Good morning and welcome to the Plexus Corporation Conference Call regarding its Fiscal Fourth Quarter 2019 Earnings Announcement. My name is Brandon and I'll be your operator for today. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open the conference call up for questions. The conference call is scheduled to last approximately one hour. Please note that this conference is being recorded. I would now like to turn the call over to Ms. Heather Beresford, Plexus Senior Director of Communications and Investor Relations. Heather?

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. The words believe, expect, intend, plan, anticipate, and similar terms often identify forward-looking statements. 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-K filing for the fiscal year ended September 29th, 2018 and the Safe Harbor and fair disclosure statement in yesterday's press release. Plus it provides non-GAAP supplemental information such as ROIC, economic return, adjusted operating income, adjusted operating margin, and free cash flow because those measures are used for internal management goals and decision-making and because they provide additional insight into financial performance. In addition management use of these and other non-GAAP measures such as adjusted net income and adjusted earnings per share to 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 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, President and Chief Executive Officer; Steve Frisch, Executive Vice President and Chief Operating Officer; and Pat Jermain, Executive Vice President and Chief Financial Officer. Consistent with prior earnings calls Tod 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?

Thank you, Heather and good morning everyone. Please begin with our fiscal fourth quarter results on Slide 3. Yesterday evening after the close of the market, we reported results for our fiscal fourth quarter of 2019. We achieved record quarterly revenue of $810 million which exceeded the top end of our guidance range of $760 million to $800 million. Each of our sectors met or exceeded our expectations entering the quarter. Our aerospace and defense and industrial commercial sectors were exceptionally strong in the quarter delivering 15% and 6% quarter-over-quarter growth respectively. Our industrial commercial results were considerably better than our expectations entering the quarter, in part due to a modest improvement in semiconductor capital equipment demand. We delivered GAAP EPS of $1.23 including $0.19 of stock-based compensation expense. Our non-GAAP EPS of $0.93 was above our guidance range of $0.81 to $0.91. The non-GAAP results excluded a $0.35 benefit due to a non-recurring tax event and a $0.05 expense due to restructuring in order to right-size our communications business. Through our continued focus on productivity and exceptional execution, our teams achieved fiscal fourth quarter 2019 adjusted operating margin of 4.8% comfortably within our target range of 4.7% to 5% and at the higher end of our guidance range. Finally, I am quite pleased with the progress we have made through our inventory reduction efforts. We reduced inventory by an additional $56 million or eight days within the fiscal fourth quarter. These efforts were critical to our ability to deliver free cash flow of $92 million in the quarter. Over the past two quarters, we have reduced inventory over $100 million or 15 days. Please advance to Slide 4. Next, I will discuss additional accomplishments within fiscal 2019. First, I'd like to highlight that Plexus celebrated its 40th anniversary in…

Thank you, Todd. Good morning. Please advance to slide 10 for a review of the fiscal fourth quarter and the full year performance of our market sectors for fiscal 2019, as well as our expectations for the sectors for the fiscal first quarter of 2020. Our health life sciences revenue increased 1% in the fiscal fourth quarter. The result was slightly better than our expectations of flat revenue. For the full year of fiscal 2019, the sector achieved growth of 17%. Strong historical wins performance yielded several new program ramps, which fueled the sector's third consecutive year of double-digit growth. Looking at the fiscal first quarter, the introduction of lower cost next-generation products will impact top-line revenue. As a result, we expect a mid single digit decline for our health care life sciences sector in the fiscal first quarter. However, we expect the ramp of new programs will return the sector to growth in the fiscal second quarter. Revenue in our industrial commercial sector increased 6% for the fiscal fourth quarter, which was meaningfully better than our expectations of a low single-digit decline. Stronger demand from 12 of the sector's top 15 customers drove the growth. For the full year of fiscal 2019, the team overcame a 21% headwind in the semiconductor capital equipment sub-sector and grew overall sector revenue by 7%. As we look at the fiscal first quarter of 2020, we see modest strengthening in the semiconductor capital equipment sub-sector being offset by modest softness in the energy management in self-service sub-sectors. The net result is that we anticipate a low single-digit increase for our industrial commercial sector in the fiscal first quarter. Due to strong execution from our global operations teams, our aerospace and defense sector grew an impressive 15% in the fiscal fourth quarter. The result…

Thank you, Steve, and good morning everyone. Our fiscal fourth quarter results are summarized on slide 16. Fourth quarter revenue of $810 million, was above the top end of our guidance and sequentially higher by $10 million. Gross margin of 9.6% was sequentially higher by 70 basis points primarily due to improved, mix better-fixed cost leverage and continued cost containment efforts. We experienced margin expansion across all three of our manufacturing regions. Selling and administrative expense of $38.6 million was slightly above our expectations primarily due to higher variable incentive compensation expense. As a percentage of revenue, SG&A was 4.8% sequentially up 20 basis points. During the fiscal fourth quarter, we completed all restructuring activities to address revenue declines within our communication sector. These activities resulted in charges of $1.7 million which were lower than previously anticipated. Before consideration of the restructuring charges, adjusted operating margin of 4.8% was at the higher end of our guidance and sequentially improved by 50 basis points. Included in this quarter's operating margin, was approximately 70 basis points of stock-based compensation expense. Non-operating expenses of $4.1 million were lower than expected in part due to foreign exchange gains. Our GAAP effective tax rate for the fiscal fourth quarter was a benefit of 10%. During the quarter, we re-asserted that a majority of our undistributed earnings for certain foreign subsidiaries are permanently reinvested, therefore do not require liability for withholding taxes. As a result, a related liability of approximately $10.5 million was reversed and benefited the fiscal fourth quarter. GAAP diluted EPS of $1.23 included a non-cash benefit of $0.35 per share related to the special tax item and a charge of $0.05 per share related to the after-tax restructuring activities. Excluding these items, non-GAAP EPS of $0.93 was above the top end of our…

Thank you. We will now begin the question-and-answer session. [Operator Instruction] And from Longbow Research we have Shawn Harrison. Please go ahead.

Good morning, everybody and congrats on a strong finish to the fiscal year.

Thanks, Shawn. Good morning.

Just hoping to pin you down a little bit more. Single digits is a pretty broad range for looking at the fiscal year. Is that low, mid, high? And what are, I guess, the biggest unknowns you're looking at out there in terms of trying to triangulate the fiscal year?

Sure. So, I mean, obviously, Shawn, it's a little early to make bold predictions about fiscal 2020, but I'll give you our best view as we know it today. So we're expecting reasonable growth, I'd call it, in fiscal 2020 certainly below the levels of 2018 and 2019 where we're in double digits. But we'll look at -- we're thinking about mid-singles as we look at it currently. And I'll tell you how we make that up. One is, we anticipate communications to stay at depressed levels, so we're not modeling in any expansion of -- any meaningful expansion beyond new program ramps within communications. So no end market expansions. Semi-cap, while we're seeing, I would call it, some modest growth and slightly above fiscal 2019, it's modeled nowhere near fiscal 2018. And then, if we look at the rest of the sectors that we talked about, A&D, we're expecting really strong growth again in A&D. Probably wouldn't approach the 32% of last year, but strong growth nonetheless due to new program ramps and good end markets there. Industrial/commercial markets are looking reasonably stable there. Healthcare, we have a little bit of a headwind going on with these transition into some lower cost programs that's going on right now. So that's hurting our top line in the near term. So not a stronger growth from healthcare in 2020 as opposed to 2019. Although, we're positioning ourselves for a really good 2021 in healthcare, because we have a number of very significant game changing programs that are ramping, but they're more -- if we're fortunate, they're late F 2020, but they're really looking more like F 2021 of really moving the needle on revenue. So that's kind of how things look from a revenue standpoint. But with that said, I mean, our big focus for 2020 is around cash and operating margin expansion. So, Pat talked about us targeting free cash flow in the area of $100 million. We think that's a very achievable level as we continue to make progress on our working capital initiatives. And then, operating margin we're looking for expansion, so we really believe we can be in this double-digit EPS growth range in fiscal 2020.

That was great and it was a good segue for my follow-up to Pat. As we think about kind of the components of EBIT margin expansion in fiscal 2020, you're going to see a dip in gross margin here in the December quarter. But how do -- or how should we model both gross profit -- or think about gross profit margin expansion as well as SG&A, as you move through fiscal 2020, where you're going to get more of the leverage?

Yes. So, you're right. This first quarter gross margins will be a bit depressed, as you recall in the second quarter as well, we do merit increases. So I think the first half of the year, we're going to be in a similar level for gross margin. I think the back half is where we can see some improvement in gross margin, probably 10 to 20 basis points. I also think with SG&A, that's where we'll gain some leverage and this year fiscal 2019 we ended at 4.7%. I think, we can gain at least 10 basis points with our operating expenses as we leverage those.

Great. Thank you.

From Stifel, we have Matt Sheerin. Please go ahead.

Yes. Thanks. Good morning. Just a question on the commentary regarding the product or customer transitions in the healthcare, life sciences space. Is that concentrated to one customer? Or are you just seeing, for any reasons -- typical reason, you have multiple customers transitioning?

This is Steve. It's associated with multiple customers. The healthcare, life science team has done a phenomenal job with wins through fiscal 2019 and we're going through NPIs with several different programs. And as Todd highlighted, it looks like the timing of those are late 2020 and 2021 in terms of where they hit manufacturing and volume.

And one of the challenges with healthcare and predicting revenue growth is that the transitions can be quite long based on the qualification and FDA cycle that's involved with the various products. So some of the wins are just -- they just have a longer qualification and validation cycles than would maybe be typical in other sectors.

Okay. That's helpful. And then on semi-cap, I know that you and most of your peers have been really not expecting any kind of pickup in semi-cap area until early next year, you're seeing a modest pickup, but have relative cautious outlook looking for just modest growth relative to big declines that you saw this year. Do you have any better visibility into that business that gives you any more or less confidence?

Yes. This is Steve again. We've been all talking to customers and I think there is an expectation that there will be an increase in the mid-term horizon. And probably the feedback from the customers and even the industry publications are talking about a meaningful increase in 2021. The question is does that come in a little early; does it push out a little bit. I guess, probably recapping what Todd said a little bit as we expect our fiscal 2020 to be stronger than our fiscal 2019, but not as strong as our fiscal 2018 and some of these modest increases that Todd's talking about is kind of short-term drop-insurance, and so we'll be monitoring that throughout fiscal 2020 to see if those start picking up or not as we end calendar 2019 to maybe get a little bit more visibility as to when that increase may happen.

Okay. And then my last question regarding the inventory and you've seen some really nice progress in bringing those inventory days down back to where you were a couple of years ago. Are you comfortable at those levels? Do you see continued progress also given your mix of business seems to be different today than it was maybe four years ago when you were back into the 1980s? So, I'm wondering what the targets are there. And then relative to that tight supply environment that we saw a year ago, I know every quarter it's improving. Are you seeing any areas of tight supply where there is some shortages still or is everything pretty much easy to get?

So, Matt, this Pat. I'll start with the first part and maybe have Steve touch on the supply and demand. But with regard to inventory days, there is work still to be done. I mean, really pleased with the improvement our teams did over the last couple of quarters but we've got to keep that up and the teams are very engaged in driving continued improvement. From a target standpoint, I think we can get a few more days out of inventory throughout fiscal 2020 and that's what we're driving towards. But we do have to manage that with some of our regions are ramping new programs and that's part of the reason why cash cycle in the fiscal first quarter will be up a couple of days. So we have to balance those two, but by all means our teams are still focused on driving improvements.

Yeah. This is Steven. And maybe I'll hit your supply chain question. I'd say there is nothing that is -- from a component standpoint that's driving significant challenges for us at the moment. You used the word easy there are always challenges in terms of tracking something down. For us, it's probably more associated with customer forecast in short-term drop-ins causes us the scramble and chase components. I think that's probably more of our supply chain headaches than there is any kind of just industry trends.

Okay. All right. Thank you very much.

From JP Morgan, we have Paul Coster. Please go ahead. Paul your line is open. I think you might be on mute. Okay. We'll take the next question from Sidoti & Company, we have Anja Soderstrom. Please go ahead. Anja your line is open. Anja, can you hear? Check this if you are ready to go. Anja, do you have a question?

Yes. I'm here. Are you there? Operator: Yes. Please go ahead.

Okay. I’m sorry about that. Congratulations on good ending the year.

Thanks, Anja.

There has been a lot of good questions asked already, but first of all, I think Todd you said in the presence here that 2020 is more of a lay-up here and 2021 should be better is that a correct comment or?

Well, potentially from a revenue growth standpoint, I expect 2020 to be a strong year from an EPS standpoint. The one thing that is really factoring into to 2020 that shouldn't be overlooked is we're expecting more than a $100 million headwind in the communications business of 2020 versus 2019. So to overcome that is really taking a certain amount or depressing a certain amount of the growth that we expect.

Okay. And then when we talk about the communications segment, it seems like that you expect to be sort of flattish for this year, do you expect it to come back in 2020 or how do you think can happen with that.

Yes, so this is Steve. I think the thing that we need to watch for is what the capital spending patterns of the MSOs look like as we come through the end of calendar 2019. So pre-coming out with their expectations probably in the December, January timeframe and I expect that to kind of set the tone for what fiscal 2020 is going to look like for our customers and for us for the full year.

And what I'd say is we're modeling it as if it doesn't come back, although if you read some of the industry press there's an expectation that at some point it is going to. So it's just a question I think of when. Q – Anja Soderstrom: It is going to be this year or next year. Okay. And then also on the non-operating expenses and the guidance there's a little bit higher than the run rate in the past and not Patrick mentioned you're not going to capitalize the interest expense and also some foreign into that not expecting to get. So is this sort of the run rate we should be looking at for the year the first quarter?

Yes, I think we'll see it come down a bit as we generate free cash flow and pay down our revolver. The street right now has a little above $18 million for the full year for all non-operating expenses. I think that's a little light. I think it's closer to $19 million is probably what the forecast should be. So it won't be at the run rate that we're at in the fiscal first quarter. It will come down from that. But I think in total around $19 million is a good number for the full year. Q – Anja Soderstrom: Okay. Thank you. That was all for me.

You are welcome. Thanks, Anja.

And from JPMorgan, we have Paul Coster. Please go ahead, sir.

Yes, thanks. Can you hear me?

Yes.

Okay. A few quick ones. First of all in the healthcare and life sciences segment you talked of the next-generation programs launching at lower cost but you also went on to sort of pick that as a temporary condition. Why is it temporary and not something that we'll persist?

I think what we are looking at is the revenue dip in healthcare life science has been a temporary situation as basically the launch or the ramp of these additional programs or other programs will overcome the revenue dip as a result of the lower cost next-gen programs.

Also I heard your commentary around the mid-single digit growth expectations for 2020, what kind of macro assumptions have you made in that assuming that we continue to see modest growth across the global and what are the swing factors for you?

I would say it's consistent with where we're at today. So no meaningful change in trade dynamics or end markets certain market dynamics from what it is today. So I'd call it a modest growth economy.

Got it. And then the aftermarket services. How do those splits across your segments and how do they compare from a margin perspective with your traditional business?

Yes, it's still ramping. So it's not at its ultimate margins yet but we'd anticipate over time it would be superior to corporate margins. And the business itself, it goes across all our sectors but I would say the best play forward is in healthcare life sciences but we have business across all four of our sectors in the aftermarket space.

Got it. And then finally your debt. You obviously have near zero on a net basis. So what is the strategy that why not take on more debt maybe get some leverage buy back some shares, et cetera?

One thing to recognize Paul is at the end of the quarter we always see a high mark with our cash balance and then right at the start of the next quarter, a lot of that cash is going out the door to pay vendors. So we need that type of level of cash on the balance sheet but we will look at this as we continue to generate free cash flow the type of position we want to be in. Right now we've got the $50 million buyback that we'll execute this year and we'll look at next May our strategy going forward depending on our free cash flow generation.

Thank you very much.

You are welcome, Paul

[Operator Instructions] And from Needham & Company, we have Jim Ricchiuti. Please go ahead.

Hi, guys. This is Mike Cikos [ph] on for Jim Ricchiuti. Couple of questions here. The first on the healthcare vertical. I understand that you guys have won a number of new programs here, particularly in the robot assisted surgery space. When should we expect those historic contributing more meaningful revenue? Are those the programs you're alluding to ramping early in fiscal 2021?

Yes. This is Steve. They're definitely part of it but not exclusive to those.

Okay. And are those the programs then that we're looking for coming on maybe the back half of this year to help offset some of these lower cost programs that are ramping in the next-gen space?

Yes. Our expectation is as Todd kind of talked about. The short-term here, the headwinds are the pressure is putting on our top line revenue in Q1 with a couple of these lower cost programs, we expect that to be overcome as we look into Q2 and beyond with growth with these other programs. And so it's more of a temporary issue just associated with the introduction of those lower cost programs and we expect to return back to growth sequentially in Q2.

Okay. And in the Aerospace and defense sector, can you help us better understand the manufacturing wins that you guys had. Was there any budget flush there? Or was it mortgage share gains with new customers or existing customers?

Yeah. So with Aerospace, we are definitely gaining market share with some of our larger customers. We know explicitly where the products are coming from. And I think our operations team's execution and ability to meet the customers demand is driving our strength there. In the defense side, we are seeing an uptick of defense work for the sector. And in wins there are newer programs, and not one that we've had in the past. So, a lot of the stuff is all associated with growth with new programs. It's not exclusively related to just increases in current programs.

Thank you very much.

Okay, thank you, Jim.

And we have no further questions at this time. I will now turn it back to your CEO Todd Kelsey, for closing comments.

All right thank you, Brandon. So, I'd like to take a moment and end by thanking our Plexus team members globally for delivering an outstanding fiscal 2019. It's through your passion that you help create the products that build a better world. And this leads to exceptional customer service and a vigorous culture. In the process, you achieved outstanding revenue growth produced strong profitability and positioned Plexus for future success. It's your efforts that differentiate Plexus in markets with highly complex products and demanding regulatory environments. And the results of fiscal 2019 leave me optimistic, that we'll have continued future success. So keep up the tremendous work. And then finally, thank you to everyone, who joined us on our call today. We appreciate your interest in Plexus, and your support.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.