Good morning, and welcome to the Plexus Corp. Conference Call regarding its fiscal third quarter 2023 earnings announcement. My name is Benny, and I will be your operator for today's call. [Operator Instructions]. 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 information provided during our call today will be forward-looking statements, including without limitation, those regarding revenue, gross margin, selling and administrative expense, operating margin, other income and expense, taxes, cash cycle, capital allocation and future business outlook. 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 1, 2022, is supplemented by our Form 10-Q filings and the safe harbor and fair disclosure statement in yesterday's press release. 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, Chief Executive Officer; Steve Frisch, President and Chief Strategy Officer; Pat Jermain, Executive Vice President and Chief Financial Officer; and Oliver Mihm, Executive Vice President and Chief Operating 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 pleased with the performance of our global Plexus team in the fiscal third quarter, including their ability to support future growth opportunities and deliver strong results while navigating a volatile demand and supply chain environment. Fiscal third quarter revenue of $1.02 billion met guidance amidst a number of cross-currents within the period. Markets were mixed with certain subsectors seeing demand strengthen, some seeing demand seemingly bottom and others beginning to show near-term weakness due to a variety of factors. Simultaneously, while we are seeing further modest improvement in component availability, certain lagging edge semiconductor lead times remain quite elevated, and we under-shipped demand by more than $100 million once again this quarter. For the quarter, we delivered GAAP operating margin of 2.8% with GAAP EPS of $0.56 per share, including $0.14 per share of stock-based compensation expense and $0.76 per share related to an arbitration decision and non-recurring restructuring charges. Adjusted operating margin of 5.0%, which included 37 basis points of stock-based compensation expense, met the high-end of our guidance range. The team's ability to mitigate supply chain challenges, along with improvements in manufacturing efficiency and better-than-anticipated performance from our engineering team contributed to the strong result. The fiscal third quarter represented our fifth consecutive quarter with operating margin exceeding 5%. Non-GAAP EPS of $1.32 per share, inclusive of $0.14 of stock-based compensation expense exceeded guidance, benefiting from the team's focus on operational excellence and lower-than-forecasted taxes. Our go-to-market team once again did an outstanding job in the fiscal third quarter, winning 30 new manufacturing programs, worth a record $321 million when fully ramped into production. Several of the program wins represented competitive share takeaways. We have exceeded $300 million in quarterly new program wins twice during the…

Thank you, Todd. Good morning. I will start on Slide 6 with a review of the fiscal third quarter performance of our market sectors, as well as our expectations for the sectors for the fiscal fourth quarter of 2023. Starting with the industrial sector, revenue declined 3% in the fiscal third quarter. The result was better than our expectation of a mid-single-digit decline. Improvements in supply chain, especially for our test and measurement subsector contributed to the stronger results. As we start this quarter, we are experiencing short-term forecast lateness with some test and measurement and communication customers, leading to a forecast for a mid-single-digit decline for the industrial sector for the fiscal fourth quarter. Even with the slight decline this quarter, ongoing program ramps will mitigate the double-digit decline we are seeing in our semicap business to keep the industrial sector flat for fiscal 2023. As we anticipated, revenue in our healthcare, life sciences sector was down 7% for the fiscal third quarter. Continued supply chain challenges and modest end market softness were the main reasons for the decline. In the near term, the forecast fluctuations are relatively balanced. And that result is that we anticipate our healthcare, life sciences sector to be flat for the fiscal fourth quarter. For the full year of fiscal 2023, the healthcare, life sciences sector is on track for an increase in the range of 20%. Our aerospace and defense sector decreased 1% in the fiscal third quarter. The result beat our expectations of a mid-single-digit decrease. Our supply chain team's ability to improve deliveries with constrained components drove the stronger results. As we look to the fiscal fourth quarter, commercial aerospace demand remains robust and the actions that our teams have taken to improve material flow are creating positive impacts. As a…

Thank you, Steve, and good morning, everyone. Our fiscal third quarter results are summarized on Slide 12. While revenue came in at our midpoint, gross margin of 9.2% was towards the top-end of our guidance. Better performance from our higher value-added services, along with improved contribution margin in our APAC and EMEA regions drove the healthier-than-expected gross margin. Selling and administrative expense of $42.3 million was favorable to guidance, primarily due to lower stock-based compensation expense. As a percentage of revenue, SG&A was 4.1%, which was favorable to expectations and sequentially lower by 20 basis points. Non-GAAP operating margin of 5%, which excludes 220 basis points of restructuring and other charges was at the high-end of our guidance due to the improved gross margin and lower SG&A expense. This result also included 37 basis points of stock-based compensation expense. Non-operating expenses were slightly unfavorable to expectations as a result of greater-than-anticipated foreign exchange losses. Non-GAAP diluted EPS of $1.32, which excludes $0.76 of restructuring and other charges, exceeded our guidance due to the factors previously mentioned. Also contributing to the EPS improvement was lower-than-expected tax expense due to discrete tax items recorded during the quarter. Turning to our cash flow and balance sheet on Slide 13. Relative to our initial expectations, we were pleased with our free cash flow performance this quarter. We delivered $18.8 million in cash from operations and spent $30.3 million on capital expenditures, resulting in fiscal third quarter cash outflow of $11.5 million. This result included $20.3 million in payments related to one-time nonrecurring charges. During the quarter, we purchased approximately 150,000 shares of our stock for $13.5 million. We have approximately $9 million remaining under the current authorization and expect to purchase this amount during our fiscal fourth quarter. Next month, we'll be reviewing with…

[Operator Instructions]. Our first question comes from the line of David Williams of The Benchmark Company.

Yes. I guess, first, on the funnel. Understanding there's lots of puts and takes there, but it looks like this is the first time over the last maybe 7 quarters that we've seen that kind of come down, but it was up pretty big last quarter. Is this really just a function of some of that being pulled through or anything else that we should be thinking about in terms of the funnel?

Yes. I think, David, you can certainly look at the program wins and say that there was -- it had an impact on the funnel, but I'd still say at $4 billion, it's the second largest funnel we've ever had in the history of the company. So, we're feeling really good and view it as very much a robust funnel.

Yes. And if you look at the beginning of fiscal '23, we came in at like a $3.4 billion funnel start in the year. So the prospect of finishing the year at something in the $4 billion range to Todd's comment makes us feel pretty good about where we're at.

One of the things I'd add to is what we report to you is our qualified funnel. We also have an early-stage funnel and that's actually at a record level right now. We're not going to say what that is, but there's quite a bit that's percolating in the background as well.

Okay. Great. And then maybe just on the incremental weakness that you talked about in the semicap equipment. I think you previously mentioned some of your customers were requesting more inventory held maybe for some upside demand that comes in. Are you seeing a change in that strategy? Or just maybe any color around the semicap equipment, the weakness that you're seeing?

Yes. As we talked about throughout the year here, we've definitely seen it come down. I mean, Todd's comment, we see some signs of it being bouncing around the bottom. So from our perspective, we are managing the inventories tightly with our customers. They all basically are talking about -- when it comes back, they want to make sure they have the right inventory levels and mix of products available and ready. So, we are working with them to optimize that. A little early to predict exactly when the strengthening will happen. But I think the focus now is people talking about when it returns versus managing the downside. They're talking about more being ready for the upside.

A little bit of additional color that I'd add on semicap as well, David, is we're really excited about when semicap recovers. And if you look at our past history, from '15 to '22, we had a 30% CAGR within semicap. During this downturn period, we've outperformed the market through share gains. And we're really excited that when the market does recover, we think we're going to have some substantial growth within that semicap subsector.

Great. And just one more, if I might here. You've just been upbeat about the health care opportunity, and that's been trending very nicely. It was a bit lower, I think, this quarter than we had anticipated. Anything noteworthy here that -- or any updates maybe on the pause and ramp discussed a couple of quarters ago?

I wouldn't read too much into it. I think we did talk about one customer and a few program ramps, a couple of program ramps that were a little bit slower than what we anticipated. Part of that was driven by the customers' end market supply chains. In other words, there's disposables or single-use devices that they need for the product that they were having difficulty getting. So, that's definitely muted a little bit of our growth. But I wouldn't read too much into it. Little bit of volatility in a, I'd say, as people adjust their inventories and people are predicting what they need as we go into fiscal 2024. But again, we're very optimistic yet in terms of where healthcare, life sciences are for us.

Appreciate the color, and congrats on the progress.

[Operator Instructions]. The next question comes from the line of Melissa Fairbanks of Raymond James & Associates.

Just kind of digging in -- just kind of digging in a little bit more on the industrial. It would be helpful if you could give us a little more detail where you're seeing the weakness outside of semicap? And is it safe to assume that these are just pushouts or delays by your customers? And then maybe if you could give us an updated revenue split between semicap and the rest of industrial?

Yes. So Melissa, the 2 subsectors that we're seeing the softness on within industrial space is test and measurement as well as communications. I think certainly, in the latter, what we're seeing is the technology switch over there. So, we view that more as a pause. Test and measurement is slightly softer right now, but we do view that as recovering later. As we look at semicap, it's about a little over 1/3, maybe 40% of our industrial sector. So it puts us kind of in the higher teens or mid- to upper teens range from overall Plexus revenue.

Okay. Great. And then just on inventory, that's one of my favorite topics. It's interesting to see the days of inventory covered by customer deposits increased again. I was wondering if you could give us an update what you're seeing in component hotspots, if it's still the same usual suspects, pricing of some of those components and if we can expect to see overall inventories continue to decline?

Yes, Melissa. This is Oliver. I'll hit that. From an overall supply chain perspective, I'd really break it down to 3 lines, 3 stories. First is broadly across our commodity base, we are seeing normalization of lead times. Pricing tends to follow that. We see some suppliers trying to build inventory. And so just in general, the trend there continues to make incremental progress. In terms of our challenge spots, we still see constraints in both custom-engineered components and electrical mechanical commodities. And then as Todd earlier mentioned, within lagging edge semiconductors, you get into the lower volume specialized components really just from a handful of key suppliers. We're still seeing quite inflated lead times, unexpected de-commits, essentially 0 inventory on the open market to enable a pull and a recovery. So that's one of the areas that we are working on. We are working with the suppliers to improve that dynamic. And then the third piece I'd talk to, and this was also alluded to a little bit earlier, is when our customers sometimes have supply chain challenges and in certain instances, we actually will engage with them to help them solve that as a partner. And I can think of one specific example that's going on right now.

And then, Melissa, from an inventory dollars perspective, where we think we can get to, for Q4, I was guiding cash cycle of the midpoint of 108, which would be a 3-day reduction from Q3. A lot of that's related to inventory. Now there is some return of deposits that we're anticipating in the fourth quarter. But we do expect dollars to reduce in the fiscal fourth quarter. And then going into fiscal '24, I think there's a lot of opportunity based on some of the comments that Oliver made to see further reductions in both dollars and inventory days.

Yes. And maybe just to build on that, we do continue to make investments in both tools and processes relative to how our materials operations performs. And one piece of innovation that we've now deployed across all of our AMER manufacturing sites is building machine learning and predictive analytics into our planning algorithms. And so this is going to switch back to your question, which essentially enables us to optimize material positioning, so I think working capital relative to our customer demand. And it creates a more feasible production plan for our customers. Really, if you take a step back, that predictive analytics creates for us a more accurate feed or capture of true supply and availability. So as I open with, we now have that in place across all of our AMER manufacturing places and are now deploying that globally.

The next question comes from the line of Steven Fox of Fox Advisors LLC.

I had two questions, if I could. First of all, if I'm understanding what you said about beyond this quarter for the early part of next fiscal year, it sounds like it's going to start off kind of flattish with the September quarter levels. And I would assume that usually, you would have seen a little bit more growth into the end of the year. Am I reading those comments right? And if you could just sort of maybe put a little more color around what you're seeing generally after this quarter?

Yes. I think your interpretation there is accurate, Steve. And what I'd say is when we look at Q1, we view it as -- it looks pretty similar to Q4 right now. I think as we get into Q2, we could begin to see some growth now. But remember, again, that, that quarter is typically a big challenge from a margin standpoint as we have seasonal cost increases. And then we see some strong acceleration as we get into the second half of the fiscal year as we see a bit more stabilization in markets. We make continued progress on new program ramps. We have a couple of very large ones that are in the queue right now, a couple of them that Steve alluded to. And then the supply chain continues to see incremental improvement. So, we'd expect that to continue over the second half of the year.

And the reason Q1 is flat with Q4, it's basically end markets, I guess? Or is there any kind of churn within your business?

It's basically the demand dynamics that we referenced in the call. So the continued softness in semiconductor capital equipment, the near-term softness in the industrial markets and then continuing to work through the supply chain. So, those are the nearer-term dynamics that are offsetting some of the positives that we have within the markets. Now if we saw the supply chain improve more rapidly than we expect or semicap effect gets a more rapid recovery as maybe some are starting to suggest it could, we would see upside from what we're projecting here.

Got it. And then just as a follow-up. You mentioned some competitive takeaways in the new win category. I was wondering -- I'm assuming it's across different types of products, but is there any sort of common thread to why maybe you're taking business from competitors more recently?

Yes. This is Steve. I guess I'm not surprised by what our customers are doing as you came through COVID and you have supply challenges, everybody was focused on deliveries, just trying to get product. And now that those are starting to soften and basically, people are getting a little bit less worried about can I get my product. Now they're starting to focus on who is the best provider of it. And so we kind of saw this building through the tail end of COVID here. And as the funnel of opportunities started to increase, we're having more strategic conversations with our customers about what their long-term supply plan is going to be post COVID. And really proud of our team's ability, both from a supply chain and operations standpoint, how they were able to deliver through COVID. And I think we're getting rewarded for it. So, I do expect the next couple of quarters to continue to see these kind of opportunities come into the funnel and be part of the wins.

The one thing I'd add too, to Steve's comment there is it's broad-based across our market sectors. We saw takeaways in each of our market sectors.

The next question comes from the line of Matt Sheerin from Stifel.

Yes. I wanted to follow up on Steve's question regarding your outlook for the December quarter and beyond and how that plays into your $5 billion target for fiscal '25, because it looks like based on what you said for Q1 and Q2, you're going to be flat to down year-on-year. And it looks like you're going to have to grow at least mid- to high single digits in order to -- unless '25 is a double-digit growth year. So trying to figure out how we bridge to that $5 billion number, given that you're going to be flat to down in the first half of fiscal '24?

Yes. So what I'd say, Matt, is when we look at overall fiscal '24, the 9 to 12 goal that we have will be difficult. We expect growth in it and reasonable growth, but to get to that range might be a bit challenge. But you should see the revenue accelerate to levels that make the $5 billion achievable as we're into '25. So, that's the way we'd look at it.

Okay. Okay. And then just back to the... Go ahead.

Yes. Again, Matt, it's based off of the programs that are ramping and already won.

Okay. And is that skewed more towards the defense and health care spaces?

No, across all 3 sectors.

Okay. Okay. And then on the supply issues, you talked about that $100 million number where you were unable to ship. And is that sort of the number that we're looking at for the next couple of quarters? Or will you work that down that backlog as Oliver talked about some of the supply constraints easing?

Yes. It's coming down, and it's come down from what it was 3 or 4 quarters ago and we would expect to see -- continue to see it reduce as we move through fiscal '24 in particular.

The next question comes from the line of Anja Soderstrom of Sidoti.

So, I'm just curious for commercial aerospace, it seems like that's picking up for you again after being a big challenged. How much of that strength is due to backlog work through versus new growth?

Yes. This is Steven. I'll start here. The demand from the commercial aerospace customers has been quite strong for a period of time here. The challenge was -- is coming through COVID. The pipelining of materials wasn't as sophisticated as some of the other sectors. And so a few quarters ago, we talked about the fact that we were really working with our customers hard to come up with a better plan for forecasting and getting a pipeline of materials slowing. The teams have been able to do that. And so what you're seeing here is our ability to basically continue to meet kind of a backlog of demand. With that said, our team just returned from the Paris Air Show. And if you read through some of the press, orders being up and demand being up, it looks like in addition to the backlog that we have, it looks like going forward, there could also be additional strengthening in demand. So feeling pretty optimistic about where commercial aerospace is going to be for us in 2024.

Okay. And also you seem pretty confident in your $5 billion target. What's the biggest risk to reaching that?

I'd say the biggest risk would be the macro environment and if things go south from a macro standpoint from where they are today.

Okay. Actually, it's the last question. Last question comes from Chris Grenga of Needham & Company.

The EMEA region has been demonstrating strength in particular in wins. I was just wondering if you could expand on what you're seeing there, what's been contributing to that strength?

I think it's a market that we've continued to invest in over the years. I would say a few years ago, we kind of got to critical mass in our manufacturing facilities as well as investing in the team, and they're just having a really good success with the value proposition. So, our value proposition is well based, both everything from the engineering standpoint with our design centers there, all the way through manufacturing and we added services there about 18 months ago. And so from that standpoint, it's a great value proposition. We do believe and we are seeing suppliers or customers, I should say, in that market that are looking to bring things back from Asia to Europe, a little bit more regionalization and localization. We're benefiting from that. So, I think the combination of those couple of things is, again, it's going really well as you see the wins number is exceeding really kind of our annual revenue number. So, our expectation for growth for that region are quite large as we look to 2024.

Great. And with the new program wins, with those 30 wins, how many or to what extent did those wins begin as engineering wins? And I guess what I'm trying to get to is how is the engineering -- as you ramp-up the number of engineering wins, how is that being flowed through into the new program wins?

Yes. I don't know that we have a breakdown for this quarter. I mean, typically, on the order of about 1/3 of our manufacturing wins tend to be heavily engineering-centric previously.

Yes. Just going through the data here again. As Todd said, I don't have the numbers here in front of us. The wins this quarter were dominated a bit by the strategic sourcing decisions, where it's more of a consolidation of supply base or competitive takeaways. So, there's probably a few less this quarter that were driven by engineering. But again, I don't have that data in front of me either. So...

Thank you. At this point, I would now like to turn the conference back to our CEO, Mr. Todd Kelsey, for closing remarks.

All right. Thank you, Benny. I'd like to thank everybody, the shareholders, investors, analysts and our Plexus team members who joined us today on the call. As always, we appreciate your interest in Plexus. And I wish you all a very great day.

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