Good morning and welcome to the Plexus Corporation Conference Call regarding its Fiscal Year Third Quarter 2020 Earnings Announcement. My name is Myra, 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 us 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. Heather, please go ahead.

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 28, 2019 as supplemented by our Form 10-Q filed with the SEC on May 8, 2020, 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 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 operating income, adjusted operating margin, 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 Investors on top of that page. In light of the current situation with COVID-19, we are conducting this quarter's call virtually. 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 on slide 3 with our fiscal 3rd quarter results reported after the close of the market yesterday evening. I'm incredibly proud of our global Plexus team as they manage through the complexities resulting from COVID-19 while delivering record quarterly revenue of $867 million. The result represented 12% sequential growth and 7% growth from the 3rd fiscal quarter of 2019. While each of our locations faced challenges resulting from the COVID-19 pandemic our sites operated near full capacity for the quarter. This level of performance was possible for many reasons. I will highlight three of the most significant. First, the leadership of our regional and site teams ensured that the robust policies and procedures we developed to safeguard the well-being of our teammates, were implemented and sustained. Second, the dedicated frontline associates at our sites, each day display their commitment to our customers and help create the products that build a better world. Finally, our supply chain team effectively expedited components, allowing us to fulfil upside demand as they continue to deleverage their strong partnerships with our suppliers and uphold their commitments to our customers. We delivered GAAP diluted EPS of $1.20, including $0.22 of stock-based compensation expense. Our GAAP operating margin of 5.3% was our best quarterly margin performance in 3 years. While direct COVID related costs were substantial within the quarter, our operating margin was higher than the anticipated as we benefited from leverage due to increased revenue, reduced United States healthcare costs, and exceptional operating performance from our teams. Please advance to slide 4. Next, I will discuss additional accomplishments within our fiscal third quarter of 2020. I will start with items related to our revenue growth. Our team overcame the challenges of the pandemic to deliver an exceptional…

Thank you, Todd. Good morning. I will start on slide 7 with an update on how the Plexus team is leading through the COVID-19 pandemic. We have not wavered on our commitment to our employees to make Plexus the safest environment outside of their homes with the mitigations we have put in place, we believe we are delivering on this pledge and the likelihood of the COVID-19 virus being transmitted within our facilities is low. We were happy to see the settlement reflected back to us by our employees in a satisfaction survey we conducted during the fiscal 3rd quarter. The largest issue we face is the increasing number of employees who contract the virus outside of Plexus. To mitigate this risk, we are continuing our work from home policy where possible. In our facilities where employees need to be at work, everyone is required to wear masks and practice social distancing. We check employees for COVID-19 symptoms every day, individuals who have symptoms are proactively quarantined at home, while they're being tested, and we perform contact tracing even before test results are received. Although we cannot stop employees from bringing COVID-19 to work, we have been able to effectively manage the risk of it spreading at Plexus thus far. In addition to mitigating the health risk for employees, slide 8 highlights our team successes in mitigating the business risk for customers. Although some disruptions are still occurring in the supply base due to COVID-19 impacts, the main challenge for our supply chain organization in the fiscal 3rd quarter was expediting materials to meet demand increases. As reflected in our strong results, the team was able to procure additional materials, and our operations team's efficiently converting them into finished product for our customers. This was possible because our manufacturing facilities…

Thank you, Steve, and good morning everyone. Our fiscal third quarter results are summarized on slide 14. Revenue of $857 million was sequentially higher by $90 million while gross margin of 9.7% improved 170 basis points. For the fiscal third quarter, we experienced significant fixed cost leverage and as revenue increased 12% while fixed manufacturing expenses remain consistent with the fiscal second quarter. Healthcare costs and travel expenses were two areas where we experienced lower spending compared to last quarter. Improvement in our business mix also contributed to better gross margin. Selling and administrative expense of $37 million was slightly above our expectations primarily due to higher variable incentive compensation expense. However, as a percentage of revenue, SG&A was 4.3%, which was better than expected and sequentially lower by 65 basis points. Again, reduced healthcare costs, and travel expenditures provided improvement in this area. Our GAAP operating margin of 5.3% included approximately 75 basis points of stock-based compensation expense. This represented a 230 basis point improvement from the fiscal second quarter non-GAAP result and an operating margin nicely above our target range of 4.7% to 5%. Non-operating expenses of $4.2 million were better than expectations primarily due to lower interest and other expenses. GAAP diluted EPS of $1.20 was positively impacted by the improvement in operations, lower non-operating expenses and lower-than-expected tax expense. Turning now to our cash flow and balance sheet on Slide 15. For the fiscal third quarter, we delivered $47 million in cash from operations and spent $10 million on capital expenditures, generating free cash flow of $37 million, a result in excess of our net income. Through the first nine months of fiscal 2020, we generated free cash flow of $51 million. There is no share repurchase activity during the fiscal third quarter. As I mentioned…

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] We have our first question from Adam Tindle from Raymond James is online with the question. Please go ahead.

Thanks and good morning and congrats on the strong results in this difficult operating environment. Todd, I wanted to ask you, you talked about in early fiscal '21 how COVID related demand was going to moderate in advance of new ramps. So it does sound like there is maybe a little bit of an air pocket coming and I just have two questions on that. First, if you could just help us understand the magnitude to revenue, would we kind of expect down low-single digits year-over-year, kind of like we saw last quarter or would it be worse because there's more segments impacted? And secondly, what you're doing on the operational side to plan for this. I'm sure it's a little bit of a catch 22 with ramps coming in the back half of the year so you probably don't want to make major OpEx adjustments. Just how big a dip in operating margin we should expect in how it comes out the other side? Thanks.

Yes, sure, Adam. I guess one of the things that became obvious with the question here is perhaps we concerned people a bit too much or a bit more than what's reality here. So if we look at the situation, we think about where we're at today with the fiscal fourth quarter guidance, at the midpoint, we'd be up about $100 million sequentially over the next, over the past two quarters. What we didn't want people doing is thinking that we would continue to grow at that rate, that we were going to take a bit of a pause as some of these demand increases level off and new program ramps hadn't quite caught up to it yet. So what we really expect, I would call it a modest dip in Q1 and Q2 from what we expect to end at in Q4 and then we would expect to be in sequential growth again in Q3 and Q4. So, there really isn't any structural changes we need to make operationally, we expect strong operating performance throughout, throughout fiscal 21 and with strong margins. And we expect, as we look at fiscal 21, we expect it to be, in today's environment there's a lot of caveats here based off of the broader economy and the broader things that are going on in the world, but with today's environment we'd expect some growth in fiscal '21.

Okay, that's helpful, thanks. So maybe just as a quick follow-up. Comparing the last recession where you had a string of quarters of revenue down around 20%, operating profit down 2 to 3 times, this, here in this recession, we had one quarter of a blip, but now we're at record revenues and margins. What are the major differences you're seeing this time around, and just thoughts on big takeaways for the industry as we think about coming out of this? Thanks.

So, I think what we saw in the last recession was a very broad-based demand reduction. I think what we're seeing right now, it's very targeted across specific markets and with the way that we've been able to diversify our portfolio, we're not seeing a significant of an impact as other people. So, as we go through our sectors, and I talked about it, in aggregate, our demand being strong. About 70% of our business is solid to operate now, with only about 30% of it being, what I would call weaker impacted by the recession. And I think a lot of it has to do with the diversification of the portfolio and the markets that we're playing in. And so, I think that's what's different. And I think what we're going to see across the various industries and across the various sectors of the market is there is going to be some areas that do quite well and some areas that do poorly and that's what I think is a lot different, was very broad based last time and it's very targeted this time.

Thanks and congrats, again.

Adam, from a margin's standpoint too, maybe I can add a few things to that. So I mentioned that we were up 170 basis points sequentially. So just to give you a few numbers around that; I'd say about 35 basis points of that sequential improvement related to lower healthcare costs, and travel expenditures. So that's something that's probably more temporary. We expect to see a return to those levels later this year. COVID related expenses were about $4 million this quarter, last quarter, they were $5 million, so a little lower this fiscal third quarter compared to the second quarter, so benefits there. I think where the real delta was around productivity; our ability to manage with a smaller workforce and leveraging that higher revenue, essentially keeping our fixed manufacturing expenses consistent from the second quarter. So, I think some of that will continue and will change going forward and stay with us from a margin standpoint, hence, Todd's comment about expecting to see strong margins continuing.

I just wanted to add one more comment too before we left on your first question, Adam, because I didn't have the numbers at my fingertips about year-over-year performance, because we tend to think more about sequential performance but year-over-year, the comparables are good. Q1 last year of fiscal '20 was a pretty solid quarter, we'd expect to be on par with that certainly, and Q2 would be at a depressed quarter, we'd expect to have, we'd expect to be up substantially from that quarter in fiscal '21.

Got it. Thank you.

Shawn Harrison is online with a question. Please go ahead.

Good morning, everybody and my congratulations to the entire team as well as the outstanding results and guidance. Wanted to dig in on two areas, the first just being the robust program win rate this quarter in light of an inability to visit our potential partners. How does that potentially accelerate coming out of it, if you're actually able to meet people in person and they get to walk through the Plexus facilities. Is there an opportunity you see even more programs come to Plexus over the next 12 to 24 months, hopefully once we get COVID under control?

Yes, this is Steven. I think there is a potential opportunity. One of the things that we are seeing is companies drilling through COVID and frankly the tariff situations in the recent past, really starting to look at and evaluate different supply chain strategies. So, we are, I would say, getting more requests and discussions associated with what should a forward looking supply chain strategy be from potentially new customers, and I do believe although we're being successful addressing those virtually, I don't believe there's anything better than getting on the street and being able to talk to people directly about those. And so, we have made a few investments here in the last couple of quarters in our business development team, both in EMEA as well as the US, and really kind of our expectation is to be able to try and [indiscernible] business development wins as we go in the fiscal '21 because the reality is, is to keep our wins metric where we need it to be and want it to be, we need to increase, increase that number through '21 and into '22 to keep the growth going.

That's helpful. And then, Pat, I'm going to put you on the spot. You did a 5.3% EBIT margin this past quarter, the midpoint is at 5, you still have COVID cost overhead, but it sounds like you've learned some manufacturing efficiency lessons here during the pandemic, why wouldn't you be able to hold above a 5% EBIT margin in fiscal '21 if you're going to see some top line growth and we've got COVID cost along the way and lessons from these, during the pandemic efficiency helping out as well.

Yes, I think the opportunity is definitely there, Shawn, I think it's just a little early. We're right in the process of preparing our annual operating plan for the Board. We'll present that to them next month. I think the opportunity is there. I think we've proven to ourselves we can be more productive, efficient with the workforce and I expect that to carry through. So to your point, I think COVID expenses will come down a bit, especially the labour side, I think we'll continue to have personal protective equipment needs that will carry through fiscal '21. But I think the opportunity is there, it's just probably just a little early to guide that.

Thanks.

We have Jim Ricchiuti from Needham & Company online with a question. Please go ahead.

Yes, good morning. I may have missed it but did you give a COVID related expense level that you're anticipating for Q4?

Jim this is Pat. I don't think we did, I think we'll be around $2 million for Q4, so that's coming off 4 million in Q3.

Got it. And Pat, I just wanted to come back to the comments you made about the business, 70% of the business being solids up which is impressive given the environment we're in, the economic environment. I'm wondering as you look at that business, that portion of the business, do you have a sense as to how much of that might have been this COVID-19 tailwind that you've experienced?

Yes, we do in certainly general terms and that's part of what we're seeing where we talk about a bit of a moderation early in the fiscal year. So I mean it might be on the order of 30 million a quarter or so that, and I'm just going ballpark off the top of my head here of impact that's, I'd call it more surge related from COVID, but I think a lot of it is just demand that's non-COVID related, that's just in solid in the right markets. So, the other thing we have going for us to that we're, we think will help as we move into fiscal 21. We not only have the program ramps but if you look at our healthcare business where you could say a fair amount of that or at least some of that is COVID related, I think some of it's more sustainable like the point of care testers are going to be around for a long time. But I think if you look at that business, you have the elective business that we anticipate to come back more strongly than it has. There's signs of improvement but I would say it's still quite weak right now. So, we have that to look forward to I think as we get into fiscal 21.

Got it. And then, some real nice growth in wins in North America and I think you touched on some of it that I am just wondering if there is any other color you can provide on where that growth is being generated.

Yes, this is Steve. Obviously; yes, so strong wins in the Americas, we've seen in the recent past also strong wins in APAC, and just a message I would give you is that we do see customers really focusing on probably a little bit more disciplined approach on continuity of supply and long-term partnerships. And so as some of these issues have been happening across the globe, I think there's a little bit more due diligence being applied to suppliers as opposed to just chasing the lowest cost, and I think that resonates really well for Plexus when we deliver our message and people can see and we can show them examples of what we've been able to do, it resonates really well with them. And so, I think our ability to win is, in my opinion, ability to just to demonstrate what we've done for other customers and then quite frankly just the stability of the company, both from a financial and an execution standpoint. It's a pretty easy message to tell people and they like it.

Got it. And last question from me, you talked about getting to full capacity at your facilities, just given the way this pandemic’s been moving around. I wonder if you could just provide any update just as to where you are. I mean, we've talked in the past about potential, the headwinds you faced in Malaysia, but just in general is, has there been any, are there any things we need to be paying attention to?

Yes. From a capacity standpoint, I guess the comment I made is that the ability to run at full capacity and our full capacity doesn't mean we don't have the ability to expand and drive more revenue with new programs into those facilities. And so, where we sit today is roughly from a capacity standpoint, roughly about 50% of available capacity as tool, we're in the 70% range, but we have seen an uptick, more in the APAC region. So APAC on the higher end of that more, getting closer to 80% as tooled. And so, for us, we're pretty comfortable with our footprint. The additions that we made in fiscal '19, I think were the right additions. But as I look to the growth in really kind of APAC outside of China, is probably an area for us to be looking at in the future.

Yes, one of the things that I'd add too is that we certainly went through a period and are continuing to go through a period where, which everybody is really dealing with COVID and it's like an everyday occurrence across the business or every week on those orders. So, it's something that we've learned to manage around and we believe given the business that we're in, the locations we're at we don't foresee any issues at this point and being able to operate. We think we'll be able to stay at this, at or near our, call it our tooled capacity, our revenue capacity, which is where we want to be. As Steve mentioned, we have plenty of room to be able to add new business as we go forward.

Okay, got it. Thanks very much and congrats on the quarter.

Thanks, Jim.

Thanks.

We have Steven Fox from Fox Advisors online with a question. Please go ahead.

Thanks, good morning. Two questions from me please. First just following up on that last comment. So, when you're talking about your tooled capacity versus new programs coming on, are we looking then at next year having sort of a typical type of capital spending year or would it be unusually high et cetera, can you just give us some direction there? And then I have a follow-up.

Yes, this is Pat. I, I think at some point as Steve said we're going to have to add capacity and I don't see that maybe until later in fiscal '21 or into '22 it will probably toggle those two years. So, I think we are looking at that, Steve, to satisfy the demand we expect over the next several years. So, I think we will be looking at some expansion kind of later in '21 into '22.

Okay.

What I would add, some of the rationale around that, Steve, is we viewed China as a second growth engine for Asia, when we -- as we are bringing those facilities online and I think it's just, our team is proving it can be a growth market for us, but it's not going to be a strong growth engine like Malaysia and given our footprint in Malaysia, substantial size, we just believe we're going to need another geography in Asia. That's going to be a strong growth engine.

Got it, that makes sense. And then just another sort of COVID related question. On the point of care testing, can you sort of explain as much as you can what you're providing into that supply chain and whether your ramp is consistent with some of the announcements out of the US government given the funding for availability later this year. And then secondly, on similar lines, I know you mentioned you're supplying into for warehouse efficiencies, given how the supply chain has changed in retail. What about other processing equipment where you also are seeing supply chain issues around food manufacturing, other consumer essentials? Thank you.

Yes. So, in regards to the -- I'll take the second one first. In terms of the other markets outside of healthcare that are focused on serving other industries. We have heard and seen from some of our industrial customers that their segment of healthcare life sciences, so they have segmentations in the different markets, and I mean, obviously they're seeing strength in those areas, so whether it's some of the ruggedized industrial controls and those types of things that are going maybe into pharmaceutical laboratories and those types of things, they've seen an uptick. It's a little difficult to quantify exactly how much of that business isn't, but again to Todd's point we've seen some upticks in some of the other sectors attribute some of that to that. And then, in terms of like -- to point-of-care products and the things that we do there; for the most part we're building the entire device. It's a finished device that we'll be shipping to the customer or even the end customer. And so, from a supply chain standpoint, we are working closely with our customers to basically develop, in some cases a supply chain, a robust supply chain that can deliver that product because to Todd's comment earlier, our customers do believe that these products, although they're being developed and used for COVID-19 testing, their capabilities go well beyond just COVID. So they can be used as for testing for other viruses and other things into the future. And from -- and we really don't comment directly about the products that we're doing, but some of the things that we're engaged in are some of the things that are being discussed out in the public in terms of what some of these companies are trying to do and so we are engaged in helping some of these companies that are basically being recognized for their efforts to help them get their testers out into the market.

Great, that's very helpful. Thank you.

We have Matt Sheerin from Stifel online with the question. Please go ahead.

Yes, thank you and good morning. Just a question regarding things that you're seeing in the semi capital equipment market, this is probably three quarters in a row that you've seen growth there. And when you talked about the moderation expected in Q1 and Q2 within industrial. Is semi-cap part of that or do you have visibility that you're going to continue to see strength next year because we are seeing signs of some semi cap reductions in terms of CapEx next year?

Yes, so in industrial, some of the products are the ones that I mentioned as being COVID related surges, Matt, those are non-semi-cap. I think the semi-cap demand we're seeing is not necessarily COVID related. But we do, we do see a little bit of a moderation as we go into fiscal '21 in semi-cap demand.

And are you seeing that from across your customer base or maybe some specific areas like memory?

Yes, I'm going to have Steve take this, this piece of the question.

Yes. So maybe just I answered or add a little bit to Todd's first response and then I'll answer your second part. One of the things that you've seen us do is outperforming industrial commercial space, especially in the semiconductor market. Part of the reason we're able to do that is that our inventory levels with these customers are higher than they would normally be. And as you look at our customer deposit days, you'll see those up as well. And so, there are semiconductor capital customer, capital equipment customers are having us carry extra inventory because they believe there is upside demand coming, but a lot of them are struggling especially through the COVID period here as to whether or not that's going to be in '21 or in the '22, but they're all pretty bullish in that, at some point here there is going to be stronger demand. And so, we carry extra inventory and then when that demand comes, we're able to fulfil it. And so, as we look into fiscal '21, we see modest numbers from our Industrial Commercial sector because I think the same issue kind of exists that anticipation of when might there be upside demand that they want to be there. Specifically, as it relates to products. Memory, for us continues to be strong in some of the higher end semi components. It looks like that might be a little bit softer, which you may be hearing in the marketplace a little bit. So, as we look across our semiconductor customers, we are quite diversified in both the front end and the back-end process, but also as well as whether that's internal demand, external demand. And then, finally, as to what markets are actually going after, Memory versus higher end semi. And for us, Memory's strong, higher end semi, we see a little bit of softness in it across the board. We see everybody kind of being modest in the fiscal '21. But everybody, since everybody, most customers are bullish that there is upside demand at some point in the future, there's just a difficulty in predicting wins.

Okay Steve, that was a very helpful. And my follow-up actually ties into your comments on inventory, your inventory position is a little bit elevated, but you talked about really not having any supply constraints that kept you from meeting customer demand in this environment, obviously as a very strong result. So, as you look forward, are you seeing supply open up a little bit or it's continued to be day to day battle and you're expecting to remain sort of at somewhat elevated levels here?

Probably the best way I can quantify that is we have a process we call flexible right, which is basically a list of critical components we need within the quarter or within the coming quarter and typically that list -- so, we throw corporate resources at it to help solve those problems. Typically, that list will run nine hundred to a thousand things on that list in any given month. In the month of April, it spiked up close to 2500, it's come back down to roughly 1300,1400. So, things are definitely improving from where they were earlier in the fiscal third quarter. Going forward, we do expect it to continue to come back down as we look specifically what we're battling related to COVID. There is still a few CECs, customer engaging components, that are spot issues as a smaller supplier has a problem on the electronic side at a higher level, tantalum capacitors, are little site right now and you can map that directly back to some shutdowns that those suppliers had. And then, the last one for us is logic and discrete semiconductors more on the transistors and diode area, again, related to capacity constraints and issues that a few suppliers are having. But from everything we see, those are more short-term issues that should work themselves out in the coming quarters. And then, we're actively watching and looking at as automotive comes back online as people have been talking about whether MLCCs continue to be or return to being an issue, our supply chain team is actively watching those. But right now, there's a lot of work that's being done. I don't want to under-emphasize that, but it's more related to short-term issues we believe than long-term trends.

Okay. That was helpful. Thanks so much.

We have Paul Coster from JPM online with the question. Please go ahead.

Yes, thanks for taking my question. So, it sounds like you've got about 2 million in the quarter of COVID related expense exiting this year and into next year. Should we assume that that sort of, I mean some of these scenarios, it's almost a stupid question, but if this is the new normal, is that the new normal drag on earnings about $0.20 a share or do you think you can pass on the expense to your customers or does it even go away?

Yes, Paul, this is Pat. First question, I think it will be a low lower than what we're expecting for the fiscal fourth quarter. Our forecast would say probably $1 million a quarter next year, again, mainly equipment related. We don't anticipate passing that along to our customers. Kind of a new norm and we've learned how to become more productive as well because of this situation. So, I think that more than offsets the cost we're going to have to absorb.

All right.

Yes, I just want to add. I mean just to be clear, Paul, we believe we have overcome the costs related to COVID through productivity gains. So, the margins, while we may not hit the margin level that we did in Q3 every quarter, we believe that we're going to deliver strong margins as we go forward, whether or not COVID.

It's impressive stuff, Todd. I just want a little picky question, you mentioned 3D printing as a semi another in regards to PPEs, you mean that you're using 3D printing for PP products or that you are producing 3D printers for the end markets? Which of those please?

Yes, it's actually both. Interestingly enough, we have 3D printer business that we're putting out into the marketplace, so actually helping our customers get their products out into the market so that all these people can use them, but we also have 3D printers within our facilities that we use more for tooling and fixtures and things like that and we have used those to create PPEs for local medical facilities.

Got it. Thank you.

And you have no further questions at this time, please continue.

All right. Thank you, Myra. So in closing, again, I'd like to thank our Plexus team globally. You all performed incredibly well this past quarter while serving each other, our customers and our communities. And again, I want to thank everybody who joined our call today. We appreciate your support. We appreciate your interest in Plexus. Have a good day.

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