Good morning and welcome to the Plexus Corp. Conference Call regarding its Fiscal Third 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 turn the call over to Ms. Heather Beresford, Plexus’ Senior Director of Communications and Investor Relations. Heather?

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 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 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, clicking on Investors at the top of that page. Joining me today are Todd Kelsey, President and Chief Executive Officer; Steve Frisch, Executive Vice President and Chief Operating Officer; and Pat Jermain, Executive Vice President and Chief Financial Officer. Consistent with prior earnings calls, Todd will provide summary comments before turning the call over to Steve and Pat for further details. Let me now turn the call over to Todd Kelsey. Todd?

Thank you, Heather, and good morning, everyone. Please begin with our fiscal third quarter results on slide three. Yesterday evening, after the close of the market, we reported results for our fiscal third quarter of 2019. We achieved record quarterly revenue of $800 million. This result represents a 10% increase from the fiscal third quarter of 2018. We delivered revenue at the high end of our guidance range through successful program ramps and healthy demand in our differentiated end markets. Our health care and life sciences, and aerospace and defense sectors each delivered solid sequential revenue growth while meeting our expectations set at the beginning of the quarter. Our industrial/commercial and communications sectors, while down sequentially, exceeded expectations entering the quarter. GAAP EPS of $0.81 was in line with our expectations and met the midpoint of our guidance range. The result included $0.18 of stock-based compensation expense, a penny higher than anticipated entering the quarter. Our operating margin improved to 4.3%, as a result of traction gained by our productivity initiatives, which was partially offset by an unfavorable product mix. Please advance to slide four. Next, I will highlight additional accomplishments within the fiscal third quarter. Our teams maintained the strong wins performance achieving manufacturing wins of $227 million annualized when fully ramped into production, bringing our trailing four quarter wins to $938 million, which represents the highest level since fiscal 2013. The sustained wins performance enhances our confidence of future growth. The wins consisted of a healthy mix of programs with new and existing customers across our differentiated portfolio of highly complex products and demanding regulatory environments. The wins included future revenue associated with robotic assisted surgery and exciting technology that we highlighted at our Analyst Day in June. In addition to the strong wins performance, our teams increased…

Thank you, Todd. Good morning. Please advance to slide seven for a review of our market sector performance during the third quarter of fiscal 2019 as well our expectations for the sectors for the fiscal fourth quarter of 2019. Our health care/life sciences sector revenue increased 3% in the fiscal third quarter. This result was in line with our expectations of lower single-digit increase. New program ramps are the main contributor for the growth. Looking at the fiscal fourth quarter, the new program ramps continue. However, the introduction of lower cost next-generation products with a larger customer will mask the growth of the program ramps. As a result, we expect revenue to be flat for health care/life sciences sector in the fiscal fourth quarter. At this level, the sector would follow its 21% growth rate in fiscal 2018 with a high-teens growth rate for fiscal 2019, a clear indication that our strategy with this differentiated market sector is working. Revenue in our industrial/commercial sector was nearly flat for the fiscal third quarter, which was better than our expectations of a mid single-digit decline. 5 of the top 10 customers within the sector outperformed original forecast. As we look at the final fiscal quarter of 2019, we see a mix of forecast increases and decreases across all of the subsectors. The net result is that we anticipate a low single-digit decline for our industrial/commercial sector in the fiscal fourth quarter. With this finish, the team would overcome an approximately 25% decline in revenue in the semiconductor capital equipment subsector and achieve a mid single-digit growth rate for fiscal 2019. They have been very successful in diversifying the sector’s portfolio. Our aerospace and defense sector grew 8% in the fiscal third quarter. The result was in line with our expectation of a…

Thank you, Steve, and good morning, everyone. Our fiscal third quarter results are summarized on slide 13. Third quarter revenue of $800 million was at the top end of our guidance and sequentially higher by $11 million. Gross margin of 8.9% was sequentially lower by 10 basis points, primarily due to the underabsorption of fixed costs within our EMEA region and an unfavorable changing in customer mix. Selling and administrative expense of approximately $37 million was favorable to our guidance and sequentially lower by $800,000. The SG&A reduction was mainly related to our EMEA region, which reduced spending to partially mitigate the underabsorption of fixed cost. As a percentage of revenue, SG&A was 4.6%, a sequential improvement of almost 20 basis points. Impacted by lower gross margin, operating margin of 4.3% was at the low end of our guidance while sequentially higher by 10 basis points. Included in this quarter's operating margin was approximately 70 basis points of stock-based compensation expense. Non-operating expenses of $4.7 million were lower than expected in part due to foreign exchange gains. Our effective tax rate of 16.5% was slightly above guidance due to the geographic distribution of earnings. GAAP diluted EPS of $0.81 was at the midpoint of our guidance, with the number of diluted shares outstanding slightly favorable to guidance due to elevated share repurchase activity. Turning now to the balance sheet and cash flow on slide 14. In the fiscal third quarter, we continued our cash repatriation strategy by bringing back approximately $37 million of offshore cash. Since the enactment of U.S. tax reform last year, we have brought back over a $0.5 billion. During the quarter, we purchased approximately 784,000 shares of our stock for $44 million, at an average price of $56.61 per share. Through the third quarter, we have…

Thank you. [Operator instructions] And our first question comes from Shawn Harrison from Longbow Research.

Good morning, everybody. As you can imagine, I’ll delve right into the communications business. How much of this is a function of weaker demand versus maybe technology shifts that your customers are dealing with? And with this business, is there any risk of disengagements? We’ve have seen that with some communications customers over the years. As we look through fiscal ‘20, whether there is further downside side?

Well, let me start on this, Shawn, and then, I will pass it over to Steve for some additional details and color around the technologies and such. But, in general, I’d view our customer relationships as strong and healthy, and all of the existing customer relationships we view as continuing out into the future and continuing to be significant suppliers. But what we’re seeing is basically broad-based demand reduction across the various subsectors that we service within communications now. Now, obviously, our portfolio is potentially different than other people in the market. So, they may or may not be seen as similar scenario that we are, but our subsectors are showing declines across all of them. In fact, as Steve highlighted, 8 of our top 10 customers are down, 6 of them are down double-digit percentage wise quarter-over-quarter. So, it goes beyond just a customer and goes very deep within the sector. Now, in general, when we look at the sector and our expectations, we expect the fourth quarter to be a trough, but it may be a bit more U-shaped, like we saw with the semiconductor capital equipment space. But, in general, we're not planning for a recovery of end market demand. But, we expect new program ramps from these previous wins that we talked about, to pick up revenue a bit, as we get into the fiscal 2020. And I’m certain that some on the call likely view this as a major issue for us, the communications reduction. And, I would say that we don't. We view it as a derisking of the portfolio. It’s certainly a volatile sector for us, our lowest margin sector. And it's given us the ability to drive our portfolio to over 90% in these other sectors. So, health care/life sciences, industrial/commercial, and aerospace and defense moving forward. And even despite the projected weakness, we're still expecting reasonable growth due to the strengths in the other sectors, kind of paralleling onto this over 20% growth that we're seeing in ‘19, excluding the semi cap and the communications business. So, we’d expect these other three sectors to overcome year-over-year communications reductions that we're going to see. Then, when you couple that with the margins going back into our target range, we’d expect fiscal ‘20 to be a good year from an EPS standpoint. So, Steve, maybe you want to highlight some of the technology and how we play perhaps at least in the in the cable space where we have several customers?

Sure. Shawn, I think you asked the question, is this a technology shift? And I think, from our perspective, it is. It's not a surprise, as you look at the centralized architecture is going to more distributed in the cable space as well as the virtualization. This is being worked on for years. I probably the only surprise to the industry has been the investment reduction by the MSOs. In the early calendar 2019, there was a pretty significant drop off in capital spending. I don't know anybody really anticipated. I think it's forcing kind of a look at what the architecture is going to be. So for us, we do participate in the centralized architecture, we also participate in the distributor architecture. And so, for us, we see programs that -- the shift happened. We see our potential revenue shift happening from centralized and more distributed. The challenge for us or the interesting part for us is the centralized being a bigger box, more expensive box and a bit lower volume box. The manufacturing solution that you put in place for that versus what you were probably going to need for a distributed solution, i.e. more medium volume products, lower cost products, is basically having us take a look at our long-term roadmap for where our communication products are going to be built and what we need to do to service our customers. And so, we believe the technology shift is happening. I don't think it -- it will be interesting to see how quickly it does shift because from our understanding, the distributed solutions and the virtualized solutions, although they're being investigated and worked and people are investing in them, they're not necessarily a commercial solution yet. So, we think this will take a few years to play out. But proactively, we're getting in front of it with our customers to make sure that the manufacturing solution that we have as the architecture shifts, solves their needs. And so, that's what we're doing, as we kind of talked about here in the script.

So, that's a fantastic description. I guess, if I may have one follow-up. Todd, you touched on this, a U-shaped recovery and semi cap. I kind of get the sense that you're feeling maybe some of that recovery has been pushed out even a bit further into 2020. I don't want to put words in your mouth but just anything on semi cap?

Yes. I would say, we don't have great visibility into it right now. I mean, what we see -- what we hear from our customers and read about is probably similar to what you do that people are talking about a 2020 recovery, probably back half, I would call it our best guess right now too. But the visibility is not great within semi cap. What I would say though is we're not seeing -- and it’s been consistent for well over a year now, we're not seeing any degradation in semi cap forecast. So, we truly believe we’re floating at the bottom right now.

Our next question comes from Matt Sheerin from Stifel.

Just another question relative to the communications business and the cost cutting efforts there. You talked about margins improving next quarter and in fiscal ‘20. In terms of these cost cutting efforts, and I know you haven't provided details, but is the plan to get that segment at least within a profitable range to help boost the overall process of the Company? And imagine it's perhaps breakeven or even worse at this point.

Yes. Matt this is Pat. That would be the plan, and that's our expectation. We will point our annual operating plan together right now and laying out fiscal ‘20. And that would be our expectation. I mean, these actions we’re taking are pretty focused on one or two sites where our concentration of this business is at. And just to give a sense of magnitude, I mean, we’re still working this plan. But, my expectation is, the charges involved would be less than $3 million and the savings would be probably be 3 times that. But it would be important to execute on those initiatives and achieve those saving in order to get, as Todd said, back into our target operating margin range for fiscal ‘20.

Okay. And in terms of the facilities where you’re making those cuts, I imagine you have other customers in other segments. So, is it relatively easy to just modify the equipment to serve other customers in other segments?

Yes. Matt, this is Steve. Yes. And actually to be honest with you, long term, I actually see this as a good thing because the mix of where the products are going and the business that we're wining for those sites, we actually see those sites as growth engines for us with other sectors. And so, this is freeing up space for us the long-term that is going to help us minimize any other investments there in the short-term. To be honest with you, long-term, it’s a really good thing. Short-term, to be honest with you, it’s lousy though because this reduction happening in the comms revenue as quickly as it did is forcing us to do this. But long-term, it’s going to work out really well for us.

Our following question comes from Jim Ricchiuti from Needham and Company.

Thanks. Good morning. I know, your program wins can bounce around quarter-to-quarter. But, I wanted to just about the number of wins in the quarter down from previous quarters and yet your revenue potential for program is up nicely. So, I wonder if you could just speak to that. Is there anything that you’re pursuing larger deals, larger opportunities?

Yes. Jim I would say, no. I would say, we're seeing more larger opportunities and we happen to close a bunch of them this quarter. But I think you will see that number of program wins fluctuate quite a bit. So, I wouldn’t be surprised to see it pop up to be something significantly higher next quarter. It just happened to be low this quarter because we closed a couple of big opportunities that we had in front of us.

Got it. And on the industrial/commercial side of the business, I think you alluded to 5 of the top 10 customers outperforming. And I wonder if you could provide any additional color on that, just in light of, I guess, people's concerns about some choppiness in different parts of the industrial market and the potential that there could be some weakening going forward, even though it sounds like you're fairly positive about that part of the business.

Yes. This is Steve. We are fairly positive on that part of the business. And part of my message was really, there wasn't a direct inclusion I could draw, saying that there's any market sector that was or sub sector that was significantly increasing or decreasing. We had customers at each of the subsectors, whether it was in transportation or oil and gas or even semiconductor capital equipment, see a little bit of an uptick and saw a few others come down. So, I don't see a trend in any one of the subsectors that really points to anything significant happening, other than the fact that, overall as we blend it together and look into in the fiscal 2020, we see growth in that sector for us. So, we are quite positive and optimistic on it going forward.

And just to add a bit, Jim, and beyond the growth even from an end market standpoint, if anything we're seeing, end markets tick up modestly. So, we're not seeing weakness in the subsectors that we're servicing right now, other than to state the obvious that semiconductor capital equipment continues to be weak, but not getting any worse.

Got it. Last question for me, and I'll jump back in the queue. Thank you. Just with respect to the robotic assisted surgery, you've been talking about that for a while now. And I'm just wondering, at what point do you begin to see that potentially start to contribute more meaningfully to revenues in that sector? And I presume it's also going to be accompanied by better margins, I would think.

Yes. We’d expect to start to see some impact to it in the back half of our fiscal ‘20. More meaningful impact would be as we get into ‘21 and ‘22 though.

Okay. And carrying better margins?

That's probably fair.

Yes. Okay. Thank you.

Our next question comes from Anja Soderstrom from Sidoti.

I just have some follow-ups. You mentioned for the communications segment, it's generally lower margin. So, how should we think about that for the overall margin? Are you trending like what you see is driving into more advanced communications equipment with higher margins or is it going to help the overall margin that this is sort of becoming a smaller piece of the pie?

Yes. I’d say, in general Anja, we see margins improving as we go into fiscal ‘20. And I think, the portfolio and the mix, basically having the over 90% the other areas certainly plays a role as those productivity initiatives that we talked about, starting last quarter. They’re starting to have a meaningful impact. So, we would expect to see margins up from what they are this year.

Okay. And that's going to be helped partially from the lower contribution from the communications segment.

Yes.

Okay. And then, I also had a follow-up on the customer -- the contract wins that just had become larger. So, how should we think about that also, how that’s going to be helping, hopefully helping margins going forward as you don’t need to ramp as many projects, is that how to look at it? And it’s better that there are larger contracts, so you don’t have to shift their production as often?

Yes. This is Steve. We see kind of the wins this quarter in terms of the larger size and smaller number is not necessarily a trend. As I look at the funnel broken out in terms of size of opportunities across all of the sectors, our overall portfolio of opportunities in terms of their size and the number that we have in each of those buckets has fundamentally shifted over the year. And so, as I look at the funnel of opportunities that we have coming at us, it's pretty well balanced between larger ones, medium ones and smaller ones. It just so happened that this quarter, we did call the few larger ones which drove the average up higher. And yes, ramping fewer, bigger does help in terms of the cost structure that you have to have in place to ramp them. But I don't see this, just this one quarter is not a trend and not something I’d really read into anything different than what we’ve been doing in the past in terms of the growth projection of the business or the investments that we need to make to grow the business.

Our next question comes from Paul Coster from JP Morgan.

This is Paul Chung on for Coster. Thanks for taking my question. So, just on free cash on the CapEx side, understand you’re investing in facilities this year, that level of spend should come down next year, but on the working cap side, inventory levels improved but your overall cash cycle days continue to increase. When can we see more material improvement in free cash flow and when can we get above that $100 million mark?

Yes. So, Paul, we're right in the stage of preparing our plan for next year. So, we will be finalizing that in the next month. But, as I look to fiscal 2020, there is three areas that I believe we’ll see improvements to our cash cycle. You touched on one of them, capital spending, which is in that range of $80 million to $90 million this year. Our expectation next year that will be reduced probably $25 million to $30 million from that number because we did do a lot of investment in fiscal ‘19 in facilities, and we won't see that level of spending next year. So, that's one area that we will see improvement. Second area is around what we’ve touched on operating margins, getting within that target operating margin range, which will deliver more free cash flow from operations. And then lastly, our efforts around working capital, we're seeing those start this year with the reduction in inventory days. We expect to see that continue in the fiscal fourth quarter. We are working through the reduction in the communications sector. Because that’s come down significantly over the last couple of months, we pulled back and procurement activity, but some of that inventory we had on hand given longer lead times. So, that is impacting fiscal ‘19 free cash flow at the end of this year. But our expectation is to continue our efforts around inventory management throughout fiscal ‘20 and see improvement there. So, the combination of those three, I think will be approaching $100 million. Whether we get above that, we will see as we finalize the plan over the next month.

And then, just a follow-up on your accounts payable that had to do some of the comps dynamic there. What's kind of driving the higher payments there that? Is that those days something we should expect in the coming quarters or is that something structural?

Yes. So, what we saw this quarter was a significant reduction in our accounts payable days, probably a little more so than we had forecasted for a couple of reasons. With the inventory efforts, we’re obviously pulling back on purchasing materials. So, that's reducing our payable days. But, then also, with the communications, reduction, we've pulled back on purchasing that -- of those components. So, to answer your question going forward, I think we will see our payable days and that balance elevate over the next few quarters and probably get more to the normal level we've seen before this quarter.

I think, in general, Paul, if we look at our inventory reduction efforts, as we're going through that, our payables are likely to be a little bit depressed, but in the longer term, they should exceed 60 days as they typically do, as we get moving toward reduction efforts stabilized.

Got you. And then on the comp side, if this downward pressure kind of continues to accelerate, are you having discussions on possibly exiting this business and maybe redistributing resources to maybe healthcare/aerospace? Is this kind of even a possible option for you guys, if you could expand on that?

We're certainly looking at how we manage our team and utilize our resources internally. What we're now looking at doing is doing any proactive moves with our customers. And then, we value the customers we have in this space. And we think they are really good companies that have good technologies. But I think you'll continue to see communications be relatively small piece of our portfolio. But, at this point -- and we allocate our resources appropriately, based off of that.

And Paul I’d add. I mean, last quarter, we reported that we added five new logos. So, there are opportunities for us in this sector.

Okay. And then, lastly, on the tariff font, any further update from your commentary from analyst day? It seems like Mexico's in the clear now but -- for now, at least. But are your customers kind of taking any actions at all to move productions in China or any of those discussions accelerating at all? Thank you.

Yes. So, there's a bit of movement in China right now, given that there hasn't been a successful resolution yet of the tariff situation. So, I mean, just to remind everybody, we're just a little bit over 10% of our revenue in China, so a little over $300 million. So, it's not a significant exposure for us. And a significant portion of that, more than half stays in China. But, we do have discussions going on with multiple customers. And we have -- for that we're doing some qualification builds in other geographies. So, it could end up being about 10% or so of our China revenue that moves to other geographies during the course of fiscal ‘20 as of right now. So, we're seeing some impact. We're certainly seeing some impact in where we source new programs. Although we did have a major win in China this quarter. So, I think there's an ability to be able to -- to have small growth within China as we move forward, just not at the levels maybe that it’s been in the past.

Thank you so much.

[Operator Instructions] We have no further questions at this time. I'd like to turn the call over to Todd Kelsey for closing remarks.

All right. Thank you, Sylvia. And thank you to everyone who joined us on our call today. As always, we appreciate your support, your interest in Plexus. I’d also like to thank our Plexus employees globally for their commitment to our customers and our customers’ success. It’s the efforts of our teams that truly differentiates Plexus. So, I look forward to a successful close of our fiscal 2019 and further progress in fiscal 2020.

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