Good morning, and welcome to the Plexus Group Conference Call regarding its Fiscal Second Quarter 2020 Earnings Announcement. My name is Sidney, 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 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 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 28, 2019, as supplemented by our Form 8-K filed with the SEC yesterday and 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 for internal management goals and decision-making and because they provide additional insight into financial performance. In addition, management uses these and other non-GAAP measures such as adjusted operating income, adjusted operating margin, adjusted net income and adjusted earnings per share to provide a better understanding of core performance for purposes of period-to-period comparison. For a full reconciliation of non-GAAP supplemental information, please refer the 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, Todd will provide summary comments before turning the call over to Steve and Pat for further details. Let me now turn the call over to Todd Kelsey. Todd?

Thank you, Heather, and good morning, everyone. Please begin with our fiscal second quarter results on Slide 3. After the close of the market yesterday evening, we reported results for our fiscal second quarter of 2020. We achieved quarterly revenue of $767 million. While our revenue result was below our expectations entering the quarter, I commend our teams and their ability to mitigate the impact of Covid-19-related supply chain constraints, and government mandated workforce reductions at our facilities in Penang, Malaysia. Our sites in Malaysia operated with 40% of typical workforce for the final three weeks of the quarter. With the exception of our China sites in the month of February, the remainder of our facilities operated near full capacity for the quarter. While each of our locations face challenges resulting from the Covid-19 pandemic, our talented and dedicated team members at all locations remain committed to meeting the essential needs of our customers and communities. We delivered GAAP EPS of $0.43 including $0.19 of stock-based compensation expense, and non-GAAP EPS of $0.61 excluding $0.18 due to the previously announced closure of our Boulder Design Center. Both our GAAP and non-GAAP EPS included $0.14 of cost directly related to the impact of Covid-19. Please advance to Slide 4. While our results were impacted by the Covid-19 outbreak, our teams demonstrated their ability and resolve to overcome the complexities and challenges of Covid-19. They remain committed to delivering for our customers and helping to create the products that build a better world. Our efforts supported our Healthcare/Life Sciences customers and healthcare workers around the globe by delivering critical medical products that are in the frontline of the battle against Covid-19. This includes products such as infusion pumps, portable ultrasounds, medical bed electronics, portable patient monitors, ventilators, mobile radiography electronics, and diagnostic…

Thank you, Todd. Good morning. The COVID-19 pandemic impacted our fiscal second quarter operational metrics. To provide better context of the situation, I will start with the status of our global facilities on Slide 8. All of Plexus’ facilities have requirements placed upon them by the respective governments where they are located. However, all of our facilities have been granted permission to conduct business. Our fiscal third quarter guidance includes the currently anticipated operational inefficiencies due to Covid-19. Our design centers, global headquarters and most office personnel are under mandates to work from home when possible. Our teams have adjusted to this new paradigm and we believe we can function in this manner for an extended period of time if necessary. In regards to our manufacturing facilities, the status varies by region. Starting in APAC, our China sites experienced a period of very limited production due to the restrictions imposed by their government in response to the spread of COVID-19. However, the team worked significant overtime and overcame supply constraints to fulfill most of our customers' orders within the fiscal second quarter. For the fiscal third quarter, we anticipate full staffing levels and an improved local supply chain in China. As we announced on March 23rd, our sites in Malaysia are subject to the national movement control order. The current order restricts the number of employees who can work at our sites at 50%. The impact to some of our local suppliers is more severe as they were completely closed. Our revenue softness for the fiscal second quarter can largely be attributed to the situation in Malaysia. As we start the fiscal third quarter, the order remains in effect, and we believe it could be extended past the current expiration date of April 28. However, as a result of mitigations…

Thank you, Steve, and good morning, everyone. Our fiscal second quarter results are summarized on Slide 14. Revenue of $767 million was sequentially down 10%, while gross margin of 8% was down 130 basis points. The lower gross margin was primarily due to the under absorption of fixed manufacturing expenses across all regions, seasonal compensation cost increases, and the incurrence of more than $4 million in Covid-19-related expenses. Selling and administrative expense of $38.2 million was consistent with our expectations. As a percentage of revenue, SG&A was 5%, sequentially higher by 40 basis points due to the lower revenue and seasonal cost increases. During the fiscal second quarter, we completed all restructuring activities related to the previously announced closure of our Boulder Design Center. These activities resulted in charges of approximately $6 million. Before consideration of the restructuring charges, adjusted operating margin was 3%. Included in this quarter’s operating margin was approximately 75 basis points of stock-based compensation expense. Non-operating expenses of $3.1 million was better than expectations primarily due to foreign exchange gains. GAAP diluted EPS of $0.43 included a charge of $0.18 per share related to the after-tax restructuring activities. Excluding this item, non-GAAP diluted EPS was $0.61. Turning now to the balance sheet and cash flow on Slide 15. During the quarter, we purchased approximately 225,000 shares of our stock for $13.2 million at an average price of $58.57 per share. At the end of the fiscal second quarter, we had approximately $27 million remaining under the authorization. However in March, we suspended the repurchase program indefinitely, given the current environment. For the fiscal second quarter, we used $29 million in cash for operations and spent $17 million on capital expenditures resulting in negative free cash flow of $46 million. Through the first six months of fiscal…

[Operator Instructions] Our first question comes from Adam Tindle with Raymond James. Your line is open.

Okay. Thanks and good morning. Todd, I just wanted to start, you mentioned that the guidance does not assume material impact to end-markets beyond what has occurred. So just to start, maybe can you touch on what has occurred thus far from a product order standpoint? Because it seems like the shortfall in March is largely operational-related, which is understandable, but not a material reduction in demand thus far. So maybe just touch on what you’ve seen so far in demand reduction.

Sure. So, from a demand standpoint, Adam, probably the biggest impact has been in our aerospace subsector. Now defense and space within that entire sector as we define it are strong. But aerospace itself is weak and we are also seeing much of Industrial/Commercial beyond semiconductor capital equipment as weak. Now the semiconductor capital equipment demand is holding up rather well right now. I mean, I think there is some question out there in the market as to whether that’s going to be long-term or whether that’s a near-term situation. But right now it’s strong.

Okay. And if we follow kind of normal downturn, it typically takes another couple of orders or sharp order cuts, - quarters of sharp order cuts. Are those further downticks in order cuts contemplated in your guidance?

For Q3, yes, yes. One other thing that’s worth noting too, Adam, is we talk about the strength in healthcare, and that’s a little bit bifurcated as well too. It’s very strong in critical care products and of course we won a number of new programs that are directly related to Covid-19. But when you consider products that we make that are more used in, say, elective type, surgery type applications or things like that, the demands weaken quite a bit. So there is a bit of a mixture within healthcare as well, too.

Okay. And maybe just one final one for Pat. You created positive economic return despite navigating the pandemic. I know you’ve had some benefit from restructuring, but it’s still positive if we factor that in. Maybe just first touch on how the team adjusted to achieve that and moving forward, margins are expected to move up, cash cycle down. So I would expect further improvement. If you could touch on the key drivers of the cash cycle improvement they are expecting to drive this? Thanks.

Yes. So, at the end of the second quarter, we had the negative free cash flow and a lot of that was driven by not being able to factor some of our accounts receivable and I think we’ll see improvement in that area as we progress into the third quarter. Inventory levels will be more elevated in the third quarter as we ramp some of these new programs. So I expect that, but also our payable days, I think that’s where we will see improvement and offset to the increase in inventory days. And we are securing some additional customer deposits, because in some of these markets that have upside demand where the customer wants to ensure inventory is on hand. We are requesting customer deposits to help offset that working capital investment. So, I think the teams are doing a fantastic job around inventory management in all of our regions. And so, we are seeing improvements there. But in this near term, we will see some increases in inventory. Those are probably the main components for us of the cash cycle.

Makes sense. Thank you.

Thank you. And our next question comes from the line of Shawn Harrison with Loop Capital. Your line is open.

Hi, good morning everybody. It’s good to hear your voices. I wanted to delve into, I guess two topics. The first being just, the incremental outsourcing here and how much of it maybe is a pull-forward versus maybe a permanence of incremental outsourcing for a while that we’ve seen in prior market corrections?

Yes. So, I’ll take that one. This is Steve. I would say, the conversations with customers, and I'm going to expand your question a little bit, the conversations with customers is interesting right now, because a lot of customers are starting to look at what is from a continuity of supply strategy, what is COVID going to do for the long-term? Today, it’s more reactionary, but I do expect that Covid-19 will change the manufacturing strategy for lots of customers and the ability, our teams’ ability to deliver through this crisis is definitely helping us gain market share with several customers. And as we look at the incremental part of that is, is it goes into the future quarters. We would expect customers that if the downturn comes, or if there is a slowdown, we would expect the opportunity to increase for the number of outsourcing opportunities. And so, it’s a little early to see what the impacts of Covid-19 are going to be. But I think your question is kind of focused on it, is this going to follow a similar pattern? I guess our expectation is that it probably will.

Okay. And then, I guess, there is a follow-up, the strength in the communications business, is that kind of – is it level off here in the June quarter? Or is this something because of the work from home environment you see multiple quarters of incremental spend by the big broadband providers and other kind of Internet providers that we all need that signal at home?

Yes. At the beginning of Q2, our forecast for Q3 did show some strengthening. So, we did anticipate some strengthening. Covid-19 has increased that in a substantial way. We do expect it to stabilize at this level. The question will be is probably get into 2021, what does it look like and obviously it’s a bit early to call that one.

Okay. That’s great, Steve. Thank you.

Thank you. And our next question comes from the line of Jim Ricchiuti with Needham & Company. Your line is open.

Thank you. Good morning. I may have missed it. But could you provide any Covid-19-related expense that maybe embedded in your gross margin guidance for fiscal Q3?

So, I’ll start with this and then I’ll pass it off to Pat a bit more specifics as we – as I think about Covid-19. One of the things with regards to our guidance, our demand is higher than our guidance. So we are staffed for higher demand. But we are – so that’s impacting our margins. But we are realistic in knowing that there are significant challenges within the supply chain right now and the ability to be able to get the parts that we need and the time that we need. I mean, it’s more – certainly more volatile than would be in a normal environment. So we are taking that into account. But beyond that, we’ve taken an approach that if we need to have an employee self-quarantine because of Covid-19 or if we choose to close a site for a period of time, as a result, we compensate our employees. So there is some direct cost around that as well as PP&Es. So, and I’ll pass it off to Pat and he can give you more specifics around the numbers.

Sure. Yes. So, Jim, in Q2, we had the $4.7 million. In Q3, we are expecting that to be around $2 million and to Todd’s point, combination of direct equipment and some labor cost. And so, from a margin standpoint, we are guiding operating margin of 3.8% to 4.2%. So the midpoint is 4%. Those direct costs that we expect in Q3 are about 30 basis points. So without those, you’d be at about 4.3%. So we are still below our target range of 4.7% to 5% and that’s where I think this difference is really in the inefficiencies that we’ll see in sites as some programs are coming down significantly and we are managing that labor force, while other programs are increasing and sites need additional headcount and managing through that labor situation. So I think that kind of bridges where – how we get back to our target range in future quarters.

It’s helpful. If we look at the Aerospace and Defense segment, is there way for – can you size what the commercial aerospace represents of that, only because it doesn’t sound like that business is coming back anytime soon. Is that a fair way to think about it?

Yes, it will be down for a while certainly, and that’s about half of our business within the sector.

Okay. And then, on the Healthcare/Life Science, I think it’s interesting the way – you are clearly seeing the benefit there from all of the increased demand as it relates to critical care. Do you have any sense as to when that more elective piece that you alluded to might start coming back or is that still a little tougher to tell given that we are still in the thick of things here?

Yes. So, this is Steve. I’ll try to answer that the best I can. If you breakdown Healthcare/Life Sciences and I talked about the fact that we had a net 16% increase from our January forecast for Q3 to our April forecast for Q3, if you look at healthcare, the healthcare portion was actually a 20% increase and life sciences was relatively flat. If you look at the top 15 customers just within the healthcare subsector, all 15 had double-digit movement from January to April. However, nine of those were up and six were down. The six that were down were associated with non-critical healthcare products, elective procedures. And so, with – do we expect the double-digit continue to increase? That will depend a bit on pandemic, but we do expect those elective procedures will return as the economies across the globe get turned back on and elective procedures start to happen. The question that we are asking is, is there going to be a pent-up demand? Is it going to be a slower ramp, but we would expect those elective programs to come and that demand to come back as soon as the economies of world to turn back on and people are basically allowed to move.

That’s helpful, Steve. The last question for me is just on the Industrial/Commercial side of the business and this may be tough to call, but do you get the sense that June maybe the bottom? Or is this just the visibility maybe just too limited here?

I think the, again, looking at the changes that we’ve seen in the forecast from the January cycle to the April cycle, the forecast demands in some of those subsectors that we talked about coming down, I mean, it come down substantially. And so, we do believe that a fair amount of the customers have taken a pretty good look at where their forecasts are going to be for our fiscal Q3. And so, they’ve adjusted pretty well. Is it going to come down more? I think that’s a little bit early for us to tell in terms of what’s going to happen given the global situation.

That’s fair enough. Thank you.

Thank you. And our next question comes from the line of Paul Coster – JPMorgan. Your line is open.

Yes. Thanks for taking my questions. Just a quick pass-through on the healthcare front first of all. Are any of the – is any of this new business from new logos, is it brand new products that the customers have kind of devised on the fly or are they existing programs that they are ramping up? As you ramp up, do the margins kind of – are they under pressure initially and then do they improve over the course of time?

Yes, in general, Paul, the five new wins that I talked about are our new programs that are in the process of ramping. I think those are – the margins should be fine with those. I think we will be able to ramp those at kind of corporate level margins, though. So, I wouldn’t expect it to be dilutive during the ramp period.

No new logos at this time?

Yes, there are new logos.

Included in that five?

There are, yes, correct.

Interesting. Okay. And then, just a quick question on credit risk. Are you seeing any issues amongst your customers that you are monitoring carefully?

Well, we are monitoring credit really carefully. But we have not seen any concerns at this point. The benefit is, when you look at our customer list, our top-10 customers make up 55 or so percent of our revenue, all international companies. So we feel comfortable at this point, but it is something we are going to closely monitor.

Your sales team is working remotely and virtually at the moment and I guess it’s reasonable to expect that their win rates probably got – now that they’ll lose business to anyone, but just the ability to close deals will be impaired somewhat in this next quarter. Is that a fair assumption? Should we have fairly – should we expect the manufacturing wins to be more modest in fiscal 3Q and then maybe pickup in the back-end of the calendar year?

I wouldn’t assume that just yet. I think, opportunities with new logos may be a little bit harder to close. However, we are seeing increased opportunities with existing customers and so, our expectation with the business development teams is that, they are going to continue to deliver with that. Our corporate communications team is doing a fair amount of work with virtual videos and things to allow and give our sales force the tools that they need to be able to continue to sell our services. And so, again, I think, new logos maybe a little bit more challenged. They may slowdown their decision-making. But we potentially see our existing customers providing more opportunities. So the split might shift a little bit.

Got it. And then last question. Going back to Jim Ricchiuti’s question around the defense and Aerospace segment. So, I assume first of all the 50% that was commercial was on a backward-looking basis looking forward you mentioned it’s going to be a smaller percentage at least for a while to confirm that. But also, can you just clarify for us, what kind of business you are doing in the commercial Aerospace segment? Is it newbuilds, i.e. new aircraft? Or is it related to actual air miles traveled and therefore, sort of a consumable product?

Yes, it’s a combination of both, Paul. There is a – certainly it’s dominated by the newbuilds. But there is an amount of aftermarket business that we have and that’s obviously taken a near-term hit right now, the aftermarket business. And the 50:50 split I call that a pre-COVID split.

Right. So, therefore if there is a recovery at air miles travels, we should at least see the variable, consumable aftermarket business pickup. I hate to be picky, but what percentage of the commercial Aerospace businesses is aftermarket versus newbuild or if you can guess of that?

Yes, unfortunately with our customers, we are shipping field units that we don’t always get visibility completely what’s going in the new aircrafts versus aftermarket services. It would be purely a guess for me.

All right. Okay, thank you so much.

Thank you. And our next question comes from the line of Anja Soderstrom with Sidoti. Your line is open.

Hi everyone. Thank you for taking my question.

Hi, Anja.

A lot of good questions asked already. So, I am just going to ask about the SG&A. You are sort of guiding down to - for the third quarter. Is that due to the seasonal compensation going down or are there other moving parts there and how sustainable is that for the coming quarters? How we should we think about that?

Yes. So, it’s not the seasonal cost coming down, because those go into effect January 1st those are merit increases. So those are carrying through. Some of it is better inefficiencies that were driving better productivity. We are seeing some of the COVID expenses that flow through in Q2, be smaller in Q3. And what we’ve done from a discretionary spending standpoint is really pulled that back. Travel, as you can imagine is essentially non-existent and some of our headcount hires we’ve delayed. So, Q3 is going to be much smaller and lower and as we go into Q4, I expect that to rebound a bit and probably be closer to $38 million in Q4. Some of that is variable incentive compensation expense as well, that’s down in the third quarter. But we expect higher expense in the fourth quarter. So, I think going forward, something in the $38 million range per quarter is probably reasonable.

Okay. Thank you. And then, it seems like your non-operating expenses are ticking up a bit too. What’s the moving parts there?

Probably two main things there, Anja. One is, in Q2, we had about $1 million of foreign exchange gain and those were driven by mainly in Mexico the peso devaluation generated some gains for us. So that was about $1 million that we wouldn’t anticipate recurring in Q3. Also with the increase in working capital that we started to experience towards the back half of the second quarter, we expect that to continue into the third quarter. So our borrowing is higher than the quarter and the interest expense is going to be higher than what we had in the second quarter. So they are again, I think going forward and the – kind of the midpoint of that guidance for the third quarter is $5 million. That was pretty similar to what we had previously guided for prior quarters. So removing the FX activity, I think $5 million, $4.5 million to $5 million a quarter is a pretty reasonable number assuming no FX gains or losses.

Okay. Thank you. And then in terms of inventory and supply chain, I understand that’s a bit challenging now. What do you see in the supply chain? How – do you expect that to be challenging going into next year? Or is it – does it going to improve? Or just a bit of a color what you are seeing there?

Yes, this is Steve. The supply constraints – the supply chain constraints we are seeing now are more associated with facility closures due to COVID-19. And so, our expectation is, as all facilities come back online, the supply chain constraints will free up and we’ve seen that happen with some of our suppliers particularly in Malaysia and China. They had shutdown early and they’ve come back online and the supply chain constraints are starting to disappear. Now, obviously the pandemic is widespread and so, many different companies, both on the custom engineering components as well as electronics have seen different portions of their business get shutdown for periods of times. And so, it’s sporadic, but it’s meaningful. And again, we’d expect that to return to more normal things as these facilities get back online and the world manages the pandemic.

Okay. Thank you. And the shutdown is due to them not being deemed essential businesses or?

No, the facility shutdowns are – yes, similar to what we’ve faced in Malaysia. Although we are in essential businesses, different governments are – making the case early for us in the quarter. We are only allowed to have 40% of our workforce in the facility. And so, production for us was limited. Now, some suppliers including some of ours were deemed not essential and they were forced to shut down completely. And so, we’ve been working with the respective governments to basically help them understand that supply chain is critical and we’ve been able to get some of those suppliers turn back on. And I think if this trend continues, and we are seeing it continuing through the fiscal third quarter here, we’ll see these suppliers coming back online and reaching more normal levels of production which will basically free up some of these constraints.

Okay. Thank you. That was all for me.

Thank you.

Thank you. Our next question comes from Matt Sheerin with Stifel. Your line is open.

Thanks and good morning. I appreciate all the color so far. Just only question for me just regarding the healthcare business in the ramps you are seeing in the Covid-19-related programs. Could you give us an idea of the sustainability of those programs in terms of lifecycles or any programs that are more one-off or two or three quarters in terms of getting equipment out there?

Yes, I would say, Matt that, one or two of these, I would call one-off programs that probably have a one to three quarter duration to them and the remainder would be sustainable, but I would anticipate that that once we get out somewhere from two to four quarters, that their volumes would drop a bit.

Okay. And I guess, in theory, at that point, you will see the elective equipment, surgery type of programs ramp to offset that.

We believe so, yes.

Okay. Okay. That’s it for me. Thanks so much.

All right. Thanks, Matt.

Thank you. I am not showing any further questions at this time. I would now like to turn the call back to CEO, Todd Kelsey for any further remarks.

All right. Thank you, Sidney. And again, I want to thank everyone who joined our call today. We certainly appreciate your support and interest in Plexus. These are certainly interesting times and I am sure it’s impacted all of you. Some of you are probably at a different location than you typically are as you are listening to this call. But I know, I certainly look forward to the day when things are closer to normal and stay safe and stay healthy and we’ll talk to you soon.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.