue and operating margin levels, we anticipate delivering GAAP diluted earnings per share of $1.13 to $1.29 including $0.22 of stock based compensation expense. Our guidance assumes that supply chain constraints And COVID-nineteen do not materially impact end markets or our operations beyond what is already anticipated. Next, a few thoughts regarding our longer term outlook. Looking at our end markets, we see broad based strengthening of Healthcare Life Sciences demand over the next several quarters led by a recovery for equipment related to elective procedures. Likewise, our industrial sector is showing significant broad based demand increases. Semiconductor capital equipment and communications forecasts are both robust, while we are anticipating meaningful contributions from program ramps with industrial and warehouse automation customers. We believe our aerospace and defense sector revenue is beginning to inflect higher Driven by improvement in commercial aerospace and healthy demand from defense and commercial space customers. In summary, we remain optimistic in our outlook. In addition to strong end market demand, we are major participants in secular growth markets Such as robotic assisted surgery, warehouse and factory automation and commercial space. We continue to win significant amounts of new business aided by our capabilities, expertise and commitment to our customers through exceptional quality and superior execution. Furthermore, we benefit from the differentiation provided by our engineering and aftermarket services. Looking into fiscal 2022, We are confident these demand catalysts support double digit revenue growth as we continue to drive industry leading operating performance With GAAP operating margin consistently above 5%. I'd again like to thank our incredible Plexus team for their unwavering support and dedication. It is through their efforts and talents that we're able to further our vision of creating the products that build a better world while delivering for all of our stakeholders. I will now turn the call over to Steve for additional analysis of the performance of our market sectors and operations. Steve. Thank you, Todd. Good morning. Please advance to Slide 6 for a review of our performance by market sector. As Todd highlighted, our operations in Penang, Malaysia were significantly impacted by workforce curtailments enacted by the Malaysian government during the fiscal Q3. In addition, we experienced a program ramp delay due to a supplier quality issue within the quarter. As a result, all the sectors missed expectations in fiscal Q3 due to the negative impacts of these factors. Todd reviewed the actions we are taking to resume more normal operations in Penang And we have solved the supplier quality issue. Therefore, I will focus on the expectations for the sectors for the fiscal Q4. Our industrial sector is seeing continued strong demand in the semiconductor capital equipment subsector. In addition, ramps with warehouse automation programs and strength with the cable access product driving meaningful growth in the sector. As a result, we're expecting a low double digit increase in our industrial sector for the fiscal Q4. In our Healthcare and Life Sciences sector, the demand shift from COVID related products to elective procedure devices has accelerated. In addition, new program ramps are gaining momentum. The combination of these events yields an expectation of a high single digit increase in our Healthcare and Life Sciences sector for the fiscal 4th quarter. Our Aerospace and Defense sector continues to see improving forecast in Commercial Aerospace. We anticipate the strengthening demand to drive a high single digit increase for Aerospace and Defense Sector in the fiscal Q4. Please advance to Slide 7 for an overview of our wins performance for the fiscal Q3. We won 31 new manufacturing programs that we expect to generate $275,000,000 in annualized revenue when fully ramped into production. The market sector teams continue to expand our existing relationships while establishing new ones. Included in the wins, the addition of 5 new logos. The The continued strong wins performance lifted our trailing 4 quarter wins to another record level of $1,100,000,000 Our wins momentum, Which is the trailing 4 quarters of wins divided by the trailing 4 quarters of revenue increased to a healthy 31%. The result is above our 25% goal and supports our fiscal 2022 growth expectations. We can advance to Slide 8 to review the manufacturing wins by region for the fiscal Q3. The Americas region wins were impressive $162,000,000 in the fiscal 3rd quarter. The strong result drove the region's trailing 4 quarter wins above $1,500,000,000 to finish at $507,000,000 With approximately 80% of the fiscal third quarter wins associated with our manufacturing facilities in the United States, we expect meaningful growth margin expansion in several of our U. S. Locations in fiscal 2022. The APAC region had robust wins of $91,000,000 in the fiscal Q3. In spite of the distractions created by the pandemic, the team has not lost its focus on delivering customer service excellence. They're being rewarded with new opportunities that quarter wins above $140,000,000 Included in the wins is a meaningful new aftermarket service program that expands the server's offering in our Aradia, Romania facility. Please advance to Slide 9 for further insight into the manufacturing wins performance by market sector. Industrial sector wins in the fiscal Q3 were $47,000,000 including the addition of 2 new logos. Although the wins result was lower than typical, we expect the fiscal 4th quarter wins to return to a more historical level. Our Healthcare and Life Sciences team beat their strong fiscal 2nd quarter wins by delivering another record wins result of $159,000,000 in the fiscal 3rd quarter. With With our trailing 4 quarter wins at a record $513,000,000 we're expecting meaningful growth for the sector in fiscal 2022. The aerospace and defense sector had robust wins totaling $69,000,000 in the fiscal Q3, resulting in trading linked 4 quarter wins of almost $200,000,000 Included in the wins is addition of a new logo in the defense subsector. Please advance to Slide 10 for further insight into some of the fiscal third quarter wins. Included in the Healthcare Life Sciences wins is a meaningful aftermarket services program that expands our global service and repair to additional products for our current customer. Although we are not the original manufacturer, we are developing solutions in Guadalajara, Mexico and Aradia, Romania to service and repair the devices. In addition to this opportunity, the Aradia facility also won the production of an ultrasound machine used in cardiac care from an existing customer. The Healthcare and Life Sciences team also expanded our relationship for the manufacturing of the next generation diabetes monitor for our current customer. In In addition to the North American production we announced last quarter, we won the volume production for the Asian markets. The Asia Pacific demand for the new device will be produced by our Penang Lasia Healthcare Facility. Included in the industrial wins is the turnkey manufacturing of the self-service kiosk for a new customer. The complex higher level assembly will be produced in our Appleton, Wisconsin facility. Our industrial team also secured the manufacturing of a next generation industrial controller That is used in artificial intelligence applications. The product will be manufactured by our team in planning Malaysia. Included in the aerospace and defense wins is a program with a new defense customer who is focused on counter electronic technology. The company selected Plexus' Neon Wisconsin facility because of the site's ability to support complex prototypes and volume production within the United States. Finally, the Aerospace and Defense team also expanded our relationship with the commercial space customer. The new programs add to the increasing quantity of complex assemblies that Plexus produces that are launched in the space. These new assemblies will be added to the current family of products that we build for this customer in our Boise, Idaho facility. We can proceed to Slide 11 for highlights of our funnel of qualified manufacturing opportunities. Our funnel grew by $72,000,000 in the fiscal 3rd quarter Finish at a robust $3,100,000,000 Our industrial sector increased our funnel by $90,000,000 to close the fiscal Q3 at $673,000,000 A meaningful outsourcing opportunity from an existing customer who is reevaluating their internal manufacturing strategy contributed to the funnel's growth. Even with the strong wins performance in the fiscal Q3, the Healthcare and Life Sciences sector kept their funnel at a very healthy $1,800,000,000 4 larger manufacturing opportunities, including an ultrasound machine, an insulin pump, a diabetes monitor and a robotic surgical instrument were added in the quarter. The product variety of these additions to the funnel illustrates the broad expertise our engineering and manufacturing teams have developed. Our Aerospace and Defense sector finished the fiscal third quarter with a funnel of $671,000,000 Our multiple design centers and manufacturing facilities in the United States Continued to attract defense and commercial space customers who require domestic capabilities. We expect the need for U. S. Manufacturing will continue to be a meaningful part of the sector's funnel. Next, I would like to turn to operating performance on Slide 12. In spite of the adverse revenue impacts experienced during the fiscal Q3. The team generated GAAP operating margin of 4.5%. 2 exceptional operational efforts 75% with only 60% of the workforce being allowed in the factories during the back half of the fiscal third quarter. 2nd, our global engineering team capitalized on strengthening backlog and strong execution to achieve exceptional revenue and profitability during the fiscal Q3. As we look to the fiscal Q4, we are making strategic investments to support growth. Our site, regional and corporate supply chain teams have added resources We are working tirelessly to mitigate operational inefficiencies and component constraints to meet customer demand. In addition, we are making meaningful investments in new program ramps that we expect commence in fiscal 2022. Even with these additional investments, the team is committed to delivering solid operating results With operating margin in the range of 4.8% to 5.2% for the fiscal Q4. A few final comments. We highlighted some of the great execution that our team in Penang, Malaysia delivered during the fiscal Q3. I want to highlight some of their exceptional efforts that are continuing in the fiscal Q4. Although the team is still operating under Malaysia's workforce containment that limits our workforce to 80%, they are producing at nearly full output levels. In the 1st 8 days of operation, Plexus' vaccination center has delivered the first dose of a COVID-nineteen vaccine to over 6,600 Plexus employees and over 4,400 employees from our customers, suppliers and other manufacturers. Assuming the center's allocation of doses follow projections, all Plexus employees who desire to be vaccinated will receive their first dose by this Sunday and all will be fully vaccinated by the end of August. In spite of the many challenges that the pandemic is creating in Malaysia and Thailand, the construction of our new manufacturing facility in New Bangkok is progressing. We expect to complete the facility in the Q3 of fiscal 2022 as planned. The team's ability to develop an industry leading vaccination center while optimizing production output with a reduced workforce and keeping strategic initiatives on track in the middle of a pandemic call is remarkable. I will now turn the call to Pat for an in-depth review of our financial performance. Pat? Thank you, Steve, and good morning, everyone. This morning, I want to focus on 3 areas: our cash flow and balance sheet results for the fiscal Q3, working capital trends and our fiscal Q4 guidance. Starting with our cash flow and balance sheet results, Which are summarized on Slide 13. We delivered $42,000,000 in cash from operations and spent $11,000,000 on capital expenditures, Resulting in fiscal 3rd quarter free cash flow of $31,000,000 a result in excess of our net income and our expectations for the quarter. During the fiscal Q3, we purchased approximately 292,000 shares of our stock for $27,300,000 estimated $26,000,000 remaining under our authorization. We intend to purchase the remaining amount during our fiscal Q4. With our commitment to returning all excess cash to shareholders, we will soon 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 approximately $307,000,000 sequentially higher by $13,000,000 Also at quarter end, we had $50,000,000 outstanding under our $350,000,000 revolving credit facility And our gross debt to EBITDA leverage ratio of 1 was at an attractive level. For the fiscal third quarter, we delivered above our weighted average cost of capital, creating solid shareholder value. At quarter end, we were pleased with our cash cycle, Please turn to Slide 14 for details on our working capital and cash cycle. Sequentially, inventory days increased by 19. The increase in days primarily related to the reduced revenue for the fiscal Q3. In addition, we procured inventory toward the end of the quarter call as we prepare for higher revenue anticipated in the fiscal Q4. Also with the current supply chain environment, We are experiencing longer lead times for certain components. In order to meet greater demand for certain products and maintain a high level of customer service, We are procuring components earlier, accepting that inventory dollars will be higher. Partially offsetting the increase in inventory days Where increases in both payable days and customer deposit days. With elevated purchasing activity to support. Our revenue demand payable days sequentially increased by 10 days. Customer deposit days increased by 2 days 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 9.2% to 9.6%. At the midpoint of this guidance, gross margin would be sequentially higher by 30 basis points. We expect to gain better leverage on our fixed costs with anticipated sequential increase in revenue. For the fiscal Q4, we expect SG and A expense in the range of $39,000,000 to $40,000,000 At the midpoint of our revenue guidance, anticipated SG and A would be 4.4% of revenue, slightly improved from the fiscal Q3. Again, increased revenue should provide added leverage. Fiscal 4th quarter GAAP operating margin is expected to be in the range 4.8% to 5.2%, which includes 70 basis points of stock based compensation expense. At the midpoint of this guidance, GAAP operating margin would be 5% and sequentially higher by 50 basis points. This result would lead to operating margin atorabove5% for 5 of the last 6 quarters. With this consistent track record, we remain committed to delivering a GAAP operating margin in excess of 5%. At our Board of Directors meeting next month, we will be revisiting our future operating margin target and we'll share more details during our October earnings call. A few other notes for the fiscal Q4. Depreciation and amortization expense is expected to be approximately $15,000,000 Which would be consistent with the fiscal Q3. Non operating expenses are expected to be in the range of 3.8 to $4,200,000 We are estimating an effective tax rate of 13% to 15% and diluted shares outstanding of approximately 29,000,000 shares. Our expectation for the balance sheet is that working capital investments will increase compared to the fiscal Q3. We expect additional inventory as we increase procurement activity to meet the anticipated demand as we move into fiscal 2022. Based on our revenue forecast, we expect this level of working capital will result in cash cycle days of 82 to 86 days. At the midpoint of this guidance, cash cycle would increase 4 days compared to the fiscal Q3, primarily due to the inventory requirements. Capital spending for fiscal 2021 is expected to be in the range of $70,000,000 to $80,000,000 slightly below last quarter's estimate. For the fiscal Q4, we expect free cash flow to be negative. The tightening supply chain environment and extended lead times have required additional investments in inventory to satisfy customer demand. We are working closely with our customers to secure deposits to minimize working capital investments. In addition, we have already started investing in working capital to support the strong demand we anticipate Even if that results in added working capital investments. With that, Rens, let's now open the call for questions. The queue. Please press the pound key. Our first question comes from the line of Jim from Needham and Company. Your line is now open. Hi, thank you. Good morning. Just a couple of questions. You highlighted the fact that the industrial wins was down in the quarter sequentially. And you're also suggesting a recovery in fiscal Q4. And I'm just wondering what you're seeing there. And I guess the question the broader question I'm having is, do you have any sense if the supply chain issues that we've all been hearing about are beginning to or potentially impacting wins in this or any other areas of the business just because it's been so broadly based across different market verticals, what we're seeing in terms of supply chain. And a follow-up on that is, I'm wondering if there's any way of quantifying potentially what type of headwind you might be anticipating from component availability in Q4? Thank you. Sure. Maybe I'll hit the second part first, which was focused on the supply chain impact and wins. I don't believe that the supply chain right now is impacting the funnel or the wins rate. Really couldn't correlate anything happening there. So I think we're at normal levels. Specifically as it relates to the industrial wins in Q3, I won't read too much into that either. We do not measure the teams by a quarterly number. For us, it doesn't really matter whether we win it at the end of the last day of the quarter or the beginning of the next quarter. And so we don't incentivize the teams to try and close something to meet a quarterly metric. That's why we focus quite heavily on the trailing 4 quarter wins number. So, it was a softer quarter, but like I said, I expect Q4 to come back to a healthy level. So again, I wouldn't read anything too much into that either. In terms of headwinds as we In terms of the revenue that we forecast that we have in front of us for Q4, there is a sizable customer forecast That we're unable to achieve in Q4 due to component supply chains. Corporately, you rolled up the numbers that would be in excess of $100,000,000 With that said, Even if we could procure $100,000,000 worth of components, then we have to start talking about the labor and the manufacturing capacity to be able to do that. So from an overall standpoint, there's a lot of demand out there. And again, From an opportunity standpoint, the teams are working aggressively to close it. Got it. And just one follow-up. I'm Assuming you're fairly pleased with what you're seeing in the AMS business, really seems like you're gaining traction there. The expansion of the new relationship that you highlighted. This is on the medical side, the healthcare side. Is that and I'm wondering what may be driving that and to what extent you're really beginning to see traction with this in some of your other areas of the business. Thank you. Yes. So you're correct, Jim. The new relationship is on the healthcare side And it has the potential or it will be quite substantial. I mean, we've talked about it a couple of quarters in a row and both quarters I had meaningful programs that we're launching for this customer. And what I would say about the AMS business is, right now, we have business across all three of our sectors. But clearly, we're gaining the most traction within our Healthcare business. And I think it has to do with a lot of our regulatory capabilities that we have within the Healthcare Life Sciences space. So we're getting some excellent traction there and the team is doing a great job of building out that business. And when you roll it all up, I mean, it looks like it could be A very substantial growth year in F 'twenty two for our AMS business. Got it. Thank you. Thank you. The next question is from the line of Angela Soderstrom from Sidoti. Please go ahead. Hi, everyone, and thank you for taking my question and congratulations on a strong quarter despite the difficult environment. I just had a couple of questions. In terms of in Penang, the efficiencies you've been driving there, as you get back to 100% capacity, how are those efficiencies going to play out? And Are you going to be able to still benefit from those? Yes, specifically about the efficiencies. I I mean, the efficiencies are being done are being achieved because the team is working corporately exceptionally hard and probably at a pace that's not long term sustainable. So We are learning things and some of those things will basically be used into the future in terms of how we can be more efficient. But I think thinking that we're going to run at a 15% above Where we're our work levels is probably not a realistic thing ongoing, but we are, I guess, I'm learning a few things about how to Improve the facilities as we go forward. And you had a follow-up or another question? Yes. It was in regard to the cash cycle days. So, I understand they are elevated now because of the supply chain environment. But once we get back to a normal environment And you have improved your the systems. I think you've been guiding before to try to be in the low 70s in cash cycle days. Is that still achievable? Or could you improve that with these new systems? Or how should we think about that? Yes, Anil, it's Pat. Yes, I think you're right. We are at a high point right now. And as we look into fiscal 2022 and move through the quarters, I want to see inventory getting back to the low 90 days, and that would equate to an overall cash cycle in the mid to low 70s. And so I think that's a reasonable spot to be operating within for most of or for the latter part of fiscal 2022. Okay. Thank you. That was all for me. Thanks. Thank you. The next one is from the line of Matt Shereen from Stifel. Please go ahead. Yes, thanks. Good morning, everyone. Good morning. Just a question regarding the margins and you're guiding up sequentially relatively nicely and leverage on that revenue. But it's still you're still talking They're down from the peak levels of what 5.5 percent operating margin, 10% or so gross margin and relative to the revenue upswing. So are there some still costs related to COVID, labor costs in Malaysia, things like overtime. Steve, you talked about the fact that you're able to basically be at full production levels despite the fact that you're still at 80% or lower at labor level. So are there some costs there that go Spend a lot of time talking about program ramps impacting margin because it's part of what we just build into doing the business. But this is a bit unique in that it's ramping incredibly fast and we're adding a lot of resources very rapidly. So there is a bit of an impact there. There is the inefficiencies that are occurring yet in our Penang operations that are impacting Q4 And also just some of the intense supply chain efforts that are ongoing right now to secure components. So those are all having Any impact on the cost structure. But when we look further out, we do believe the margins we've achieved in the past are achievable in the future. And Pat talked about how we'll be discussing our annual operating plan and our long range plan with our Board next month, and we'll come out with a new margin target. It'll be somewhere north of 5% is what I'll say as a precursor to that. Yes. Okay. Hey, Matt. One thing I'd add is you had asked about COVID costs. Just to give you some perspective, in Q3, we had about $1,600,000 in COVID related costs. We expect that to be around $1,300,000 in the 4th quarter. Seeing some reduction there as our testing that we're doing of employees will go down as more employees are vaccinated. So we see those costs come down a bit in the fiscal Q4. And I'll add one point because Anja kind of asked about it as well in terms of Penang efficiencies. I think the one thing to keep in mind is although We have 60% or 80% of the workforce on-site that are generating outperforming and generating higher efficiencies. Rally is we're still paying 100% of the employees even if they're not at work. So our cost structure hasn't really changed as it relates to the labor force there. Yes. And then I just had one last thing on the operating margin target. As Todd said, we're going to talk through that with our Board next month. But If we would come up with a goal, say, of mid-five percent, really important to keep in mind that that's a GAAP operating margin. And when you add back stock based compensation, we'd be north of 6% on an apples to apples basis with our peers. Understood. Okay. Thanks for that. And then another question on inventory. I guess the fact that you were able to build As much as you did in the quarter, given the supply constraints, somewhat surprising, although I guess that's primarily a function of the fact that you had lower production levels because of the Malaysia issue. So you were bringing components in. So I guess the question is, are you seeing areas where Things are opening up where you're able to build some inventory or do you think a lot of this is just kind of tied to backlog that's been building and you're just going to run that through? Yes, it's probably more of the latter. We don't necessarily do the component constraint issues starting this off until we get into fiscal or calendar 2022 even. So we do expect it to be a continued constrained market. Hence the reason we are bringing in a little bit more inventory. We also have customers that are A little bit leery about losing, even though there may be from a forecast standpoint, we have a little bit time to bring it in. The lead times are still there. There's more and more customers that are a little bit leery about not having the inventory on hand because they're afraid that it might disappear for some reason. And so we have some customers that are asking us Even though we can potentially get it with lead time to bring it in now and that's where we're working with them on deposits to help offset that. So there are a few different, I say non normal business things happening as it relates to the inventory management. Yes. And just related to that, on the pricing side, we know ASPs fees are going up across the board, semis and components. Are you just able to pass that along to customers or is that sort of a battle that the So buyers are going through. Yes, we are. I mean, we look at our contracts and the way things are priced as we as there's variances in prices and things going We were able to pass those for the most part on to our customers. Okay. Thanks very much. Sure. Thank you. The next one is from Adam Tindle from Raymond James. Okay, thanks. Good morning. Just a quick question for either Steve or Todd on the supplier quality issue. It sounds like you said that this is resolved, but Just trying to get a sense for what percent of customers are using this part or is this more of a custom part for that one customer? Just really trying to get a sense of the risk of broader contagion across the customer base from this or is this really just a one off? Yes, it's a one off. It's a custom part for that supplier and it's not an electronic part. So this is a one off for That system and it's resolved and we're back in full production for that customer. Okay, got it. So I really wanted to ask about the fiscal 2022 comments, Todd. You talked about double digit growth. And correct me if I'm wrong, I think you had been talking about double digit growth in past as we think on a go forward basis. So I'm wondering if we add this non perishable demand on top of that double digit growth and be more like mid teens growth or is there something missing with that logic? Yes, it was intentionally vague with double digit. I mean, what I would say is, when we think of our growth number, we're thinking of really What would it be, 2022 over 2021? So it takes into account the adjustments. But what I can say is, well, We're early in the cycle and it's a long ways to even the start of F 'twenty two, let alone the end of F 'twenty two. So things could change. But we wouldn't be talking about double digit growth unless our forecast comfortably supported that level, is what I would say. And when you think about The dislocated revenue, here's the way I would look at it. I mean, we had with the way Q3 ended, we had about $80,000,000 that I would call dislocated because we performed a bit better than we thought we were going to. Some of that, a small amount is recovered in Q4. There's a small amount that's perished and you can think of about maybe $50,000,000 or so rolling into the first half of 22. Got it. That's helpful. Just last one for me to clarify on the near term margin commentary. So you have the AMS business ramp. I think in the prepared comments, you talked more about that being a Q1 impact. Sounds like some of it may spill into Q4 as well. I'm just trying to understand how much cost is associated with that and maybe a way to Think about it is, how to build off of this 5% or so at the midpoint guide for Q4 As we think about Q1, are there more headwinds related to the AMS ramp or tailwinds related to Malaysia utilization? Should we be building higher or lower off that? Thanks. Yes. Adam, I can take that. So we're doing the investment in the fiscal Q4 and then The revenue will start towards the end of the quarter and into fiscal 2022. So that investment in fiscal The Q4 is going to be about 10 basis point drag on the margin before we start generating the revenue to more than offset that investment. Okay. So that 10 basis points should be recovered throughout the course. I'm just thinking for Q1 of next year. Sounds like there's more tailwinds versus Q4 sequentially. Okay, got it. Thank you. To maybe help understand the ramp, If you look at a circuit card that's ramping, you're typically there's not a lot of labor involved and it's more about just procuring the components and we typically have the staff To build more circuit level assemblies. When you're looking at aftermarket services, it's service and repair. So it's more about training people To do the service and repair. So the cost that we're talking about doing is we have to add a significant amount of operators and technicians and train them on how to service and repair before we can actually start And so that's what that's why on AMS, the costs are a little bit more front loaded than what would be normal ramps. Helpful color. Thanks, Steve. Thank you. The next one is from Steven Fox from Fox Advisors. Your line is now open. Thanks. Good morning, everyone. Hi, Steve. I I had a big picture question just on the new wins and how you're going about it. It looks like there's been a bit of a step up on sort of the average size of the wins over the last couple of years, more like $6,000,000 or $7,000,000 per win versus $5,000,000 or $6,000,000 in the prior 2 years. And I'm just curious how you would sort of describe why that's happened, whether it's been circumstance, sort of ability to go after bigger wins and how you think about sort of investing in that front end machine to drive wins in the future. Do you scale that up more? Do you think you can target higher and higher wins per average size wins, etcetera? And then I had a follow-up. Yes. So your math on the average wins is correct. We've seen a bit of an uptick over the years into that magnitude. And I would say that it is part of a little bit of a conscious effort to focus on bigger opportunities, but we don't necessarily exclude anything from a size standpoint. I know that some of our competitors have thresholds where they say they will only chase a certain size opportunity. For us, it's more about the partnership with the customer. And I think as our relationships have continued to get stronger, we are seeing bigger opportunities across the board. So I don't expect Significant increases in the average size in the coming years, but it doesn't surprise me that they will pick up. Yes. Just to add a bit too around investing in Our customer facing team, Steve, that's something that we continue to make pretty significant investments in. We have Of course, we have our new business development team as well as our existing customer team. And the existing customer, a bit scales with revenue is the way to think of that. The new business development team, we get additional leverage on, but we still continue to invest in there. And one of the things that I'd point out is just the progress that's been made in that team and that's being reflected in the new logos that we're we've been talking about. So we've had 17 Already this fiscal year, a typical year might be 10 to 12 new logos. So that we've done a great job of bringing in Some new talent, leveraging some existing talent within that organization, building out our processes within The new business development effort of targeting new customers and it's paying off right now. Great. That's really interesting. And then just as a follow-up, patent. Can you I don't think you talked about this way, but you said that, engineering services helped margins. Can you put a little bit of math around that, like how much Of a benefit it was, I don't know, quarter over quarter, year over year, however you want to talk about it. Yes. I mean, we really don't break that out, Steve, if I had to look at the different components we had around lower health care costs, Better engineering and the productivity. Maybe it's a third, a third, a third. We haven't really done the math behind it, but That kind of feels right to me that not any one of those 3 was really dominating the improvement. They're probably pretty equally spread Among the 3. Okay. That's helpful. I appreciate that. Thank you. Sure. Thank you. The next one is from Paul Chung from JPMorgan. Hi, thanks for taking my questions. So, I have a couple. On Aerospace and Defense, nice surge and wins this quarter. Can you expand on the strength there? And as we head into the next 12 months, you have relatively easier comps in that segment and nice momentum wins. How should we think about the overall growth as we navigate through the next 12 months in Aerospace Sure. The wins this quarter, obviously, yes, very healthy size. And one of the things that I talked about it in the script a The bit was a large defense customer. It was an abnormally large opportunity that we won for defense size. And so that definitely helped push the number higher. And then as we've talked about, we are continuing to gain share in the commercial space part. And so We see a meaningful growth in that as we look through fiscal 2022 with what we've been able to capture and expanding those relationships. With the outlook of commercial aerospace starting to rebound, we believe, pretty optimistic in terms of what the sector is going to look like for 2022. Yes. What I'd say is we feel good about all three of our sectors for next year. Obviously, A and D gets a little bit easier comp, but we think they're all going to strong growth sectors for us in fiscal 2022. Okay, great. And then on CapEx, a little lighter been expected in 3Q, but kind of a big ramp in 4Q, seem to catch up. So are there any delays Thailand facility. I think you mentioned it's on track for next year. And then on the facility itself, is there even more emphasis focus on automation. How do we think about kind of contribution margin of that facility? I think you've mentioned the Malaysian facility kind of generates relatively higher margins. I assume given the kind of scale and size of that facility, but how do you expect the Thailand facility margins to kind of shake out? Thank you. Sure. I'll answer the first part and maybe Pat will jump into the second. In terms of the building, I'm actually generally impressed with the team's ability to keep the project on track. We're tracking right now is about a week or 2 What we planned a year ago, and seems confident they can catch it back up. So from an expectation standpoint, we do expect the facility to be online in Q3 of 2022. We are talking to a handful of customers right now. And there's some interest in From a risk mitigation standpoint, I have some of our existing business from Penang move there to help basically build a more robust supply chain for those people. We have hired the GM for the site. It's actually an internal person. We've announced that and he's building a team. So our plans are going really well. Yes. And with the margin, Paul, typically, I mean, we'll see 3, 4 quarters where it will be a drag on margin just because of The business ramping up and putting new business in there. What we've got going for us is similar to the campus environment we have in Penang. We'll be utilizing a lot of the overhead structure we've got in Penang to help support Thailand. So I think similar to what we saw when we put up our 5th facility in Penang is that the ramp to our corporate operating margin target was fairly quick, again, like a 3 to 4 quarter period. So I don't think you're going to see much of an impact, to the overall results, because typically we do have facilities ramping at one point or another. So I wouldn't necessarily, depress our overall margins just because we're going through a period Of ramping with Thailand. Got you. And last question, your diversification in APAC improves kind of post the Thailand facility. Are we done for now? Or do you have expectations to kind of grow that footprint even further in 'twenty three and beyond. Thank you. Yes. I think when you consider, call it, dots on the map, we're not necessarily looking to add new dots on the map. But with the growth projections that we have, I mean, it won't be too far out when we need to be thinking about expanding within the locations where we're at. And a second Thailand facility isn't out of the question somewhere down the road. Thanks. Thank you. I'm showing no further questions at this time. Presenters, please continue. All right. Thank you, Rens. So in closing, I'd like to reiterate that we are optimistic about fiscal 2022. It's shaping up to be a strong growth year given the exceptional wins performance, the improved end markets we're seeing and our participation in secular growth markets. We're also establishing new and higher baseline for our operating margin performance, which all position us well strong EPS growth within the fiscal year. So in closing, I'd like to thank you all for joining us on the call today. We appreciate your support and interest In Plexus. Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.