Good morning and welcome to the Plexus Corp Conference Call Regarding its Fiscal Second Quarter 2017 Earnings Announcement. My name is Sylvia 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. I would now turn the call over to Ms. Susan Hanson, Plexus Director of Communications and Brand Management. Susan?

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 October 1, 2016, 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 net income and adjusted operating margin 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 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 by clicking on Investor Relations at the top of that page and then Event Calendar. Joining me today are Todd Kelsey, President and Chief Executive Officer; Steve Frisch, Executive Vice President and Chief Operating Officer; and Pat Jermain, Senior Vice President and Chief Financial Officer. Consistent with prior earnings call, Todd will provide a summary comment before turning the call over to Steve and Pat for further details. Let me now turn the call over Todd Kelsey. Todd?

Thank you, Susan, and good morning everyone. Please begin with our fiscal second quarter results on Slide 3. After the close of market yesterday, we reported results for our fiscal second quarter of 2017. Revenue was $604 million with GAAP diluted EPS of $0.84. The EPS results included $0.13 of stock-based compensation expense. Our GAAP diluted EPS was $0.05 above the top end of our guidance range, robust productivity improvements, favorable product mix and record revenue and profitability and engineering all contributed. We delivered the solid earnings performance despite weaker than anticipated sales, displaying the resiliency of our operating model. Our communications market sector weakened considerably within the quarter and our Healthcare/Life Sciences and Industrial/Commercial sectors softened slightly. Advancing to our fiscal third quarter guidance on Slide 4. We currently expect continued end market weakness within our communication sector coupled with a forecast adjustment with a large Industrial/Commercial customer to offset meaningful growth within the remainder of our business. As a result, we are guiding revenue in the range of $595 million to $625 million, when coupled with projected operating margin performance at the high end of our target range of 4.7% to 5%, we expect fiscal third quarter 2017 GAAP diluted EPS to be in the range of $0.68 to $0.76. This includes $0.13 of stock-based compensation expense. Please advance to Slide 5. While we are mindful of the short-term revenue challenges, we remain confident in our longer-term outlook for achieving meaningful growth as our long-term growth prospects are largely unchanged. In the near-term, our revenue constraint is primarily associated with specific demand issues with the limited number of customers. We continue to generate robust margins, provide solid economic return, accelerate our business developments success and deliver results in key areas that will enable future success. For example, we…

Thank you, Todd, good morning. Please advance to Slide 7 for insight into the performance of our market sectors during the fiscal second quarter 2017 as well as our expectations for the sectors in the fiscal third quarter 2017. Our Healthcare/Life Sciences sector was slightly down in the second quarter, which was below our expectations of flat revenue. New program ramp delays the three customers and end markets softness with one customer were the main contributors to the slight decline. Looking ahead to the fiscal third quarter, we currently anticipate a mid single-digit increase in our Healthcare/Life Sciences sector. New program ramps and end market demand are driving the growth. In addition to new program transfers from our Healthcare/Life Sciences customers, as the solutions team is transitioning or in late stage development of several medical devices. Our Industrial/Commercial sector was down 7% sequentially in the fiscal second quarter in line with our expectations of the mid single-digit decline. Our demand adjusted from mortgage customer impacted the sector and masked solid growth with other customers, 16 of the top 20 customers including all semiconductor customers grew within the quarter. Although, we believe demand from large customers will increase in the future, we have adjusted our forecast until we have better visibility. As such, we currently anticipate that Industrial/Commercial sector will be flat in our fiscal third quarter. Our communications sector was down 18% sequentially in the fiscal second quarter which was significantly below our expectations on a mid single-digit decline. End market demand softness from four of our top 10 customers drove revenue below our expectations. Soft and market demand in the timing of two new product introductions are expected to impact the fiscal third quarter revenue. As a result, we expect revenue to be down in the low teens. Our…

Thank you, Steve, and good morning everyone. Our fiscal second quarter results are summarized on Slide 13. Revenue of $604 million with a 5% below the midpoint of our guidance while gross margin of 10.6% was above our guidance and 40 basis points above the fiscal first quarter. By continuing to deliver strong operational efficiencies and executing the supply chain productivity initiatives, we are able to overcome lower fixed cost absorption caused by the sequential revenue decline. In addition, lower than anticipated healthcare claims for U.S. employees contributed to the margin improvement. Selling and administrative expense of $31.2 million was in line with our quarterly guidance due to lower revenue SG&A as a percentage of revenue was 5.2%, up 30 basis points compared to our expectations. The improved gross margin partially offset by higher SG&A percentage resulted in operating margin of 5.4% exceeding our guidance in the range of 4.9% to 5.2%. This result was a 130 basis points above the adjusted operating margin reported during the prior year of fiscal second quarter, included in this quarter’s operating margin is approximately 70 basis points of stock-based compensation expense. GAAP diluted EPS of $0.84 was $0.05 above the top end of our guidance. Fiscal second quarter results included $0.05 of foreign exchange gains, not included in our guidance. These gains were primarily generated by our China operations. Partially offsetting the foreign exchange gains was $0.02 per share of additional stock-based compensation which was above our original guidance of $0.11 per share. Turning now to the balance sheet on Slide 14, return on invested capital was 16.8% for the second quarter significantly above our fiscal 2017 weighted average cost of capital of 10.5% and the return we delivered in fiscal 2016 of 13.8%. Contributing to the higher return was a combination of…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from Matt Sheerin from Stifel.

I just had a couple of questions for me. Just first on the weakening side, you're seeing in the communications segment, it sounds like that’s going to be down. You also talked about the overall business being up significantly, sequentially in Q4. Do you expect the communications business to be up as well? Or will that be pushed out to Q1 of fiscal ’18?

This is Steve. Maybe a little more color in the communications sector. So, during the quarter, we saw 15 of the top 20 customers’ drop their Q3 forecast for us. Most of that was end market. So, now, we’re seeing about 14 of the top 20 that are down from Q2 to Q3. So for us at this point, we see stability in the long-term at this point. We don’t see a drop in any further beyond that, however, if we look to the back half of ’17 here, we see the meaningful growth coming from a couple of new program ramps.

Okay. Go ahead.

Matt, so I'll add on with respect to the overall business. So, we talked about some pretty solid sequential gains in the overall business as we exit the fiscal year. Part of that is the ramps in communications that Steve is talking about, but an additional piece of it is just the growth in the underlying business. So, we’re currently in a situation where we have a couple of near-term issues that are impacting our revenue in the near-term in Q3 and Q4 and certainly leaving us at a lower level than we had anticipated. But what that’s doing is its masking some pretty impressive growth in the rest of the business that’s occurring right now.

Okay, that’s helpful. And then on the industrial segment where you called out, customer adjusting their forecast, so lower in both in the last quarter and the upcoming quarter. And is that an issue that you see continuing? Or is that sort of a just a demand or a new program staging issue where you’ll see that pick up as well into the back half?

Yes, so one of the things that we’re doing, we’ve called this out a couple of quarters in a row, so you can see it as being a bit of a posh. But what we call that now is a forecast adjustment and nearly what we’re seeing with that customer is in general, there is call it a base amount of business that I'll call steady state that they are running at, and that’s what we’ve set our forecast at. So, and then beyond that, there is some additional cog demand burst that occurred with that customer and we’ve essentially taken that out. So what I would say is that we view that there is upside at some point in the future. The clarity is exactly when that’s going to be right now. So we just decided to take it right out of our forecast.

And you said that was a non-semiconductor customer, correct?

Yes, that was correct.

Okay, alright. Thanks.

This part that we’re talking about is for internal consumption. So as the customer prioritizes what they’re focusing on, it can shift for us a little bit differently from what end markets would be.

Our following question comes from Shawn Harrison from Longbow Research.

I guess following up a little bit on Matt’s question, but the goal previously was to hit that 3 billion of annual sales number exiting the year, fiscal year. I know it's going to be more difficult now, but would you hazard to guess as we move into fiscal ’18 based upon what you’re seeing in customer forecast, new programs coming in, whether they are in the first half fiscal ’18 event?

Yes, so what I don’t want to do Shawn is try to commit to another goal and with the demand uncertainty we’re seeing have us hit a quarter later or two quarters later than what we’re thinking. So, I want to avoid putting timeline on it, but what I can tell you is what is driving our thought process right now. So, if we looked at over the course of the last several quarters, we had a very clear path for this $3 billion goal as we exited the year. And if we went back, just a quarter ago, it was really, I call it likely was the scenario. We’ve had a couple of things change on that that are relative to a few specific customers and other than that the remainder of the business continues to progress as planned and is growing significantly. So when we look out as to when we will hit this $3 billion, it could be quickly if these situations that we’re facing right now rebound quickly. If it’s a delayed in any way could just take us a little bit longer as we continue to grow the rest of the business.

I understand that the hesitance to put, to draw a line in the same. Maybe I guess back to the comp weakness, with new product introductions. Is there any concern from you that the products that are introduced down take whole than the market and so it's step up and then all of sudden a step back down guess with the volatility we’ve seen that could be at least the worry in my end?

All indications are there'll be successful product launches.

Okay. And then lastly, I think last time in the call there was an expectation that gross margin would dip as the new programs ramp. Is that the expectation as you see revenue acceleration in the fourth quarter, you see to some incremental gross margin pressure?

We would see that Shawn, but again I think we get a nice leverage from operating expenses with that uptake. So, I think you had a question around 5% margins for the year and if you look at the last three quarter as we’ve achieved above 5%. And in Q3, we're guiding midpoint of 5% and I think we could achieve 5% for Q4. So, I think for the full year we'd be able to hit that 5%.

Our next question comes from Sherri Scribner from Deutsche Bank.

Hi. Thank you. Sorry about the background noise. It sounds like your issues in the communications the industrial segments are all more customer specific. So, there something you could maybe comment, is that the case? And what do you see in terms of the economic outlook existed all economic related? And then my second question relates to the European business, particularly mentioned that there was some mixed start. Is that industrial related? Is that related to the end market? Maybe you could give us some comments about what you're seeing geographically in terms of end demand? Thank you.

Yes, I'll start maybe with the second one first. This is Steve. In regards to I mean the comments really kind of more focused around the new business wins. We have a light quarter for wins. I think the thing to keep in mind for us is that we’re really focused on the trailing four quarters metric because we do not want our teams to artificially trying to do things to meet some quarterly metrics. So, we saw a low number on wins, but it's not concern for us. We expect it to rebound in this fiscal quarter, so no issue there in terms of where we’re at from a business development standpoint. Related to the end markets, I think we talked specifically about two areas, one was the communications customer and the other one was the Industrial/Commercial customer, which I think Todd highlighted is being the things that are kind of masking growth in the underlying business and that is basically is kind of true across the whole company. So, we do see the underlying business growing, we have commented in the past about the fact that organic growth is relative slow that is true in most areas with probably the exception of semiconductor has picked up. We’re seeing a little bit of an uptake in oil and gas, but not much, but really our growth and our expectations for growth are coming from the new business wins ramping into production.

Just to add a bit on EMEA as well Sherri. So, with respect to the demand environment, we’re not seeing that's being really much difference than the U.S. demand environment. I mean it's not really robust, but it's not generally any softer either. One of the things that as we look at our EMEA operations, we’re going to get nice growth in EMEA in fiscal ’17 and we foresee it in fiscal ’18 as well to, and we still have opportunity for further leverage within that business as we grow the business.

Our following question comes from Steven Fox from Cross Research.

Thanks. Good morning. I guess I’m still not totally clear on the gross margin improvement in the quarter. I’d imagine that you were surprised by how the revenue came in yet like you pointed out you were up 50 bps quarter-over-quarter in terms of gross margin. So, I was wondering, if you can maybe dissect that a little bit more between mix and productivity and anything else have impacted it? And then I have a follow-up. Thanks.

Steve, this is Pat. Starting with I mentioned healthcare claims were lower than anticipated. That was about a 20 basis points improvement. And then Todd had mentioned engineering organization, we had more than 4,000 additional billable hours this quarter. So a really strong performance by that team, that drove improved margin. Around supply chain productivity, with the tools we’re using and the focus on consolidating spend to preferred suppliers and getting ahead frankly if some price reduction that will be passing on to our customers benefitted us and then finally the customer mix as we shifted the portfolio, we saw an improvement in margin.

And just on that customer mix portion, is that a function of the fact that some of the business you thought you were going to have in the quarter with lower margin or a function of ramping more business at higher margin? Can you just sort of explain that dynamic a little bit better?

Yes, I think it was a combination of both, some of our customers that were down for the quarter at traditionally lower margin customers. So, we felt that improvement, but we started to ramp some customers that are coming along with ramp cost as we’ve talked about in the past, but being below the revenue level we had guided, we didn’t see as much of a drag on margins from the ramping activities we would typically see.

Got it. And then just as a follow-up, it looks like your funnel year-over-year is growing about at the same pace as your trailing 12 months win. So, I would assume you could comment on win rates being okay. But within that it looks like your average deal size has taken a jump up. And I was curious how much of that do you think is sort of transitory versus maybe a change in strategy going forward and what it means for volatility in the business? Thanks.

In regards to the funnel size and the opportunities in there, we are seeing a few more larger opportunities. I wouldn’t say from a funnel, if you look over the last four quarters, we had lighter smaller number of side wins last quarter. This one is a little bit bigger, so that’s why we will trend in the either direction. But the size of the opportunities are getting a little big bigger but not meaningful to say I think there was a significant different expectation that we have going forward.

Just add a bit Steve, I think if you looked at the trend as a number of wins over the past several years, last quarter was probably -- it wasn't very much on the high-end with regards to number of wins. This quarter is towards the lower end. I think if you look at those and you average those two quarters out, it's pretty typical of what our deal size is. So while we’re seeing some bigger opportunities. I wouldn’t view it as a move in our strategy towards bigger deals and just so happen that, we close more from this quarter.

Our next question comes from Mitch Steves from RBC.

I just had one of the operating margin insight actually, so it looks like the communication to be little weaker that maybe the one-time item on the industrial side. I assume that actually mean with the operating margin profile is actually a little bit higher on an overall basis for the Company now?

Are you referring to the longer-term, Mitch?

Correct.

Yes. One of the things I would say about in general about our margins, so of course we've talked about our target range being 4.7% to 5%, and we’ve been all couple of quarters in a row. I think if you look at the rest of fiscal 2017, we see strong margin performance and we’re guiding obviously right about at the top end of that range. Q4 was likely to be above that range, but as we go into fiscal 2018, we start to see more these investments in new programs and ramps the revenue and things such as that as well as some other cost that we’re incurring over that period of time. So, we'd expect that to go to trend back more towards that 4.7% to 5% range in 2018. So, it’s a current look as we look forward.

Got it. And then secondly I think about the sequential trends just in communication. Could maybe just help us out if we think about what typical seasonality where you guys expect just in terms of the shape of the year?

As far as the shape of the year, I mean obviously we’ve been in the downward trend right now. And we’re seeing some pretty significant in broad based weakness I would say within the sector for varying the reason across the sector. But as we get to Q4, we’re expecting a pretty substantial ramp within that sector. And our expectations overall as a company aren't completely dependent on that communications ramp as the rest of the book of business that we’re also growing rather aggressively.

Next question comes from Sean Hannan from Needham & Company.

Yes. Thanks for taking my question here. And sorry to bring so much attention to the communications, but wanted if you could just get a little bit more clarity. When you referenced the demand weakness that you're seeing, can you characterized that a little bit more in terms of do you extended that demand weakness explicitly within your customers markets versus if there are any program transitions or say end of life next gen scenarios that might have a timing impact? How do we think about that and perhaps more granularity characterized how this is impacting you?

Yes. I'll start with that, Sean. And then Steve can provide an additional color. But I think clearly we have a large customer within that communication space, and what I would say is we don’t want to say anything beyond what they said but we do believe that they've been really transparent in the end markets as well as in their program ramps. So, we’re executing to what they've stated about their end markets and the new programs.

And as you look across the sector in general, I would say it's probably a two-third end market one-third kind of shift in terms of where the softness is coming from in terms of people making a product transition versus end market softness from a customer standpoint, that’s probably the best color I can give you.

Okay, that’s actually very helpful. And then if I look at the wins that you folks have brought have for the quarter, obviously again coming back to some earlier comments they look very healthy. Your funnel looks great. When you step back and you think about the opportunity set in front of you. I guess part A to the question is when you think about the fact that 90% of that is specifically the funnel is non-traditional. How much risk would you assign to some of those opportunities given that there might be a greater magnitude of customers that having gone through the outsourcing process as much before might require a little bit more hand holding, not a strong in terms of the ability to provide forecast with you. That’s kind of part one to it and then part two, this seems to give an indication that we should have some very strong growth in ’18 and even given the time for market, you should be setting up pretty well lease delivery early stage for even ’19 given how long it takes to get into kind of a run rate with these markets. So just want to see if we can get some color around that as well?

Yes, in terms of the funnel similar to the wins ratio the funnel is approximately 70/30 between customers and targets as well. And so our confidence in what those opportunities are, is pretty high because over the existing customers either with or with divisions new divisions of customers that we’re working with. So our visibility into the funnel and those opportunities is pretty clear. I want to emphasize that we also qualify things before we put them in the funnel, so not anything that can just get in there. And then as we look forward, I think you’re right and then I think Todd hit on it. Some of the base business that we see growing is coming from some of those wins that we’ve had over the last four to five, six quarter and as we continue to drive more wins out of those non-traditional markets, that does gives us confidence for what 18 and beyond looks like. Again we‘re pretty confident in the first portfolio strategy we have here which is supported by the fall, supported by the winds and it's supported by the base growth. It's just not that visible this quarter.

Yes, I’d just like to add on to that Shawn, if we look at fiscal ’18 we are expecting strong growth in’18 and beyond. And one of the things as we sit here today I think we’re disappointed, you’re probably disappointed about where the near-term revenue situation sits right now, but when we look at the rest of the business and what’s happening within our business, we’re really excited. We feel really good about our margin performance, our earnings performance which despite some revenue challenges is really falling in nicely for the year with what expectations where at the beginning of the year. We’ve got excellent wins in funnel that we’re then continuing to be able to take advantage of and however we feel really good about our strategy. We feel really good about our performance with our customers right now. So we fell like we have were in a great position but we’ve got a couple of near-term challenges that we need to work our way through and in the typical way that we do here at Plexus we’ll work our way through them.

And our next question comes from Paul Coster from JP Morgan.

Hi. This is Paul [indiscernible] showing on for Coster. Thanks for taking my question. So, on gross margin to begin guidance suggest margin should exceed 10% for the fiscal year. Do you see more room to run? Can we even hit 2008 levels of 11% next fiscal year? And are these levels sustainable or the term is going to reinvest cost saves beyond the current levels of back to the business?

Yes. Paul, it’s the later we will be reinvesting into the business and with that type of growth and a lot of that coming from new program ramps and not end market growth. There'll be a drag on margin from ramping those programs. And just remaining competitive passing along price reductions to our customers will have to doing that since we remain competitive. But with that said, I think we’ve now focused on operating margin of that range of 4.7% to 5% and even if we see pressure on gross margin where we can gain leverage is on operating expenses with that additional revenue and still achieve that operating margin range of 4.7% to 5%.

And then my follow-up is on free cash flow levels sort of full year. I know you mentioned above a $100 million, but it looks like you're already there including guidance for 3Q. And what terms of magnitude above the 100 million. Thank you.

Yes. So, in the first half of the year, if you look at capital spending it's only about $15 million and we have delayed some of the CapEx and we’ll see more that improve or increase in the back half of the year. And as we see this ramp in revenue for the fiscal fourth quarter, we will see an increase in working capital needs specially AR. And that’s where we think there'll be some pressure on free cash flow generation. And so at this point, I’d like to stick to just saying it will be above a 100 million, but not quite sure to what extend at this point.

Next question comes from Jim Suva from Citi.

Thank you and good morning. Maybe my math is wrong, but if I look at the March sales results and the June sales results, it looks like the year-over-year growth -- sales growth is actually negative which is pretty unprecedented and has historical perspective for your company. When we just take step back and look at say 12 months, 18 months or 24 months about the win rates, I don’t think you can very good say these types of results is what the new business margin pipelines with the test. And then on the today's call, it sounds like there is a customer and industrial customer here just seems like. Can you help us better understand can two or three customers really make that big difference? And if it or was it maybe some of the new program ramps a little bit too ambitious for what the ramp rates were suppose to happen when we look at say 12 months or 18 months ago what happen the March quarter and the June quarter outlook. I was just kind of figure out that -- to the pipeline that you give is very encouraging but the results have been may people take a step back and reconsider a little bit at least in the March and June right now?

Right. Yes. So, Jim when we look at and it’s a combination of the factors that you’ve talked about this. So, when we compare year-over-year there is some a pretty significant difference in those couple of -- those few cases that we’ve talked about a specific customer demand decision which is of a significant magnitude, that it has an impact. And I will say the second one is either some programs that are ramping slower than anticipated, yes, there is a few customer programs and even beyond thing that have been reported as wins on deals that we have in play with customers that have significant revenue implications that are ramping slower than we had anticipated as well. So, it does play into it as well.

Our final question comes from Sean Hannan from Needham & Company.

Yes, thanks for the follow-up here. I think most of my questions have been answered, but there is a point of curiosity I have. If I look at the September quarter wins from ’16 and I look at the strong wins that you had within communications. Is it appropriate to consider that most of what had been won there is now effectively within your guidance and within kind of at an inappropriate run rate for those programs or is there an element of what have been won there that continues to push out a little bit further than expected?

A fair amount of those wins that we talked about then are the ramps that we’re talking about now that are basically in our forecast.

Okay, for the fourth quarter of this year.

Yes.

We have no further questions at this time. I’d like to turn the call back over to Todd Kelsey for final remarks.

All right, thanks. Thank you, Sylvia. So just in closing, I’d like to summarize again of what we feel about the state of the business and we’re certainly conscious of the near-term revenue challenges that we have. We’re disappointed I mean there is no other way to put it, but beyond that we feel really good about the state of the business and the health of the business. We’ve continued to remain committed to achieving our target operating margin range or beyond we believe we’re delivering solid economic return. We believe the base of business that we have within Plexus already is positioned to grow in a meaningful way and in a very rapid way. We also feel good about the formula of the wins that we have as we look forward to. So while we certainly have some near-term challenges that we’ll continue to work our way through, we remain committed to driving growth through Plexus. So again I want to in closing thank our employees for all their effort they’ve put forth in moving Plexus forward towards our goals. I thank our investors for their support, to all the analysts for the great questions and for following us and any other guest that we have online. So hope everybody has a good and see you next quarter.

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