Good morning and welcome to the Plexus Corporation Conference Call regarding its Fiscal First Quarter 2018 Earnings Announcement. My name is Paulette and I will 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 now would now like to turn the call over to Ms. Susan Hanson, Senior Director of Communications and Investor Relations. Susan?

Thank you, Paulette. 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, expects, 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 30, 2017, 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, adjusted earnings per share, 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, www.plexus.com, clicking on Investor Relations section 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, Senior 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 Todd Kelsey. Todd?

Thank you, Susan, and good morning everyone. Please begin with our fiscal first quarter results on slide three. After the close of the market yesterday, we reported results for our fiscal first quarter of 2018. We achieved record revenue of $677 million within the quarter. We incurred a $125 million dollar tax expense as a consequence of US tax reform, negatively impacting our GAAP EPS result. Our diluted GAAP loss was $2.93 per share. Excluding the tax impact, we delivered non-GAAP diluted EPS of $0.75, including $0.11 of stock based compensation expense. Despite the significant tax charge, we view US tax reform as immensely beneficial, given it provides us an opportunity to efficiently access our global cash. Therefore we are refining our capital allocation philosophy and plan, which we will share within the coming months. Pat will provide insight into our current thought process regarding capital allocation during his comments. Our Industrial/Commercial and Healthcare/Life Sciences sectors both achieved sequential growth and exceeded expectations, as we saw strength in the semiconductor capital equipment space, as well as with two large healthcare customers. Our Communications and Aerospace and Defense sectors underperformed as we experienced softness within our security business, and were negatively impacted by ramp rates of new programs across both sectors. We delivered operating margin of 4.7% for the fiscal first quarter. Even though our operating margin was within our target range of 4.7% to 5% for the seventh consecutive quarter, our non-GAAP EPS was at the low end of our guidance range as a result of product mix and cost associated with the significant number of new program ramps. Our return on invested capital was 16.2%. This represents an economic return of 670 basis points above our weighted average cost of capital, well above our 500 basis point goal. Next…

Thank you, Todd. Good morning. Please advance to slide six for a review of our market sectors performance during the first quarter of fiscal 2018, as well as our expectations for the sectors in the fiscal second quarter of 2018. Our Healthcare/ Life Sciences sector was up 2% in the fiscal first quarter, which was slightly above our expectations of flat revenue. Looking ahead to the fiscal second quarter, new program ramps for several customers, is offsetting seasonal softness with one customer. As a result, we anticipate a mid-single digit revenue increase in our Healthcare/Life Sciences sector in the fiscal second quarter. We expect the new program ramps and strengthening end markets will enable strong revenue growth in our Healthcare/Life Science sector in the second half of fiscal 2018. Our Industrial/Commercial sector was up 9% sequentially in the fiscal first quarter, which was above our expectations of a mid-single digit increase. The stronger than anticipated revenue was mainly due to increased demand from two semiconductor capital equipment customers. As we look towards the fiscal second quarter, increasing end market demand, especially in the semiconductor capital equipment market, is continuing. As a result, we anticipate a low double digit increase in our Industrial/Commercial sector in the fiscal second quarter. Given the stronger than anticipated first half of fiscal 2018, we now expect moderate year over your growth for our Industrial/Commercial sector. After an exceptionally strong finish to fiscal 2017, our Communication sector was down 4% sequentially in the fiscal first quarter of 2018. This result was below our expectations of a mid-single digit increase. Slower than anticipated ramps for three programs were the main contributors to the softer results. Looking ahead to the fiscal second quarter, we expect some seasonal softness in our Communication sector. In addition, a networking customer that…

Thank you, Steve and good morning everyone. Before reviewing our fiscal first quarter results, I’d like to spend a few minutes discussing the recent US tax reform and the impact on Plexus. Please turn to Slide 13 for details. As Todd mentioned, during the fiscal first quarter, we recorded an estimated tax expense directly related to US tax reform of $125 million or $3.59 per diluted share. Three components comprise this tax expense. The first and most significant component related to the mandatory repatriation tax on our undistributed foreign earnings. This expense of approximately $100 million is payable over eight years, with the first installment of $8 million due early in calendar 2019. The second component, totaling approximately $23 million is related to the withholding tax on certain offshore cash balances, which are now expected to be remitted to the US. This tax will not be paid until the funds are physically moved out of the foreign country. Finally, there is approximately a $2 million impact related to state taxes as a result of the new legislation. At this time, these amounts represent a reasonable estimate of the eventual and final amount that will be due. We may see changes to our estimates as final guidance and interpretations are issued by the Treasury Department, and the authoritative accounting bodies. One comment to make regarding our US deferred tax assets and the reductions to those assets due to the corporate tax rate change from 35% to 21%. Although our deferred tax assets will reduce, there is no income statement impact as we are in a full valuation allowance in the US/ For fiscal 2018, we anticipate our effective tax rate will increase by two to three percentage points as a result of the additional withholding tax associated with our offshore earnings…

Thank you. [Operator Instructions] And our first question comes from Sherri Scribner from Deutsche Bank. Please go ahead.

Thank you. I just wanted to dig a little bit more into the results in the Communication segment, seeing that it sounds like some programs didn't ramp as quickly and there was an acquisition that impacted some of your business. Can you just give us a little more detail on what happened there? Because it seemed like that drove some of the lower demand and is driving a lower outlook for 2Q

Yes. So Sherrie, I'm going to start - this is Todd, and I’ll start with the acquisition discussion and then I’ll pass over to Steve to give a little more color around the sector. But so first of all, that didn't have any impact to Q1. And I would say it created a little bit of a, maybe a challenging comparable to Q2. So I’ll start with that. But if we look at the details of it, it was a long term relationship that we had had and that company was acquired some time ago, I would say. And the acquiring company went through an evaluation and decided to consolidate their supply chain so to existing suppliers in essence. So that was disappointing. It is a networking customer. So it falls within our Communication space. It falls within networking, and that takes networking down to about 10% of that sector right now. Now, what I would say is, we've known about this for several quarters and we've accounted for it in our forecast. So any of the projections we had made about the fiscal year and such, had already included this and had it baked in. the other thing is too, if we hadn't seen the seasonal softness in Communications that we're seeing right now, it's likely we wouldn't have even talked about it because it's not - have anywhere the significance of some of the other - some of those other situations that we've talked about in the past. But what we didn't want to do, given this was occurring along with the seasonal softness, we didn't want anybody to draw the wrong conclusion about what's happening within the sector or with any of our customers within that sector.

Okay. So just to clarify - yes. I’m sorry. Please go ahead, Steve.

So the only thing I was going to add was that we also want - in terms of the ramps that are happening, we talked in the past a bit about, in terms of Plexus, that we have the capacity and we were basically able to keep up with the ramps. To answer that side of the equation is that we're fully able to support all the ramps that are happening. So just making - working with the customers to make sure that their plans and what they need to deliver are happening. And so my standpoint is it's moving ahead. We’re just basically working our customers to meet their needs as they request.

So just to clarify. The acquisition, you already knew about. So the miss on the communication side is largely related to seasonal weakness that you didn't anticipate.

Yes. The miss in Q1 is really a result of ramp rates of programs.

Okay. And then …

The Q2 situation is more around seasonal weakness, along with the situation with this one customer.

Okay. All right, got it. and then I guess if I look at the trailing four quarter manufacturing wins chart on Slide seven, it seems like the wins are sort of now trailing down when you look at the chart. And I guess I'd want to see that moving up to believe that you'd continue to see good revenue growth. Do you anticipate that moving up in the near term or in the next couple of quarters? And how should we think about that chart moving down over the past couple of quarters? Thanks.

Sure. So I mean our first goal is obviously to meet above our 25% target. And so as long as we stay above that, we feel like we're healthy. In terms of the trend down, yes, it has been trending down the last couple of quarters. We’d expect this quarter to be a strong quarter and that trend to turn to a more positive direction.

One of the things I’d just highlight to you as well, it’s trended down and it hasn't trended down in a really significant way. It’s just kind of a soft turn. So we'd expect to see that come up this quarter with the strong wins that we’re expecting.

And our next question comes from Shawn Harrison from Longbow Research. Please go ahead.

Morning everyone. On the - I guess two questions first off just on the, I guess the cash to repatriate. There’s nothing in guidance assume for accelerated buyback or debt reduction or anything of that nature. And so if that were to occur in the quarter, that would be I guess a bonus to you or something. Is that the correct way to think about how you're going to utilize the cash here?

Yes. that's true, Shawn, with the exception of - we think, like I said, we can bring some of this cash back this quarter and we baked in a little of that in the March time period to pay down some of our debt, but it's not a significant amount for just that one month.

And I guess, what's the greatest hurdle in terms of bringing it back? I’m assuming you're not like physically moving it anywhere.

No. I think it’s just our tax team working through the mechanics and all the documentation that's required. So I think we can get a good portion of that back this quarter.

Okay. And then secondarily, last quarter you were a bit more sanguine on the outlook for semi cap, and obviously you’ve seen some stronger growth here. What is the view for semi cap now for fiscal ‘18 versus where it was 90 days ago?

Looking at the market in general, ’17 was a very strong year. We see 30 - the market itself in calendar ‘17 was 35%, 36% growth, depending upon who you listen to. We outpaced that significantly. As we look to ’18, the industry is looking at a 7% to 8% growth rate. We expect to outpace that. And so we're benefiting not only from the growth of the market. We are also gaining market share with several customers because they've struggled with their supply base being able to keep up in ’17. So we've been awarded new business. And so we're seeing decent gr4owth as we start the first half year here. We expect it now to continue into ’18 or the end of ’18. And so the question we’re really starting to talk about is what does this look like in the ’19? Is it - does it level off? And that's kind of the expectation for now. But again, for ’18, we’re expecting a very respectable subsector for those guys.

And kind of what's changed in the last quarter, Shawn is, when we look at particularly the back half of the year, we’re a little more conservative. I think we're getting to a little bit more bullish based on what we're seeing from our customers right now.

Okay, thank you. And then if I may go back to the tax dynamic. I mean one of the slides said, go to the board for whatever it was, other uses of cash that would be shareholder friendly. What does that entail? If you can talk about it now.

Yes. Some we wouldn’t want to talk about before we have the conversations with the board. But one idea, Shawn I mentioned, we've got $100 million left under our share repurchase program. I mean going back to the board and asking them to maybe double that amount is something we consider as well.

Perfect. Thanks so much.

And hey Shawn, what I’ve done with is, I mean what we're really pleased about was being able to access this cash on an ongoing basis, is to be able to go out to our investors with a commitment on returning a certain percentage on an annual basis to our shareholders as a percentage of free cash flow, which I think we're really excited about being in that position where we haven't been in the past when that cash has been trapped offshore.

Our next question comes from Jim Suva from Citi. Please go ahead.

Thank you very much and good morning to you and your team. A quick question about your margins and your ramp rate challenges. Does that change the, like MPV of the entire project? Are you going to recoup it or was that built in and at some point, were these new projects - since it sounds like they're more challenged upfront, re they actually like materially higher than your corporate average operating margin? I'm trying to figure out how the economic challenges now close the GAAP long term once you have them ramped.

Yes. So Jim, I'll start with this, and Steve will probably have some color to add at the end too. But one of the things I’d like to start with is just by backing up just a little bit too. And if we think about towards the end of fiscal ’17, and we know we had really strong margin performance in ’17 above our target range. And there was a lot of discussion around can you consistently hit those margins? Will it go up? And we spend a lot of effort talking about our target. Our goal is to drive 4.7% to 5% growth - 5% operating margins, excuse me, with accelerated growth. And in many ways, it’s what's happening. Other than we've got the challenge with Q2 around the seasonal comp adjustments, or the seasonal adjustments which is about 50 basis points or even above that. So we're overcoming a bunch of that now already in the second quarter. So as we look to Q3 and beyond, the way we see this playing out is the programs continue to transition. So we get operating leverage on those programs and then we overcome the seasonal costs. So it really boosts margins in a pretty meaningful way. And when we think about the transitions themselves and the return on them, I think our return expectations are fine. We still view those as being highly profitable because they’re long term programs. But one of the things that we've got going on today that's maybe a little bit different is we have, I would call it high single digits of really complex and significant from a revenue standpoint, transitions that are going on, which is more than typical. And that’s in addition to the countless other call them straight forward transitions that are - that we're undergoing right now. So it's - we want to make sure we do the right thing for our customers first and foremost. But it also has a really meaningful impact to us as we get to the back half of the year from a revenue standpoint, as we get these programs continued to ramp from a revenue standpoint.

Okay. That makes a lot of sense. Go ahead.

Yes. Just a couple of things to add to that. Typically for us, the NRE costs associated with a transition get amortized into the production a bit. With that said, with some of these larger ones, we are looking at a different model of more of an upfront NRE model. So it does vary by customer and program. But from a - as Todd mentioned, it’s really kind of the quantity of these things that are happening at this point that generate a little bit of pressure.

And my quick follow up is, now that we're pretty much through a lot of January, have those ramps now started to come back, at least visibility into trajectory where you think they're going to be? Or do you think they're kind of elongated for another quarter or two?

Yes. For the most part, they’re coming back. I mean we had a couple that we called out in particular, and we saw some of the communications going just a little bit slower than we expected, a little bit of the aerospace. But there's a - I mean we can see on the horizon how they're ramping and in general the programs are ramping well. There’s a couple in Industrial/Commercial that are actually running faster than we had anticipated. So some of it is being offset, because if you look at our revenue trajectory and you kind of compare where our guide is from a revenue standpoint in Q2, it’s pretty close to expectations there. So on balance, things are net now pretty well. And when we look to Q3, Q4, we're actually seeing things strengthen from what our previous view was.

Thanks so much for the details and clarifications, and Happy New Year to you and your team.

[Operator instructions]. And our next question comes from Mitch Steves from RBC Capital Markets. Please go ahead.

Hey guys. Thanks for taking my question. I just have one on the networking communication side. So in the press release it states that you guys believe you’re going to grow double digits across essentially all the end markets. So with an adjustment from a customer on the networking side, do you still believe that that’s going to grow double digits? And if so, I mean is that more of a communications heavy side given that the networking customer is going away? Or how do I think about specifically that segment growing by product?

I'll just clarify at a high level, Mitch and then Steve will provide some more details. But from a standpoint of the sectors themselves, what we're referring to is we expect all of them to grow. But we expect overall Plexus to be double digits. So it's not necessarily each sector will be double digits. But if we look at kind of on a per sector basis, Healthcare/Life Sciences, Aerospace and Defense, we expect really strong growth in those two sectors. Industrial/Commercial, if you remember back to last quarter, we were thinking we'd have to struggle to get it to flat. That’s showing decent growth right now. And Communications is still showing good growth as well too. So I’m going to pass it to Steve for more color in Communications.

Yes. I think Todd hit it straight on. I mean we’re expecting double digits in healthcare, in Aerospace and Defense, as we said last quarter. Industrial/Commercial, we're now seeing modest growth as opposed to being flat. And then Communications, we talked about being double digit last quarter. I think there's still a chance of it being double digit. It could fall into high single digit depending upon how these ramps go as we look in the back half of the year. So as Todd said, overall we're feeling good about double digit growth for Plexus in the year. It just may shift the mix a little bit in terms of which sector does better versus what our expectations are as we finish the year.

All right. And then broadly, the networking communications, again which product lines are essentially driving the higher - the revenue growth?

As we mentioned, the networking portion of that sector has dropped to less than 10%. So it's the communication sector that's driving the revenue growth.

Great. Okay. Thank you.

Our next question comes from Paul Coster from JPMorgan. Please go ahead.

Hi. This is Paul Chung sitting on for Coster. Thanks for taking my questions. So just can you can expand on the competitive pricing environment across segments and where you’re seeing most pressure for new program wins and overall wins. What percentage of deals would you say the firm walks away from to maintain the long term operating margin targets?

Yes. So maybe starting from our philosophy in terms of the funnel. We run a process of lead generation that before something gets into our funnel, we really try to qualify to make sure it fits our strategic strategy, which is including our revenue and margin targets for it. So from that standpoint, I don't know that we’ve fundamentally seen a huge shift in the last several quarters, the last couple of years in terms of the pressure. The competition is still the same and I think the market is relatively the same. Obviously deal by deal they change and for us, I would say there is not a lot of significant change that I would say in any of the market sectors in terms of any different pricing pressures that we see. I think probably the exciting thing for me from my perspective is it's been a cost driven market a bit here over the last few years, mainly because supply was in excess, especially if you look at components. With tightening markets in components and things, customers are now getting more concerned in - about delivery. And so from that standpoint, it's nice to have a few other things other than just price being on the customer's mind. And so from that standpoint, feeling pretty comfortable with where we're at .with that said, we're not afraid and we talked about it in previous calls with other opportunities and customers where we walked away from things that don't match and we don't believe fit our long term model.

Okay. And just to follow up on the new manufacturing wins and program ramps. So which segments are the bulk of these new ones coming in this quarter and over the past couple of quarters? I'm just trying to get a sense of the margin mix. And I assume the higher healthcare mix is probably giving you some confidence in hitting margin targets for the back half. Thank you.

Sure. As we look at the - kind of the trailing four quarters of wins by sectors a bit, the Healthcare/Life Sciences, as we've been reporting here, is continuing to strengthen. So our wins, as well as our revenue is doing really well there. Industrial/Commercial is flat to an uptick as well. So feeling good there. Aerospace and Defense, the trailing four quarters is one that's a little bit of a challenge because the programs are so long. It’s maybe not as completely indicative. So we expect strong growth from Aerospace and Defense. But again that goes back to programs that we may have won even previous than a year ago. So as they ramp and mature, we're seeing decent growth there. Communications is the one that from a sector standpoint, we - trailing four quarters, it's down a bit and as I put in kind of my comments, scenario that we're focused and we've realigning the team and adding some resources there to make sure that we have the right strategy going long term. And so with that, I’ll turn it over to Todd if you’ve got any final comments on that.

Yes. I just wanted to take us around. I mean we talked about sectors, but I want to hit on regions and wins right now. And while the AMEA region wins weren’t very strong this quarter, the trailing four quarters for AMEA is really strong. And what that is doing is it's driving some really impressive growth within the fiscal year. I really feel like the region is at an inflection point right now. Right now we're projecting over 50% growth within the region in the fiscal year. And if you look at how that would potentially translate and again how it gives us the leverage and the margins we expect in the back half of the year, if you look at our manufacturing operations in AMEA, and this is not what we reported in the 10-Q. This is really some internal measures that we have, is above breakeven right now, and we‘d potentially drive it into the high single - mid to high single digits by the back part of the year. So pretty meaningful. We’ve got growth in both our UK and our Romanian operations within the region, as well as within engineering and rapid prototyping. So it's something that we're really excited about the - being able to leverage the wins we had there over the course of the past year.

And we are showing no further questions. I will now turn the call back to Todd Kelsey for closing comments.

All right. Thank you, Paulette. So in closing, I want to take a moment to thank everyone who joined us on our call today. We certainly appreciate your support and your interest in Plexus. And what I want to do is leave you with a message of optimism for the balance of fiscal 2018 and beyond. With the program transitions we have underway in the improving end markets, we’re positioned for strong growth in the balance of the fiscal year. In addition, we fully expect our operating margins to return to our normal level of performance. Finally, we're really excited about the opportunities presented as a result of US tax reform. So one final note. Our April earnings release and call will be one week later than typical due to some internal conflicts that we have. You can expect our earnings release after the close of the market on April 25 and our call the next morning. Thank you again.

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