Plexus Corp. (PLXS) Q4 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the Plexus Corp. Conference Call regarding its Fiscal Fourth Quarter 2021 Earnings Announcement. My name is Gail, and I will be your operator for today's call. [Operator Instructions] 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 Mr. Shawn Harrison, Plexus Vice President of Communications and Investor Relations. Shawn?

Good morning, and thank you for joining us today. Some of the statements made and the information provided during our call today will be forward-looking statements as they will not be limited to historical facts. The words believe, expect, intend, plan, anticipate and similar terms often identify forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of factors that could cause actual results to differ materially from those discussed, please refer to the company's periodic SEC filings, particularly the risk factors in our Form 10-K filing for the fiscal year ended October 3, 2020, as supplemented by our Form 10-Q filings 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, 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 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, Shawn. Good morning, everyone. Please advance to Slide 3. I'm proud of the resilience and unyielding focus on operational excellence of our more than 19,000 plexus team members. Their actions during fiscal 2021 were foundational to advancing our vision to help create the products that build a better world. Through their efforts, Plexus delivered exceptional results in fiscal 2021, which I will now highlight. We delivered GAAP EPS of $4.76, representing 21% year-over-year earnings growth on essentially flat revenue of $3.4 billion. Revenue was below our robust demand levels due to worsening supply chain conditions and the uncertainty created by the COVID-19 pandemic. Our GAAP operating margin of 5.2% well exceeded our previous target range of 4.7% to 5%. We believe this level of performance is sustainable, and we are establishing a new industry-leading GAAP operating margin target of 5.5%. In addition, our fiscal 2021 GAAP operating margin of 5.2% was our best performance since fiscal 2008. We delivered return on invested capital of 15.4%, with an economic return of 730 basis points above our weighted average cost of capital of 8.1%. This outcome far exceeds our previous economic return goal of 500 basis points. As a result, we are establishing a new enduring return on invested capital goal of 15%. Our team delivered free cash flow of $85 million despite the challenges created by the ongoing supply chain constraints and investments to support future growth, including the initial build-out of our new facility in Bangkok, Thailand. Next, I will highlight fiscal 2021 business development successes that position us for sustained growth as we differentiate in markets aligned with our mission of leading and highly complex products and demanding regulatory environments. In fiscal 2021, our team delivered over $1 billion of new manufacturing revenue when fully ramped into production, an increase of 8% over the previous year. In addition, our team engaged with a greater-than-typical 22 new customers during fiscal 2021. These engagements create a significant opportunity to drive incremental new program wins and in turn, revenue growth in future quarters. Finally, we ended the year with our qualified funnel of manufacturing and aftermarket services opportunities at a record $3.3 billion, as well as an increasing funnel of engineering opportunities. Please advance to Slide 4. I'm also proud of the continued progress of our environmental, social and governance program. I'll provide highlights of fiscal 2021 activities within our social pillar. Within this pillar, we advanced our efforts to support our local communities as well as the development, inclusivity and engagement of our team members who create our best Plexus. We created a positive impact on our communities through our charitable giving of nearly $1 million, a promotion of STEM education and our encouragement of volunteerism through establishing a paid time-off program available to all Plexus team members globally. These efforts support a virtuous cycle of well-being in our lives. In addition, we expanded our team member driven employee resource groups, including Plexus Young Professionals, which fosters team member development; Unis Plexus, which celebrates Plexus' diversity in different cultures; and Women in Network, which champions the advancement of women professionally and personally. These groups aid in facilitating our goal that all Plexus team members reach their full potential. Please advance to Slide 5 for a discussion of our fiscal fourth quarter results. We delivered fiscal fourth quarter GAAP EPS of $1.16 and GAAP operating margin of 5%. These results were comfortably in our guidance range, despite revenue falling below our expectations, which finished at $843 million. Worsening supply chain constraints and labor reductions in Malaysia as a result of the COVID-19 pandemic negatively impacted revenue. Our GAAP EPS, which included $0.23 of stock-based compensation expense, benefited from a focus on cost control, a strong start of a new aftermarket services program and continued robust demand for our engineering solutions globally. The fiscal fourth quarter labor availability challenges in Malaysia were a result of confirmed COVID-19 infections and mandated close contact quarantines, which includes vaccinated individuals in Malaysia. Amazingly, our Malaysia team is now nearly 100% vaccinated. In addition, as of today, the infection rates in Malaysia have reduced significantly, and our operations located there are running near normal. Given these facts, we do not expect the COVID-19 pandemic to impact our fiscal first quarter workforce availability in Malaysia. Please advance to Slide 6. As we look to the first quarter of fiscal 2022, the demand environment remains robust, particularly within our Healthcare/Life Sciences and Industrial market sectors. However, constraints in the component market continue, limiting our ability to grow revenue in the near term. As a result, we are establishing a revenue guidance range of $825 million to $865 million. Our demand exceeds this guidance range by well over $100 million. We expect continued strong operating performance and are guiding GAAP operating margin in the range of 4.6% to 5%, including 70 basis points of stock-based compensation expense. At these revenue and operating margin levels, we anticipate delivering GAAP diluted earnings per share of $1.01 to $1.17, including $0.21 of stock-based compensation expense. Our guidance assumes supply chain constraints in COVID-19, including potential vaccination and testing mandates, do not further materially impact end markets or our operations. Next, a few thoughts regarding our longer-term outlook. Looking at our end markets, we see strong demand within Healthcare/Life Sciences over the next several quarters, led by a recovery for equipment related to elective procedures. Likewise, our Industrial sector is showing significant strength led by semiconductor capital equipment and communications customers. We believe our Aerospace and Defense sector revenue will begin to move higher, driven by improvement in the commercial aerospace market. In addition to strong end market demand, we are major participants in secular growth markets, such as robotic-assisted surgery, warehouse and factory automation and commercial space. Furthermore, we benefit from the differentiation provided by our engineering and aftermarket service offerings that allow Plexus to support the full product life cycle. In summary, we remain optimistic in our outlook. As we look to fiscal 2022, customer demand remains robust as a result of improved end markets, new program wins and our participation in secular growth markets and far exceeds our 9% to 12% revenue growth goal. However, supply chain constraints will limit our ability to fulfill all demand. We continue to believe that we will achieve quarterly sequential revenue growth and expansion of our industry-leading GAAP operating margin as the fiscal year progresses. In closing, I'd like to thank our Plexus team for their outstanding efforts in fiscal 2021. It is through their talents and dedication that we're able to further our vision of helping to create the products that build a better world, while delivering for all of our stakeholders. I will now turn the call over to Steve for additional analysis of the performance of our market sectors and operations. Steve?

Thank you, Todd. Good morning. I will start on Slide 7 with a review of the fiscal fourth quarter and the full fiscal year performance of our market sectors for 2021, as well as our expectations for the sectors for the fiscal first quarter of 2022. Customer demand across our market sectors was very robust in 2021, including the fiscal fourth quarter. However, global supply chain constraints as well as operational inefficiencies due to COVID-19 in our Malaysia operations were worse than anticipated. As a result, all three of our sectors missed revenue expectations for the fiscal fourth quarter, largely due to these challenges. In spite of the many obstacles in fiscal 2021, our Healthcare/Life Sciences and Industrial sectors achieved annual revenue growth of 5% and 2%, respectively. This was largely due to successfully ramping new programs throughout the year. Although our Aerospace and Defense sector was also ramping new programs, the headwinds associated with commercial aerospace were too large to overcome. The result in revenue is a decline of almost 20% for Aerospace and Defense sector. The net result is, the teams generated Plexus revenue in fiscal 2021 that was slightly below our record of $3.4 billion in fiscal 2022. As we start fiscal 2022, we believe the COVID-19 situation in Malaysia is improving. However, the global supply chain constraints will limit our ability to capture the broad-based, robust demand from customers in the fiscal first quarter. Looking at our Industrial sector, demand in most subsectors, including semiconductor capital equipment, warehouse automation and communications remain strong. However, supply chain constraints are limiting our ability to realize the full potential. As a result, we expect a low single-digit decrease in our Industrial sector for the fiscal first quarter. In our Healthcare/Life Sciences sector, a new ramp of an aftermarket services program and a robotic-assisted medical device are enabling growth. The result is, we expect a mid-single-digit increase for our Healthcare/Life Science sector in the fiscal first quarter. Customer forecast in our Aerospace and Defense sector are strengthening, we expect the commercial aerospace and commercial space subsectors to continue to increase this trend in fiscal 2022. Unfortunately, supply chain challenges are limiting our ability to capture the demand within the fiscal first quarter. As a result, we expect a low single-digit decrease for our Aerospace and Defense sector in the fiscal first quarter. Please advance to Slide 8 for an overview of our wins performance for the fiscal fourth quarter. We won 38 new manufacturing programs that we expect to generate $251 million in annualized revenue when fully ramped into production. For fiscal 2021, the wins total exceeded $1 billion, which is a fiscal year record. In addition, the strong wins performance throughout fiscal 2021 increased our wins momentum, which is defined as the trailing four quarters of wins divided by the trailing four quarters of revenue. At 31%, the wins momentum is well beyond our 25% goal and supports our growth strategy. We can advance to Slide 9 to review the manufacturing wins by region for the fiscal fourth quarter. The Americas region wins were an impressive $142 million in the fiscal fourth quarter. The strong wins result was driven by programs that either require or strongly desire a U.S. manufacturing solution. In spite of the COVID-19 distraction during the quarter, the APAC region headwinds of $62 million in the fiscal fourth quarter. The region's track record of strong performance is supporting new wins, in spite of the inability for customers to easily visit these sites. The major reason finished fiscal 2021 with their highest quarterly wins of $47 million in the fiscal fourth quarter. Included in the wins are two new logos that we expect to ramp within fiscal 2022 in our Kelso, Scotland facility. Please advance to Slide 10 for further insight into the manufacturing wins performance by market sector. The Industrial sector wins increased to $87 million in the fiscal fourth quarter. Robust wins in the semiconductor capital equipment and communications subsectors enabled then a stronger result. Our Healthcare/Life Sciences sector generated $44 million of wins in the fiscal fourth quarter. Although a lower-than-typical wins result for the sector, it is partly a timing issue, and we anticipate a meaningful increase in the fiscal first quarter wins for the sector. The Aerospace and Defense sector had exceptionally strong wins totaling $120 million in the fiscal fourth quarter. New programs in the commercial space subsector enabled the strong outcome. These wins drove a 31% or $61 million increase into the sector's trailing 4-quarter wins, which closed the fiscal fourth quarter at a very healthy $258 million. Please advance to Slide 11 for further insight into the some of the fiscal fourth quarter wins. Including the industrial wins, it's a next-generation cable access program that our customer has decided to dual source with their internal manufacturing to mitigate long-term business continuity risk. The product will be produced by our Guadalajara Mexico operations. The industrial team also added a new Communications customer who produces a broad portfolio of connectivity products. Our team in Penang, Malaysia will be producing the first assembly, a data compression and security product, with this new customer. In addition to these communication opportunities, the Industrial sector expanded market share with an existing semiconductor capital equipment customer. The products, which are used in the front end processing of semiconductor wafers, will be built in our Portland, Oregon and our Guadalajara, Mexico facilities. The Healthcare/Life Sciences team expanded our portfolio in the differentiated market of robotic-assisted medical instruments with another meaningful win from an existing customer. This new device will be produced in our Nina, Wisconsin facility. The Healthcare/Life Sciences team also added a diagnostic tester program from a new customer in the EMEA region. The COVID PCR tester will be produced in our Kelso, Scotland facility. Included in the Aerospace wins are two satellite communication programs that we expect to add meaningful revenue to our growing space subsector. The first opportunity significantly expands our relationship with a customer in our Boise, Idaho facility, while the second opportunity is with a new customer for our Kelso, Scotland facility. With this latest win in EMEA, we expect to be producing commercial space programs in all three of our regions in fiscal 2022. We can proceed to Slide 12 for highlights of our funnel of qualified manufacturing opportunities. Our funnel grew over $200 million in the fiscal fourth quarter to finish at a record $3.3 billion. Our industrial sector led the increase by expanding this funnel by an impressive $265 million to close the fiscal fourth quarter at $938 million. Three larger RF communication programs from an existing customer drove the significant increase. The Healthcare/Life sciences sector held their funnel at a very healthy $1.7 billion. Two larger manufacturing opportunities, including an ultrasound device and a robotic-assisted medical device, were the significant new program adds in the quarter. In addition to the exceptional wins in the fiscal fourth quarter, the Aerospace and Defense sector added $37 million to their funnel to exit fiscal 2021 with a robust funnel of $708 million. New opportunities in the commercial and defense subsectors not only backfilled the wins, but fuel the funnel's growth. Next, I would like to turn to operating performance on Slide 13. The highlight of the fiscal fourth quarter and the full fiscal year of 2021 for me is the team's operational performance in the midst of a global pandemic. The team's ability to generate GAAP operating margin of 5% for the fiscal fourth quarter and 5.2% for the full fiscal year is outstanding. The performance of result of teamwork, our manufacturing, engineering, aftermarket services, market sector, supply chain and corporate teams collaborated and supported each other. Each time a new challenge presented itself, the team rallied to mitigate the issue for our customers and our shareholders. As we look to the fiscal first quarter, the teamwork carries on. We continue to make investments in new program ramps and facilities that will enable future growth. In addition, we continue to maintain additional resources to help mitigate component constraint challenges and the operational inefficiencies COVID-19 has created. Even with the additional burdens, the team is committed to working together to deliver strong operating results with operating margin in the range of 4.6% to 5% for the fiscal first quarter. A few final comments. I typically highlight an example of dedication and outstanding performance of the Plexus team each quarter. This quarter, our customers have done it for me. In addition to a recent letter of commendation from one of our largest Healthcare/Life Sciences customers regarding exceptional performance during the pandemic, one of our largest industrial customers presented us with a supplier award for outstanding performance as well. I will leave you with a few of the remarks that came with the award. The customer noted that they would like to recognize Plexus for outstanding performance responding to an unprecedented ramp during the global COVID crisis. They also commented that we increased capacity by 160% amid continuous disruptions in labor, material and equipment availability. I believe the customer captured the current environment very well and how our teams are responding. I would like to thank the Plexus team for not just their efforts each day, but for the results they are creating. I will now turn the call to Pat for an in-depth review of our financial performance. Pat?

Thank you, Steven. Good morning, everyone. Our fiscal fourth quarter results are summarized on Slide 14. Fourth quarter revenue of $843 million was sequentially higher by 4%, while gross margin of 9.4% was sequentially higher by 30 basis points. Fiscal fourth quarter gross profit improved in all three of our regions compared to the fiscal third quarter. Better business mix, cost management and labor efficiency led to the improvement. Selling and administrative expense of $36.6 million was favorable to our guidance, primarily due to strong cost control efforts given the lower-than-expected revenue, along with the reduction in incentive compensation expense. As a percentage of revenue, SG&A was 4.3%, which was better-than-expected and sequentially improved by approximately 20 basis points. Our GAAP operating margin of 5% was 50 basis points higher than last quarter, marking a return to an operating margin of 5% or better. Included in the fiscal fourth quarter operating margin was approximately 80 basis points of stock-based compensation expense. With the fiscal fourth quarter result, we have now generated operating margin at or above 5% for 5 of the last 6 quarters. We ended a challenging fiscal 2021 with industry-leading GAAP operating margin of 5.2%. Non-operating expenses of $2.9 million were favorable to expectations due to foreign exchange gains and lower interest expense. Diluted GAAP EPS of $1.16 was slightly below the midpoint of our guidance. With sequential revenue growth of 4%, fiscal fourth quarter diluted GAAP EPS improved 22%. For the full year, revenue was relatively flat compared to fiscal 2020, while GAAP diluted EPS improved an impressive 21%. Turning now to our cash flow and balance sheet on Slide 15. For the fiscal fourth quarter, we were pleased with our cash flow results. We delivered $11 million in cash from operations and spent $23 million on capital expenditures, resulting in fiscal fourth quarter cash usage of $12 million, a result favorable to our expectations. For the fiscal year, we delivered $142 million in cash from operations and spent $57 million on capital expenditures, generating free cash flow of $85 million. We were pleased to see all three of our regions generate positive free cash flow in fiscal 2021, a first in many years. During the fiscal fourth quarter, we purchased approximately 331,000 shares of our stock for $29.3 million at an average price of $88.39 per share. At year-end, we had $47 million remaining under our current $50 million authorization. We expect to execute the repurchases on a consistent basis throughout fiscal 2022, while taking market conditions into consideration. We ended the year with a strong balance sheet. Cash totaled $271 million, while total debt was $253 million. We had $55 million outstanding under our $350 million revolving credit facility, and our gross debt-to-EBITDA leverage ratio of 1 was at an attractive level. For the fiscal year, we delivered return on invested capital of 15.4%. This result generated an economic return of 730 basis points above our weighted average cost of capital, creating substantial shareholder value. Strong operating performance, while maintaining consistent year-over-year average invested capital, led to 140 basis point improvement in ROIC compared to fiscal 2020. Cash cycle at the end of the fiscal fourth quarter was 85 days, consistent with our guidance and 5 days higher than our results in the fiscal third quarter. Please turn to Slide 16 for details on our cash cycle. Sequentially, inventory days increased by eight. The increase in days was indicative of the challenging supply chain environment our industry is facing. Extended component lead times are requiring us to procure inventory earlier to improve our ability to meet customer demand. At the same time, volatility and supplier deliveries is impacting our ability to manufacture and deliver product to our customers. Essentially offsetting the increase in inventory days were increases in both payable days and customer deposit days. With elevated purchasing activity, payable days sequentially increased by five. Customer deposit days increased by two days, as we worked with customers to offset inventory purchases. Days in receivables were 56 days, sequentially higher by four days. The increase was primarily due to the timing of shipments and a reduction in receivables sold under our customer factoring program. As Todd has already provided the revenue and EPS guidance for the fiscal first quarter, I'll review some additional details, which are summarized on Slide 17. The fiscal first quarter gross margin is expected to be in the range of 8.9% to 9.3%. At the midpoint of this guidance, gross margin would be sequentially lower by 30 basis points, primarily due to lower leverage of our fixed costs. With revenue anticipated to be consistent with fiscal fourth quarter, fixed costs are expected to increase as we invest in support of future growth. For the fiscal first quarter, we expect SG&A expense in the range of $36.5 million to $37.5 million, which is relatively consistent with fiscal fourth quarter. At the midpoint of our revenue guidance, anticipated SG&A would be 4.4% of revenue, slightly higher than the fourth quarter. Fiscal first quarter GAAP operating margin is expected to be in the range of 4.6% to 5%, which includes approximately 70 basis points of stock-based compensation expense. At the midpoint of this guidance, GAAP operating margin would be 4.8%, sequentially lower by 20 basis points. During our annual planning process this past August, we revisited our long-term GAAP operating margin target and decided to increase it from the previous range of 4.7% to 5% and established a new target of 5.5%. The considerations in determining the new target included our ability to leverage fixed costs, given the demand outlook, our improved business mix and permanent gains made in reducing transformation costs during the past 18 months, while continuing to invest in the business to support future growth. We expect to make sequential progress towards achieving this target as we move through fiscal 2022. A few other notes for the fiscal first quarter. Depreciation and amortization expense is expected to be approximately $16 million, slightly higher than the fiscal fourth quarter. Non-operating expenses are expected to be in the range of $3.8 million to $4.2 million. We are estimating an effective tax rate of 13% to 15% and diluted shares outstanding of approximately 28.7 million shares. Our expectation for the balance sheet is that working capital investments will increase compared to the fiscal fourth quarter. Based on our revenue forecast, we expect this level of working capital will result in cash cycle days of 94 to 98 days. At the midpoint of this guidance, cash cycle would increase 11 days compared to the fiscal fourth quarter, primarily due to inventory requirements. The constrained supply chain environment and extended lead times have required additional investments in inventory to satisfy customer demand. We continue to work closely with our customers to secure deposits to minimize working capital investments. We are also investing in working capital to support anticipated sequential growth as we move through fiscal 2022. We are taking the necessary measures now in order to fulfill our customers' demand, even if that results in added working capital investments. For the fiscal first quarter, we expect free cash flow to be negative as we make needed investments in working capital and capital additions. Capital spending for fiscal 2022 is expected to be in the range of $100 million to $120 million. This includes approximately $50 million for our new Thailand facility, which is anticipated to open during our fiscal third quarter of 2022. For the fiscal year, we anticipate free cash flow in the range of breakeven to a usage of cash in support of our investments. With that, Gail, let's now open the call for questions.

[Operator Instructions] Your first question comes from the line of Steve Fox. Your line is open.

I guess, two questions from me. First of all, when we think about all the supply chain pressures, which, like you pointed out, has gotten worse, hopefully, some get better., how do you envision sort of business changing for you and how you work with the customers over, say, the next 12 to 18 months, if we assume that these things are still an overhang in - whether it's ports, logistics, et cetera. Can you sort of describe how you do that in a way that help returns cash flows to normal, et cetera?

Yes. So Steve, this is Todd. I'll get us started and then pass it over to either Steve or Pat, if they want to add anything. But we have a lot of activity going on within the supply chain and on the customer front in light of the pressures that are there today. And I'd like to bucket them into three different buckets. One being customer actions, the next being organizational actions and the third being process improvements or process changes. And from a customer standpoint, we're working to get extended forecasts. Pat had mentioned deposits. We're also looking to get pre-approvals to be able to purchase components at perhaps elevated prices if we find them available in the market, as well as expansion of approved manufacturers' list within the bills and materials of our customers. So, a great deal of activity going on, on that front. From an organizational standpoint, we've added a number of supply chain leadership positions within the company. We have a group, which we call supply chain operations, which takes the lead in a lot of the escalations within our supply chain. We've increased that by 50% with an overall add of about 20% into our supply chain. We've also added key account support for specific customers where we have a significant number of challenges to really try to drive the supply chain through those challenges. And then finally, from a process standpoint, a lot of automation going on from a standpoint of part searches and purchasing and revising our expedite system and even taking an approach, which we call a war room situation where we get a team together and they drive with a great deal of intensity, supply chain issues. So, a number of things going on in all fronts. They're having an impact, but it takes time for it all to ripple through the supply chain.

Great. That covered - that was really thorough. And then just as a follow-up to that, just tied into the same issue is how do we get confident around sort of your inventory days, whether this is the worst they're going to be like this quarter?

Yes. Steve, I can take that. I think as we move into our fiscal second quarter, we will see inventory dollars increase as we ramp for future demand. Now from a days perspective, I think we can keep our days relatively consistent with the fiscal first quarter guide. And then I think as we move through the back half of the year is when we can see days coming down to below where we ended the year for fiscal 2021. So, I think that's the way, right now, it's projected to play out. A lot of that's dependent on the supply chain and what develops over the next few quarters.

Your next question comes from the line of Anja Soderstrom. Your line is open.

So, a follow-up first on the supply chain pressure. Todd, you went over three categories how you are combating that. How should we think about that as we come out of this? How sustainable are those actions? And are they going to be more beneficial to you to come out of these challenges?

Yes. I think they are sustainable improvements. I think when you look at some of the process improvements that are in there, they really get to the everyday way to run the business. And I think when you look at some of the structural changes that we made within our supply chain organization, those will provide long-lasting benefits for us.

Yes. Maybe just to add a little bit onto the situation with the supply chain. One way I think about it, as we're talking to customers, they're looking for us to have inventory on hand versus just on order. Given some of the volatility, they want to derisk the aspect of all of a sudden products disappearing. And so, we've been asked by customers and we have been bringing more inventory on hand than what would be normal. So, I think as we go out over time, the - that will go back into the supply chain so there being on hand will be basically on order. And then in terms of that, the processes and the things that we're putting in order to really to understand where things are at in the supply chain. The things that we're doing today to make sure that we have the inventory going into the next quarter or 2, those tools and systems covering the improvements we make will only improve the process as we get further down the path and get back to more of a normal supply chain environment.

Okay. And then in terms of the demand that you are leaving on the table that's being pushed out. How - Can you quantify how much of that you think is going to be perishable, if at all, any?

Yes. Right now, it's largely nonperishable, but obviously, there's going to be a finite time line on that. So, it really - I think, it's going to depend on when the supply chain at least starts to stabilize, if not improve. So, we certainly saw a situation in this past quarter as the supply chain actually degrading as opposed to even stabilizing. So, that would be the situation as we're looking at it.

Okay. And what do you see in terms of sort of labor and raw material inflation. You can pass on some of the raw material cost increases to your customers, right? But how does it work with labor? And how are you combating the labor constraints?

Yes, you're correct. On the material side of the equation, that is going to be passed on to customers. In terms of labor, some we are able to work with our customers and others not. And I'd say right now, the situation is a bit that we're carrying extra cost because if the material is free, then we believe we can go build it. So, we don't want labor to be the next constraint. So, we are discussing that with customers in terms of how much we're going to carry. And in some cases, they are covering additional fixed costs for us to basically maintain that labor. And then - but we're also being a partner in carrying a little bit extra ourselves.

Okay. And then just one last on the supply chain constraints. Is there any business segment where you see more challenges than any other? Or is it...

No. I mean, it's pretty much across the board, Anja. I mean, we're seeing in all three of our market sectors, the constraints.

Your next question comes from the line of Matt Sheerin. Your line is open.

Yes. I wanted to ask, again, regarding the supply constraint situation relative to your forward guidance. And I think you're looking at sequential growth in each of the quarters in FY '22. So, I guess the question is how much confidence or visibility do you have in securing or procuring those components in advance of that. And in some of the inventory build that you're seeing now, I mean, is that basically being set aside for Q2, Q3, et cetera?

Yes. So, I'll start here, Matt, and maybe pass it along to Steve. But when we look at '22 and what the demand environment is versus the supply environment, I mean, obviously, it's two very opposing forces that we're looking at right now. And there's - I would say, it's difficult to answer with certainty how '22 is going to play out because when we look at the demand environment, our demand would support well over 20% growth. Now, supply obviously limits the ability to fulfill all that demand. But we're certainly pushing towards double-digit growth, and we believe that's achievable, should the supply chain stabilize and not degrade further from where it's at. So - but even with the challenged supply chain, we believe that we have sufficient materials being pipelined and sufficient visibility to the demand to drive the sequential improvements in revenue and operating margins throughout the fiscal year.

And if I just maybe add on to that, some of the degradation we saw in supply chain was some of the larger semiconductor manufacturers basically doing a reset of their commits. And as they saw the situation continuing to get more and more challenged, and some of them just took a breath, stepped back and realign their commit schedule, and we saw, quite frankly, saw a few decommits come through that we're expecting on now, we anticipate and believe that with those major suppliers, they've done this once and they've gotten realigned. And so, I think the - our expectation is that the supply commits that we do get will be more stable going forward is part of it as well.

Got it. And is there any concern that there may be an imbalance of inventory? Certainly, some suppliers have been able to add capacity and meet orders where others aren't. So at some point, is there going to be sort of a reshuffling of your inventory? Or do you want to just keep that on hand for the future?

Yes. I don't know that we'll see a reshuffle of our inventory. It goes back to when is it going to get utilized. And I think the dynamic you talk about is one that we're seeing. So, we do some things in industrial automation where our orders - we're actually starting to procure the materials and starting to get line of sight, but the steel associated with going into the fact - or into the warehouse, there are some shortages in steel. And so although we may be able to produce the automation products, our end customer may not be able to actually do the install yet. And so to your point, I think as supply chain things starting to clear out over the next year or so here, we are going to see some things like that happen where other factors may come into play in terms of what's impacting the deliveries and the shipments. But from our standpoint, it's going to be more of an improvement than it is going to be things going backwards.

Okay. And just lastly, are you seeing any labor shortages within your North America operations and some of your factories? We're hearing that from some other companies.

I'd say recruiting has gotten more challenging, and we have to be more creative to this point. It hasn't significantly impacted us in our ability to produce. So, we're very mindful of it. It is a tighter environment. But so far, we've been able to hire the resources we need.

[Operator Instructions] There are no further questions at this time. Please continue.

All right. Well, thank you, Gail. And I'd certainly like to thank everybody who joined our call today. As always, we appreciate your support, and we appreciate your interest in Plexus. Have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.