Good morning, and welcome to the Plexus Corp. Conference Call regarding its Fiscal First Quarter 2019 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. Please note that this conference is being recorded. I would now like to turn the call over to Ms. Heather Beresford, Plexus Senior Director Communications and Investor Relations. Ms. Heather Beresford, you may begin.

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 are not limited to historical facts. The words believe, expect, intend, plan, anticipate and similar terms are often identified 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 from the fiscal year ended September 29, 2018, 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 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 Investor Relations 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 to Todd Kelsey. Todd?

Thank you, Heather, and good morning, everyone. Please begin with our fiscal first quarter results on Slide 3. After the close of the market yesterday, we reported results for our fiscal fourth quarter - first quarter of 2019. Our results were aligned with our expectations entering the quarter. We delivered revenue of $766 million and non-GAAP EPS of $0.91, both near the midpoint of our guidance range. The revenue result represented a 13% increase from the first quarter of fiscal 2018. We achieved solid sequential growth in our Healthcare, Life Sciences, Aerospace and Defense and Communications market sectors, which offset weakness in the semiconductor capital equipment space. Both Aerospace and Defense as well as Communications strengthened in the quarter. In addition, we delivered strong operating performance with operating margin of 4.8%, firmly within our enduring target range of 4.7% to 5%. Our EPS result increased 21% from the comparable quarter last year, an outcome that supports our expectation for solid EPS leverage in fiscal 2019. The result included $0.15 of stock-based compensation expense. From a GAAP perspective, we produced fiscal first quarter earnings per share of $0.69. This result included $0.22 per share of non-recurring tax expense as a result of further guidance related to U.S. Tax Reform. Please advance to Slide 4. Next, I will highlight additional accomplishments within the fiscal first quarter. We delivered return on invested capital of 14.6%, well above our weighted average cost of capital of 9%. This resulted in economic return of 560 basis points exceeding our 500 basis point enduring goal. Our teams achieved manufacturing wins of $230 million annualized when fully ramped into production. The win consisted of a healthy mix of programs with new and existing customers and brought our trailing four quarter wins to $920 million, representing the highest level…

Thank you, Todd. Good morning. Please advance to Slide 7 for a review of our market sector performance during the first quarter of fiscal 2019, as well as our expectations for the sectors in the fiscal second quarter of 2019. Our Healthcare, Life Sciences sector grew 4% in the fiscal first quarter, which was in line with our expectations of a mid single digit increase. This result represents a 27% increase from the fiscal first quarter of 2018. As we look forward, we expect a robust demand from new program ramps to continue. However, they will be offset by seasonal softness with a large customer this quarter. As a result, we anticipate a low single digit decline in our Healthcare, Life Sciences sector in the fiscal second quarter. Our Industrial, Commercial sector was down 10% in the fiscal first quarter, which was below our expectations of a mid single digit decrease. Softer than anticipated demand from semiconductor capital equipment customers was the main reason for the lower result. For the second fiscal quarter, we expect semiconductor capital equipment revenue to decline to less than 10% of Plexus' total revenue. However, growth of new program ramps from other customers within the Industrial, Commercial sector is strong. As a result, we anticipate the Industrial, Commercial sector will grow at a mid-single-digit rate in the fiscal second quarter. Our Communications sector had a stronger fiscal first quarter than anticipated, with revenue climbing 4%. Robust calendar year end shipments drove results above our expectations of flat revenue. Looking ahead to the fiscal second quarter, we do not expect the demand to be as strong. As a result, we anticipate a high single digit revenue decline in our Communications sector for the second fiscal quarter. Our Aerospace and Defense sector grew 2% in the fiscal…

Thank you, Steve, and good morning, everyone. Our fiscal first quarter results are summarized on Slide 13. At the beginning of the quarter, we adopted the new revenue recognition standard ASC 606, which requires revenue to be recognized over time for certain contracts. We implemented the standard using the modified retrospective approach, therefore, prior periods have not been restated. The impact from adoption was minimal. First quarter revenue of $766 million was near the mid-point of our guidance, while gross margin of 9.5% was at the higher end of guidance and consistent with the fiscal fourth quarter of 2018. Product mix contributed to the improvement in gross margin. Selling and administrative expense of approximately $35.4 million was in line with our quarterly guidance. As a percentage of revenue, SG&A was 4.6%, a sequential improvement of 10 basis points. Operating margin of 4.8% was also in line with our quarterly guidance and consistent with the prior quarter. Included in this quarter's operating margin is approximately 60 basis points of stock-based compensation expense. Non-operating expenses for the fiscal first quarter were $2.8 million, which was favorable to our guidance, primarily due to lower interest expense and foreign exchange gains recognized during the quarter. GAAP diluted EPS of $0.69 included a detriment of $0.22 per share related to further refinement of U.S. Tax Reform. In late November, the U.S. Department of Treasury proposed new regulations clarifying the treatment of foreign taxes paid in relation to the repatriation tax. In accordance with U.S. Tax Reform enacted December 2017, we were able to deduct these payments. However, the recently issued regulations now prohibit this deduction. The additional tax expense will be paid over an 8-year period, consistent with the overall repatriation tax. Excluding this tax expense, we recorded a tax rate of 14.2% for the…

Thank you. [Operator Instructions] And our first question comes from Matt Sheerin from Stifel.

Yes. Thanks. And good morning, everyone. First, a question just regarding the weakness you are seeing in semi cap. You've talked about that for a couple of quarters. And I think you said it was just less than 10% of total revenue. Could you give us an idea of what it was a year ago or sort of the year-over-year declines? And talking to your customers, are you expecting to hit the bottom any time soon, where you see forecast that might indicate a bounce back in the second half as we've heard from some other companies?

Good morning, Matt. This is Todd. So I'll just start and I'm going to pass it to Steve for color. But if we look back a year ago, semi cap was on the order of 15% of our revenue. So it's dropped to less than 10%. And one of the things that I really think significant that everybody take note of is we're expecting some reasonable growth yet in our Industrial, Commercial sector over the course of the year, despite the semiconductor capital equipment drop. So we're making that up through a lot of good, hard work on diversifying the portfolio and new program wins. I'll pass it to Steve to run a little bit more color around semi cap.

Yeah, just a little bit of what happened in the quarter and what we see going forward for '19. So within the first fiscal quarter, three of our large semi cap customers brought down the forecast in aggregate of about $7 million. That was in the November time frame. So that impacted Q1 a bit. We could have been a little bit stronger if that would've obviously materialized. In the December time frame, they brought it down by about an additional $20 million for Q2. So that's what's really kind of driving some of the challenges for us in Q2 with inventory and a little bit of headwind in margins as well because we were planning an additional $20 million of revenue for them in the fiscal Q2 time frame. One of the challenges that we have with this - these customers is that a lot of the components are customer engineered components. So from an inventory standpoint, it's difficult to push them back into the pipeline. And so it's going to take us a little bit of time through '19 to burn through those. We expect that that's about a three day impact in Q2 in terms of days of inventory associated with what's happening there. In terms of your question about where do we think we're at, we do believe we're at the bottom talking to our customers. The way that it's been described is that we're in maybe a U-shaped as opposed to a V-shaped. As we come down to the bottom, we're not necessarily going to see a rapid climb back up, but maybe hover at the bottom here a little bit before we turn back up. And depending upon which customer you talk to, some say late '19, maybe at the beginning of '20, but for the most part, they believe we're at the bottom.

Okay. That was very helpful, Steve, and your commentary on inventory, it's actually part of my follow-up question. And you answered some of that in terms of the headwinds you see in terms of the cash cycle and inventory you explained on the semi cap and the custom parts. But if you look at the rest of your inventory picture, because I imagine that there is some commodity parts associated with some of that bill of material where you may have a mismatch and you did talk about bringing inventory down this year. Are you able to get parts pretty much in areas that we've seen shortages or are there still some spot shortages that you - we might still have a mismatch of parts?

Yeah. So in general, the supply chain environment is improving, Matt. And particularly, memory is good right now. We're still seeing some challenges around MLCC's industry semiconductors, but it's not as bad as it's been. So when you start to look at the ability to upside, and this is also, really feeds right into the ability to drive inventory down, that environment is getting better. So we're starting to see an ability to be able to do that. And one of the things though, that we're still continuing to do is really keep up the interactions with our primary suppliers and supply chain people. So we have a number of meetings going on with executives ensuring we're getting supply and also ensuring we're getting favorable pricing. So they are liking our strategy and our growth and our engineering content. So that's really playing into our favor.

Okay. Thanks a lot.

Our following question comes from Shawn Harrison from Longbow Research.

Hi. Morning, everybody.

Morning, Shawn.

Pat, just focused maybe for you on the cash cycle days. Is there a target you're looking to get at for the end of the year to be able to hit the free cash flow forecast that you left unchanged?

Yes. I'd want to see us in the low 70s, kind of that 71 to 74 range, and then going into fiscal '20, I'd like to get that sub-70. So that will take a little more effort.

And then it's safe to assume the majority of this is going to come from inventory being pulled out of a system versus shifts in AP or AR?

It is, yeah. And maybe some additional customer deposits where it's more a request of the customer to have that inventory on hand, and we'll support it with the deposit. So I think a combination of those two is where you'll see that improvement.

Okay. And then as a follow-up. Todd, last quarter, you talked about potential incremental outsourcing opportunities with the tariffs and the trade war. Are you seeing those opportunities come to fruition? Maybe, are they're growing, are you seeing customers begin to consider, I guess, more acutely, moving production outside of China?

Yeah. So what I'd say, Shawn, is in the - the situation today looks a lot like it did a quarter ago. So everything's pretty much taken a quarter pause while we have the trade negotiations that are ongoing. So the funnel of new opportunities is still there and the potential to move certain chunks of work is still there, but nothing's active at this point. So we'll see how this all progresses and whether it really turns out to be anything additional or not at this point.

Okay. Thank you.

But I have to say, either one is a positive because it's good to get the additional revenue, but it's also good to be focusing our efforts around bringing in new business as opposed to moving other stuff around. So either is a positive.

Got you. Thanks.

Our following question comes from Paul Coster from JPMorgan.

Thank you for taking my questions. A couple on comms. So it looks like you had a strong fiscal fourth quarter, of course. Is that - or fiscal first quarter, is that the reason why the second quarter is going to be down, was it just a pull forward? And the second question is, the pipeline looks a bit thin and what's - the most exciting thing in comms at the moment is 5G. Are you sort of under indexed to 5G?

Yeah. So I'll start, and then - with the first part, and then Steve will take the question around 5G and the comms funnel. But if we look at first quarter and the impact it had on the second quarter, it didn't have a big impact. We had a little bit of a comms, I would call it, pull forward just from a improved throughput that we had in certain programs that allowed additional shipments to go out the door. But if you look at Q2, and I wouldn't say Q2's - I mean, it's - we're still projecting at the midpoint sequential growth, so it's not down. But the reason that's a little bit below what we thought it might be, coming into this call, is semiconductor capital equipment. So that went down pretty substantially.

And your question related to 5G, from sectors that we focus on and where we differentiate, as you look at the - more of the infrastructure of the cellular arena, that's not an area that Plexus has traditionally kind of played in. Now with 5G, it opens up the door for us a bit more in terms of the IoT and the connectivity things. And one of the wins that we announced this quarter, it is a customer that deals with IoT and more on the industrial side of how we're connecting more factory automation and other things to the network. So we do see ourselves a player in it, but we're selectively focusing on where we can differentiate ourselves.

Got it. My follow-up question really has to do with the new wins. Given that you're currently wrestling with cash flow and improving your cycle there. And we've seen across the EMS space and a lot of investment to bring on new customers, are you in any way, kind of, sort of screening the new business to make sure that it's not capital intensive or inventory intensive or is there no change to your methodology?

Not from a cash standpoint. I mean, we always do a pretty thorough screening to make sure that the business fits our strategy, and we believe we clearly differentiate that it fits this mid to low volume, higher complexity, the non-commoditized markets. But from a standpoint of ability to bring on business, we're in great shape. We have access to plenty of cash.

And Paul, one thing we do too is we measure every customer by a return on capital employed. So we're looking at working capital needs compared to margin and making sure that makes sense and that has not changed.

Right. Is there any difference in the lead time between bringing on the customer and them sort of achieving the optimal margin structure?

I don't think there's a fundamental change in the recent past here. A lot of the non-traditional markets that we deal with take a bit longer. As you have a highly regulated products, either in Healthcare, Life Sciences or in aerospace, the amount of time it takes to bring them up to full production takes longer. But that hasn't changed than what it has been over the last several years.

Okay. Got it. Thank you very much.

You’re welcome.

Our following question comes from Mitch Steves from RBC Capital Markets.

Hi, guys. Thanks for taking my question. Wanted to circle back a little bit on the semi cap commentary there. So does that include, when you guys talk about that, probably Micron or is that not part of kind of the customer count as it's just related to Lam, AMAT and KYC?

Yeah, we don't include Micron in the semi cap numbers because we do a - kind of a broader portfolio and it really started in different areas of their business. So we don't include that in our semi cap. It's just part of the broader...

Okay. And then just overall for semi cap, is there any specific exposure within those three that is heavier or is it just pretty equal across three?

Yeah, we deal with customers that are servicing the whole value stream of the semi cap over from the front end to the back end processes. And so it's pretty diversified across the entire spectrum.

Okay. Got it. And then secondly, just switching to the medical side. This is like one of the first things you're seeing a sequential decline there. So is there anything to look into there or is it just more of the timing of deals in terms of what you're going negative for the sequential and Healthcare going forward?

It is more - definitely more of a seasonal thing. We have one customer that's just down for the quarter. And that's the typical - it's typical for them to see this every year. So we expect that to return to growth as we go through '19.

Yes. So the one thing, you will see sequential growth in Healthcare, Life Sciences as we go through the rest of fiscal '19. And we're expecting an exceptionally strong growth year within that sector. So things are very encouraging.

Okay. Thank you.

At this time, we have no further questions. I'd like to turn the call over to Todd for closing remarks.

Okay. Thank you, Sylvia. So I have an announcement for the analysts who joined us today. We'll be hosting an Analyst Day at our headquarters in Wisconsin on June 5th, 2019. So during that event, we'll be highlighting our differentiated strategies and our capabilities. And you can expect to see some further communications from us regarding Analyst Day later this quarter with invitations to follow. And then finally, in closing, I want to thank everybody again for joining us on the call today. We certainly appreciate your support and your interest in Plexus.

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