Good morning, and welcome to the Plexus Corp. conference call regarding its Fiscal Third Quarter 2024 Earnings Announcement. My name is Maria, and I will be your operator for today's call. [Operator Instructions] The conference call is scheduled to last approximately 1-hour. Please note that this conference call is being recorded. I would now like to turn the call over to Mr. Shawn Harrison, Plexus Vice President of Investor Relations. Shawn?

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, including without limitation, those regarding revenue, gross margin, selling and administrative expense, operating margin, other income and expense, taxes, cash cycle, capital allocation and future business outlook. 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 30, 2023, is supplemented by our Form 10-Q filings and the Safe Harbor and Fair Disclosure statement in our press release. We encourage participants on the call this morning to access the live webcast and supporting materials to 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, Chief Strategy Officer; Pat Jermain, Executive Vice President and Chief Financial Officer; and Oliver Mihm, Executive Vice President and Chief Operating Officer. For today's call, Todd will provide summary comments before turning the call over to Oliver and Pat for further details. Before I turn the call over to Todd, please note that during our fiscal fourth quarter, Plexus will participate in Needham's Virtual Industrial Tech, Robotics and Clean Tech Conference on August 20th, and the benchmark company's 2024 TMT Conference in New York City on September 4. With that, let me now turn the call over to Todd Kelsey. Todd?

Thank you, Shawn. Good morning, everyone. Before I begin my prepared remarks, I would like to acknowledge that today's call will be Steve Frisch's last earnings call, ahead of his retirement at the end of our fiscal 2024. I would like to thank Steve for his numerous contributions to Plexus' growth and success over the past 34 years. Steve, congratulations on your pending retirement and thank you for your service to Plexus. Please advance to Slide 3. During our fiscal second quarter earnings call, I highlighted my expectation of a strong finish to fiscal 2024 that would position Plexus for further momentum in fiscal 2025. This view was formed as a result of early signs of demand inflecting higher, aided by share gains and new program ramps, efforts to increase efficiency and reduce cost, and progress on our working capital initiatives. Our fiscal third quarter results and fiscal fourth quarter guidance reinforced this outlook of sustained momentum, creating the potential for 9% to 12% revenue growth for fiscal 2025, with 5.5% GAAP and greater than 6% non-GAAP operating margin exiting fiscal 2025, as well as continued solid free cash flow generation. Please advance to Slide 4. We delivered outstanding fiscal third quarter financial results. Revenue of $961 million was within our guidance range. While we experienced stable to improved revenue outlook for most customers during the quarter, design changes and product launch delays from an industrial customer, and a slower-than-anticipated transition of a competitive market share gain within aerospace and defense customer resulted in those market sectors performing below our expectations entering the quarter. This demand is largely nonperishable and will be realized in future quarters. During last quarter's earnings call, we forecast our non-GAAP operating margin would exit our fiscal 2024, 60 to 100 basis points higher than our…

Thank you, Todd. Good morning. I will begin with a review of the fiscal third quarter performance of each of our market sectors, our expectations for each sector for the fiscal fourth quarter and some directional sector commentary for fiscal 2025. I will also review the annualized revenue contribution of our wins performance for each market sector and region, and then provide an overview of our funnel of qualified manufacturing opportunities. Starting with the industrial sector on Slide 8. Revenue decreased 4% sequentially in the fiscal third quarter. The result was below our expectation of flat revenue for the fiscal third quarter and primarily driven by a new product introduction pushout due to customer design revisions and regulatory delays. Looking ahead to the fiscal fourth quarter, we expect sequential strength in semi cap, test and measurement and broadband communications. This will result in high single-digit revenue growth for the industrial sector for the fiscal fourth quarter. Industrial market sector wins for the fiscal third quarter of $58 million included a win that establishes a new partnership with a global leader in nuclear energy. We will be supplying products that support the green energy transition. Our wins also included a next-generation product for an existing broadband communications customer. This product will be built in our Penang, Malaysia campus. Within the semi cap, our wins included 2 programs with an existing customer. One program reflects a market share gain, while the other program marks the engagement with a new division with this customer. Our new program awards, coupled with some customers starting to show demand increases, gives us optimism for continued semi cap growth in fiscal 2025. Our fiscal year 2024 full industrial market sector outlook of a low single-digit year-over-year revenue decline remains unchanged. As we look to fiscal 2025, we…

Thank you, Oliver, and good morning, everyone. Our fiscal third quarter results are summarized on Slide 13. As mentioned, revenue was within our guidance range. However, gross margin of 9.8% exceeded our guidance and was sequentially higher by 70 basis points. Several factors led to this improvement, including customer mix, greater demand for our Engineering Solutions and sustaining services, efficiency gains across our manufacturing regions and savings realized from our restructuring efforts. Selling and administrative expense of $46 million, met expectations. This amount included $6 million of stock-based compensation expense. Non-GAAP operating margin of 5.8% exceeded our guidance due to the strong gross margin performance. This result excludes 100 basis points of restructuring charges and 70 basis points of stock-based compensation expense. Nonoperating expense of $8.9 million was also favorable to expectations due to improved foreign exchange performance and lower-than-anticipated interest expense as we deployed a portion of our excess cash to reduce debt. Non-GAAP diluted EPS of $1.45 exceeded the top end of our guidance due to the factors mentioned. This result excludes $0.30 of restructuring charges and $0.24 of stock-based compensation expense. Turning to our cash flow and balance sheet on Slide 14. We were very pleased with our free cash flow performance this quarter. We delivered $131 million in cash from operations and spent $17 million on capital expenditures, resulting in free cash flow of $114 million. This result significantly exceeded our expectations. As Todd mentioned, this is the second highest performance in company history. With the strong performance, we reduced our borrowing by $89 million, while continuing to support our share repurchase program. During the quarter, we purchased approximately 185,000 shares of our stock for $18.6 million. We have $19.5 million remaining under the current $50 million authorization and plan to continue purchases during our fiscal…

[Operator Instructions] Our first question comes from the line of David Williams of The Benchmark Company.

First, congrats on the really solid execution here and the continued progress, certainly driving some nice benefit on the profitability, but also good to see that the revenue.

Thank you, David.

Yes. So maybe first Pat or Steve and Todd, just if you can kind of talk through maybe how your customer tone has changed over the last maybe 90 or 180 days. I know it's been -- you talked about being a little more positive and certainly seeing better demand. But can you talk around maybe where you're seeing that, maybe what the puts and takes are? And where if anything, things have turned, maybe less favorable?

Yes. I would say, well, from a broad standpoint, the tone is incrementally positive. So we continue to see our customer base in aggregate shift towards a much more positive sentiment. And if we break it down by market sector, I mean, that's where you see a little bit of deviation across the various different sectors. Aerospace and Defense continues to be very bullish. The outlook for the remainder of '24 and into '25 is quite strong. Semi cap appears to have turned the corner, we're seeing incremental demand uptick on a quarter-over-quarter basis for the past 3 or 4 quarters now. So that seems to be a trend. Although it's not hitting the large increase that you'd expect at some point, maybe a little bit later into towards the end of '25. If we look at the rest of industrial, that's probably the -- once you get beyond communications and test and measurement, that's where you get a little bit of demand weakness right now. And I would say that those markets are probably 6 to 9 months behind where health care is at right now. And within health care, we're generally seeing more positive sentiment kind of at the bottom and trending up, and we're seeing good potential for revenue increases as a result of the strong wins in new program ramps.

Great color there. And maybe just thinking about the operating margin line, that's clearly been an area of focus. I know you put a lot of actions in place to drive that, clearly getting the benefits. But can you maybe talk about the puts and takes there? What do you think are the biggest drivers? And where is there still room to squeeze a little more on that operating margin line out?

Yes. And David, this is Pat. Maybe I'll start with gross margin, which has been performing really well for us. And I think going forward, something in the high 9s, 9.8% to 10% would be reasonable. A lot of that's been driven by improvements with our manufacturing efficiencies, some automation efforts, also our services, more engineering, sustaining services are benefiting our gross margin. When you start looking at SG&A and going down to operating margin. SG&A could be a little higher kind of in the mid 4s to lower 4% range, and I'm talking on a GAAP basis now. Part of that, as we look to fiscal '25 is additional incentive compensation that we'll be incurring, which is highly tied to 2 components: revenue growth, which we expect strong growth next year, and then return on invested capital. The combination of that gross margin and SG&A is what's getting us to that 5.5% GAAP operating margin. So those are kind of the main drivers. We'll get a full year of efficiencies out of the restructuring actions we're doing this year as well. So that's what gives us confidence in exiting '25 at that GAAP of 5.5%.

One last one for me, if I may. Anything regionally or geographically that you're seeing in terms of -- maybe China specifically?

From a demand standpoint, our China business is kind of holding steady is what I would say. And we continue to target in China for China, primarily within that region. So the team over there just does a wonderful job of executing as well, too. So it's a good region for us from an operational performance standpoint.

Our next question comes from the line of Steven Fox from Fox Advisors LLC.

I guess, first off, I was curious about the progression of margins in Europe, in particular. It sounds like you're adding more and more new programs into Oradea. The margins were depressed last year seem to be coming back. Like, how do we think about that region's profitability? And then I have a follow-up.

Yes. Steve, this is Pat. Obviously, we've been really pleased with the performance over the last year. I think there's still opportunity. There's still some capacity to fill up in Oradea and some of the additional wins we've got coming into our Livingston and Scotland facilities will continue to benefit margins. So I think that can be a driver for us of getting to the 5.5% GAAP operating margin exiting '25, that will be a key component for us.

That's helpful. And then in terms of just market share gains, you've talked about previously, but I'm just curious, like over the last 90 days when you're mentioning now some new share gains. Like is there any way you could generalize why you're having that success? How much is sort of taking business from competitors? How much is just new OEM penetration? And like I said, why is that happening?

Yes. I think -- this is Oliver. Thanks for the question. Trying to underscore in the script that we continue to really focus on customer service excellence, perfect delivery on time. And our customers value that. And so what you see is we talked about a number of market share gains that we had inside some of our sectors inside the quarter here, and then continued wins from existing customers. We talked about the Neenah campus. The majority of those wins all come from either continuing on programs or next-generation programs with existing customers, and really the focus on operational excellence and customer service excellence is what provides that for us.

Yes. I think some -- a good example of how this is occurring, Steve, is what I reflected in the prepared remarks around the customer awards that we've received in. Recently, it's been from Honeywell Aerospace and Medtronic, 2 of our most significant customers that we have. So when you win awards like that as a top supplier, you have an ability to be able to take incremental share and consolidate some -- certain businesses and things like that.

Our next question comes from the line of Matt Sheerin of Stifel.

Just following up on Steve's question regarding program wins. I know you've talked in the past about opportunities for reshoring, particularly like in semi cap as customers move to new programs that they're looking to move outside of China, Asia and other regions. Are you continuing to see that in that new program win or that share win that you talked about, did that also move locations?

Yes, I would say the big trend that we see, Matt, is in next-generation products. There's a general trend toward in region for region, particularly when you get to a larger form factor type products. So when you talk about semi cap, it's maybe a little bit early to start to see that -- starting to move to the Americas, but it wouldn't surprise me as we move forward if that was a trend that we would see.

Okay. And then on the Healthcare/Life Sciences, which has been down significantly. I know part of that, as you talked about, the pass-through of the lower component costs as those premium costs have gone away. Could you remind us like that, what that headwind has been in the last couple of quarters year-over-year? And at what point do we get really true apples-to-apples comps in terms of real organic revenue growth?

Yes. The headwind from inflating or from purchasing components at inflated prices, year-over-year '24 to '23 for Healthcare/Life Sciences was a -- was a mid -- mid-single-digit impact in terms of revenue headwind. As we look forward to fiscal '25, we really see that normalizing to something that's essentially very, very low single digit or inconsequential.

Matt, it's Shawn. On a sequential basis, it's essentially negligible in terms of the impact to our revenue right now within Healthcare/Life Sciences.

Okay. So it's bottomed out. Okay. Great. All right.

[Operator Instructions] Our next question comes from the line of Anja Soderstrom from Sidoti.

Congrats on the retirement, Steve. In terms of the gross margin being good developments there. How should we think about that going into out quarters? Do you think you can get a north of 10% there eventually when you get more absorption on the head -- overhead?

Yes. Anja, I think as we're leaning to '25, a good range is probably 9%, 8% to 10%. Going beyond that, could we get north of 10% possibly with leverage from additional revenue. I think the better opportunity is probably on SG&A that will gain more leverage there to drive maybe above the 5.5% GAAP operating margin. That I think will be our opportunity as we look past fiscal '25 for our next goal and how to get to that goal.

Okay. And just on the SG&A, you noted you expect the stock-based compensation to be higher next year helped by improved results. But how should we think about the restructuring you've been taking and sort of the true SG&A expense there versus this year?

Well, we're calling that out separately. So the guide I'm providing is just purely SG&A that will continue. I think there are opportunities for us with automation to lower that SG&A as a percentage of revenue on a GAAP basis to 4.5% or below. And again, combining that with gross margin close to 10%, we can hit that 5.5% GAAP operating margin.

So Anja, from a stock-based compensation expense, we'd expect that to go back to more normal ranges for fiscal 2025 on a quarterly basis. What we will see incrementally higher is variable incentive compensation, and that's because the anticipated much stronger revenue growth next year as well as higher return on invested capital that we'll generate.

Okay. And then just on the competitive landscape, have we seen any major changes there. And I think over the past quarters, so you've been saying that your competitors have still been rational in terms of pricing. Do you still see that or...?

Yes, it's much the same. I mean it's a good competitive market right now. I think it's always competitive, but it's certainly rational, and it's certainly a market that we feel really comfortable about our ability to win in.

Our next question comes from the line of Chris Grenga from Needham.

This is Chris Grenga on for Jim Ricchiuti. You'd called out the nuclear energy win. And just curious if you could provide any more color on what you're seeing in general with respect to power generation applications you've recently also spoken about power opportunities related to data centers driven by AI applications. Just curious if you can add any more color on those 2 with respect to how you see them contributing to growth in the near term?

Yes. Sure. Chris, thanks for the question. This is Oliver. Yes, absolutely. So we highlighted a win relative to power generation. Last quarter, we highlighted the nuclear energy win this quarter. And certainly, I think in terms of what we see in our funnel as well as the wins that we're pulling through absolutely reinforce the fact that the demands of AI on the infrastructure are requiring investment from utility companies and infrastructure. And so we're seeing that trickle through for us. And as I think we've talked about in the past with new awards, they can take some time to materialize. So that's something we would expect to impact our fiscal -- fiscal '25 growth.

Got it. And with respect to the A and D funnel, just with respect to the growth there that you saw and as well as just the general composition of the funnel, is that evenly split between commercial and defense? Or is there any skew towards one versus the other?

Yes. From a funnel perspective, for A and D, we're seeing good balance across all of our subsectors. And so I think, quite encouraging in terms of the balance there.

Great.

I would also -- Chris, it's Shawn Harrison. The only thing I would add is we're seeing an increasing amount of demand for our Engineering Solutions within the Aerospace and Defense market sector. And as you know, and most folks on the call know that it's a very good leading indicator, but we're just seeing really robust demand for our Engineering Solutions with our -- within the Aerospace and Defense market sector.

Our next question comes from the line of Melissa Fairbanks of Raymond James & Associates.

Love to see the progress on the working capital and the free cash flow. Congratulations. I know you've been working hard on that throughout the organization. I just wanted -- I had a quick follow-up on the Healthcare/Life Sciences business. You've got some really good announcements on the Medtronic, the ultrasound front. In the near term though, are you starting to see some easing of the equipment purchasing or inventory digestion that's been a little bit of a headwind for the existing programs? Or is the growth next quarter driven by the new programs?

Yes. So we'd say, Melissa, we're about 80% to 90% of the way through the inventory corrections right now. So we're starting to see some positive signs as they move further out. But the growth is largely driven by the new program ramps in the strong leanest performance that we've had within the Healthcare/Life Sciences sector. And one stat I'd like to just point out before -- while we're talking about it as well, is that our -- our wins over the trailing 4 quarters within Healthcare/Life Sciences is over $500 million at $523 million. So it sets us up really well to get some strong growth within that sector as we look to '25 and beyond.

Great. That's all I had. I think you guys covered pretty much everything.

Thank you.

Thanks.

Thank you. I am showing no further questions at this time. I would now like to turn back to Mr. Todd Kelsey, President and CEO.

Thank you, Maria. I'd like to thank shareholders, investors, analysts and our Plexus team members that joined the call this morning. To reiterate the key themes of today's call, we anticipate delivering a strong finish to our fiscal 2024 with sequential expansion in revenue, robust operating margin and sequential growth in EPS with continued free cash flow generation. Looking further forward, we expect sustained revenue growth momentum into fiscal 2025, capitalizing upon Aerospace and Defense market sector strength, increasing Healthcare/Life Sciences customer forecast and improved semiconductor capital equipment and broadband communications demand. We anticipate with this revenue growth momentum, the benefits from optimizing our business for greater efficiency during fiscal 2024 and ongoing free cash deployment toward debt reduction and share repurchases will create meaningful EPS growth in fiscal 2025. Thank you very much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.