Good morning, and welcome to the Plexus Corp. Conference Call regarding its Fiscal Fourth Quarter 2021 Earnings Announcement. My name is Gail, and I will be your operator for today's call. [Operator Instructions] 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 Mr. Shawn Harrison, Plexus Vice President of Communications and Investor Relations. Shawn?

Good morning, and thank you for joining us today. Some of the statements made and the 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 October 3, 2020, as supplemented by our Form 10-Q filings 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, 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 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, 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, Shawn. Good morning, everyone. Please advance to Slide 3. I'm proud of the resilience and unyielding focus on operational excellence of our more than 19,000 plexus team members. Their actions during fiscal 2021 were foundational to advancing our vision to help create the products that build a better world. Through their efforts, Plexus delivered exceptional results in fiscal 2021, which I will now highlight. We delivered GAAP EPS of $4.76, representing 21% year-over-year earnings growth on essentially flat revenue of $3.4 billion. Revenue was below our robust demand levels due to worsening supply chain conditions and the uncertainty created by the COVID-19 pandemic. Our GAAP operating margin of 5.2% well exceeded our previous target range of 4.7% to 5%. We believe this level of performance is sustainable, and we are establishing a new industry-leading GAAP operating margin target of 5.5%. In addition, our fiscal 2021 GAAP operating margin of 5.2% was our best performance since fiscal 2008. We delivered return on invested capital of 15.4%, with an economic return of 730 basis points above our weighted average cost of capital of 8.1%. This outcome far exceeds our previous economic return goal of 500 basis points. As a result, we are establishing a new enduring return on invested capital goal of 15%. Our team delivered free cash flow of $85 million despite the challenges created by the ongoing supply chain constraints and investments to support future growth, including the initial build-out of our new facility in Bangkok, Thailand. Next, I will highlight fiscal 2021 business development successes that position us for sustained growth as we differentiate in markets aligned with our mission of leading and highly complex products and demanding regulatory environments. In fiscal 2021, our team delivered over $1 billion of new manufacturing revenue when fully ramped into…

Thank you, Todd. Good morning. I will start on Slide 7 with a review of the fiscal fourth quarter and the full fiscal year performance of our market sectors for 2021, as well as our expectations for the sectors for the fiscal first quarter of 2022. Customer demand across our market sectors was very robust in 2021, including the fiscal fourth quarter. However, global supply chain constraints as well as operational inefficiencies due to COVID-19 in our Malaysia operations were worse than anticipated. As a result, all three of our sectors missed revenue expectations for the fiscal fourth quarter, largely due to these challenges. In spite of the many obstacles in fiscal 2021, our Healthcare/Life Sciences and Industrial sectors achieved annual revenue growth of 5% and 2%, respectively. This was largely due to successfully ramping new programs throughout the year. Although our Aerospace and Defense sector was also ramping new programs, the headwinds associated with commercial aerospace were too large to overcome. The result in revenue is a decline of almost 20% for Aerospace and Defense sector. The net result is, the teams generated Plexus revenue in fiscal 2021 that was slightly below our record of $3.4 billion in fiscal 2022. As we start fiscal 2022, we believe the COVID-19 situation in Malaysia is improving. However, the global supply chain constraints will limit our ability to capture the broad-based, robust demand from customers in the fiscal first quarter. Looking at our Industrial sector, demand in most subsectors, including semiconductor capital equipment, warehouse automation and communications remain strong. However, supply chain constraints are limiting our ability to realize the full potential. As a result, we expect a low single-digit decrease in our Industrial sector for the fiscal first quarter. In our Healthcare/Life Sciences sector, a new ramp of an aftermarket services…

Thank you, Steven. Good morning, everyone. Our fiscal fourth quarter results are summarized on Slide 14. Fourth quarter revenue of $843 million was sequentially higher by 4%, while gross margin of 9.4% was sequentially higher by 30 basis points. Fiscal fourth quarter gross profit improved in all three of our regions compared to the fiscal third quarter. Better business mix, cost management and labor efficiency led to the improvement. Selling and administrative expense of $36.6 million was favorable to our guidance, primarily due to strong cost control efforts given the lower-than-expected revenue, along with the reduction in incentive compensation expense. As a percentage of revenue, SG&A was 4.3%, which was better-than-expected and sequentially improved by approximately 20 basis points. Our GAAP operating margin of 5% was 50 basis points higher than last quarter, marking a return to an operating margin of 5% or better. Included in the fiscal fourth quarter operating margin was approximately 80 basis points of stock-based compensation expense. With the fiscal fourth quarter result, we have now generated operating margin at or above 5% for 5 of the last 6 quarters. We ended a challenging fiscal 2021 with industry-leading GAAP operating margin of 5.2%. Non-operating expenses of $2.9 million were favorable to expectations due to foreign exchange gains and lower interest expense. Diluted GAAP EPS of $1.16 was slightly below the midpoint of our guidance. With sequential revenue growth of 4%, fiscal fourth quarter diluted GAAP EPS improved 22%. For the full year, revenue was relatively flat compared to fiscal 2020, while GAAP diluted EPS improved an impressive 21%. Turning now to our cash flow and balance sheet on Slide 15. For the fiscal fourth quarter, we were pleased with our cash flow results. We delivered $11 million in cash from operations and spent $23 million on…

[Operator Instructions] Your first question comes from the line of Steve Fox. Your line is open.

I guess, two questions from me. First of all, when we think about all the supply chain pressures, which, like you pointed out, has gotten worse, hopefully, some get better., how do you envision sort of business changing for you and how you work with the customers over, say, the next 12 to 18 months, if we assume that these things are still an overhang in - whether it's ports, logistics, et cetera. Can you sort of describe how you do that in a way that help returns cash flows to normal, et cetera?

Yes. So Steve, this is Todd. I'll get us started and then pass it over to either Steve or Pat, if they want to add anything. But we have a lot of activity going on within the supply chain and on the customer front in light of the pressures that are there today. And I'd like to bucket them into three different buckets. One being customer actions, the next being organizational actions and the third being process improvements or process changes. And from a customer standpoint, we're working to get extended forecasts. Pat had mentioned deposits. We're also looking to get pre-approvals to be able to purchase components at perhaps elevated prices if we find them available in the market, as well as expansion of approved manufacturers' list within the bills and materials of our customers. So, a great deal of activity going on, on that front. From an organizational standpoint, we've added a number of supply chain leadership positions within the company. We have a group, which we call supply chain operations, which takes the lead in a lot of the escalations within our supply chain. We've increased that by 50% with an overall add of about 20% into our supply chain. We've also added key account support for specific customers where we have a significant number of challenges to really try to drive the supply chain through those challenges. And then finally, from a process standpoint, a lot of automation going on from a standpoint of part searches and purchasing and revising our expedite system and even taking an approach, which we call a war room situation where we get a team together and they drive with a great deal of intensity, supply chain issues. So, a number of things going on in all fronts. They're having an impact, but it takes time for it all to ripple through the supply chain.

Great. That covered - that was really thorough. And then just as a follow-up to that, just tied into the same issue is how do we get confident around sort of your inventory days, whether this is the worst they're going to be like this quarter?

Yes. Steve, I can take that. I think as we move into our fiscal second quarter, we will see inventory dollars increase as we ramp for future demand. Now from a days perspective, I think we can keep our days relatively consistent with the fiscal first quarter guide. And then I think as we move through the back half of the year is when we can see days coming down to below where we ended the year for fiscal 2021. So, I think that's the way, right now, it's projected to play out. A lot of that's dependent on the supply chain and what develops over the next few quarters.

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

So, a follow-up first on the supply chain pressure. Todd, you went over three categories how you are combating that. How should we think about that as we come out of this? How sustainable are those actions? And are they going to be more beneficial to you to come out of these challenges?

Yes. I think they are sustainable improvements. I think when you look at some of the process improvements that are in there, they really get to the everyday way to run the business. And I think when you look at some of the structural changes that we made within our supply chain organization, those will provide long-lasting benefits for us.

Yes. Maybe just to add a little bit onto the situation with the supply chain. One way I think about it, as we're talking to customers, they're looking for us to have inventory on hand versus just on order. Given some of the volatility, they want to derisk the aspect of all of a sudden products disappearing. And so, we've been asked by customers and we have been bringing more inventory on hand than what would be normal. So, I think as we go out over time, the - that will go back into the supply chain so there being on hand will be basically on order. And then in terms of that, the processes and the things that we're putting in order to really to understand where things are at in the supply chain. The things that we're doing today to make sure that we have the inventory going into the next quarter or 2, those tools and systems covering the improvements we make will only improve the process as we get further down the path and get back to more of a normal supply chain environment.

Okay. And then in terms of the demand that you are leaving on the table that's being pushed out. How - Can you quantify how much of that you think is going to be perishable, if at all, any?

Yes. Right now, it's largely nonperishable, but obviously, there's going to be a finite time line on that. So, it really - I think, it's going to depend on when the supply chain at least starts to stabilize, if not improve. So, we certainly saw a situation in this past quarter as the supply chain actually degrading as opposed to even stabilizing. So, that would be the situation as we're looking at it.

Okay. And what do you see in terms of sort of labor and raw material inflation. You can pass on some of the raw material cost increases to your customers, right? But how does it work with labor? And how are you combating the labor constraints?

Yes, you're correct. On the material side of the equation, that is going to be passed on to customers. In terms of labor, some we are able to work with our customers and others not. And I'd say right now, the situation is a bit that we're carrying extra cost because if the material is free, then we believe we can go build it. So, we don't want labor to be the next constraint. So, we are discussing that with customers in terms of how much we're going to carry. And in some cases, they are covering additional fixed costs for us to basically maintain that labor. And then - but we're also being a partner in carrying a little bit extra ourselves.

Okay. And then just one last on the supply chain constraints. Is there any business segment where you see more challenges than any other? Or is it...

No. I mean, it's pretty much across the board, Anja. I mean, we're seeing in all three of our market sectors, the constraints.

Your next question comes from the line of Matt Sheerin. Your line is open.

Yes. I wanted to ask, again, regarding the supply constraint situation relative to your forward guidance. And I think you're looking at sequential growth in each of the quarters in FY '22. So, I guess the question is how much confidence or visibility do you have in securing or procuring those components in advance of that. And in some of the inventory build that you're seeing now, I mean, is that basically being set aside for Q2, Q3, et cetera?

Yes. So, I'll start here, Matt, and maybe pass it along to Steve. But when we look at '22 and what the demand environment is versus the supply environment, I mean, obviously, it's two very opposing forces that we're looking at right now. And there's - I would say, it's difficult to answer with certainty how '22 is going to play out because when we look at the demand environment, our demand would support well over 20% growth. Now, supply obviously limits the ability to fulfill all that demand. But we're certainly pushing towards double-digit growth, and we believe that's achievable, should the supply chain stabilize and not degrade further from where it's at. So - but even with the challenged supply chain, we believe that we have sufficient materials being pipelined and sufficient visibility to the demand to drive the sequential improvements in revenue and operating margins throughout the fiscal year.

And if I just maybe add on to that, some of the degradation we saw in supply chain was some of the larger semiconductor manufacturers basically doing a reset of their commits. And as they saw the situation continuing to get more and more challenged, and some of them just took a breath, stepped back and realign their commit schedule, and we saw, quite frankly, saw a few decommits come through that we're expecting on now, we anticipate and believe that with those major suppliers, they've done this once and they've gotten realigned. And so, I think the - our expectation is that the supply commits that we do get will be more stable going forward is part of it as well.

Got it. And is there any concern that there may be an imbalance of inventory? Certainly, some suppliers have been able to add capacity and meet orders where others aren't. So at some point, is there going to be sort of a reshuffling of your inventory? Or do you want to just keep that on hand for the future?

Yes. I don't know that we'll see a reshuffle of our inventory. It goes back to when is it going to get utilized. And I think the dynamic you talk about is one that we're seeing. So, we do some things in industrial automation where our orders - we're actually starting to procure the materials and starting to get line of sight, but the steel associated with going into the fact - or into the warehouse, there are some shortages in steel. And so although we may be able to produce the automation products, our end customer may not be able to actually do the install yet. And so to your point, I think as supply chain things starting to clear out over the next year or so here, we are going to see some things like that happen where other factors may come into play in terms of what's impacting the deliveries and the shipments. But from our standpoint, it's going to be more of an improvement than it is going to be things going backwards.

Okay. And just lastly, are you seeing any labor shortages within your North America operations and some of your factories? We're hearing that from some other companies.

I'd say recruiting has gotten more challenging, and we have to be more creative to this point. It hasn't significantly impacted us in our ability to produce. So, we're very mindful of it. It is a tighter environment. But so far, we've been able to hire the resources we need.

[Operator Instructions] There are no further questions at this time. Please continue.

All right. Well, thank you, Gail. And I'd certainly like to thank everybody who joined our call today. As always, we appreciate your support, and we appreciate your interest in Plexus. Have a good day.

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