Thank you for standing by. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2025 Plexus Corp. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Thank you. I would now like to turn the call over to Mr. Shawn Harrison, Vice President of Relations. You may begin.

Good morning, and thank you for joining us today. Some of the statements made and information provided during our call today will be forward-looking statements, 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 is inherent difficulty 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, 2024, as supplemented by our Form 10-Q filings and the safe harbor and fair disclosure statement in our press release. We encourage participants on the call this morning to access the live webcast and supporting materials on Plexus Corp.'s website, www.plexus.com, by clicking on investors at the top of that page. Joining me today are Todd Kelsey, President and Chief Executive Officer; Oliver Mihm, Executive Vice President and Chief Operating Officer; and Pat Jermain, Executive Vice President and Chief Financial Officer. With today's earnings call, I will provide summary comments before turning the call over to Oliver and Pat for further details. With that, let me now turn the call over to Todd Kelsey. Todd?

Thank you, Shawn. Good morning, everyone. Please advance to Slide 3. Our commitment to our customer's success during dynamic market environments is enabling a growing breadth of new program wins across Plexus Corp.'s solutions. During our fiscal second quarter, we achieved our largest-ever win for our sustaining services, our best quarterly engineering solutions wins performance in more than five years. In addition, our continued progress with initiatives to increase our operational and working capital efficiency resulted in robust fiscal second-quarter financial performance. We see this momentum sustaining as we drive actions to navigate the current environment. In order to proactively help customers navigate current market complexities, we are strategically investing in talent, such as our trade compliance and logistics organization. We also continue to invest in technologies, including our growing internal use of AI, facilities, including our new site in Malaysia that will open this summer, and advanced capabilities, including numerous tools focused on process automation, efficiency, and achieving zero defects. As we look ahead, we continue to anticipate $100 million of free cash flow for fiscal 2025. Our substantial liquidity and robust free cash flow generation provide the opportunity to create additional shareholder value. Finally, while conservatively assessing the remainder of the fiscal year, and acknowledging the uncertainty associated with tariffs, we continue to anticipate achieving meaningful EPS growth in fiscal 2025. Capitalizing upon revenue growth in each of our market sectors, sequential revenue growth for the remainder of the fiscal year, robust operating margin performance, and ongoing free cash flow deployment. Please advance to Slide 4. Revenue of $980 million met our guide. As the fiscal second quarter progressed, we saw signs of incremental strengthening in outlooks from healthcare customers, which offset modest reductions in other markets. Non-GAAP operating margin of 5.7% met the high end of our…

Thank you, Todd. Good morning. I will begin with a review of the fiscal second-quarter performance of each of our market sectors. Our expectations for each sector for the fiscal third quarter and some directional sector commentary for fiscal 2025. I will also review the annualized revenue contribution of our wins performance for each market and then provide an overview of our funnel of qualified manufacturing opportunities. Starting with our aerospace and defense sector on Slide 8, revenue increased 8% sequentially in the fiscal second quarter, meeting our expectations of a high single-digit increase. Continued softness in the commercial aerospace subsector was offset by demand increase in both the defense and space subsectors. We expect revenue for the aerospace and defense sector to be up mid-single digits in the fiscal third quarter. Reflective of broad-based increases in customer demand, an increase in volume for a new product ramp. Our wins for the fiscal second quarter for the aerospace and defense sector were healthy at $27 million. Reflective of our continued strength of execution, we received awards for products currently manufactured in-house at two of our customers in the defense subsector. We also received an award for further new product launch build for a customer that continues to invest in their space product portfolio. Plexus Corp. is the sole provider for these new product launch builds. And our focus to expand our engineering design services with aerospace and defense customers continues to build momentum with the award of our largest-ever aerospace and defense sector design project. Consistent with our outlook last quarter, we expect continued sequential growth as we finish the fiscal year, resulting in modest growth for our aerospace and defense markets sector in fiscal 2025. Strength in the defense and space subsectors is being substantially offset by reduced near-term…

Thank you, Oliver, and good morning, everyone. Our fiscal second-quarter results are summarized on Slide 12. Gross margin of 10% was at the top end of our guidance due to a favorable mix of service offerings and better fixed cost leverage. Productivity improvements associated with operational efficiency initiatives helped to reduce the impact from our typical seasonal compensation cost increases. Selling and administrative expense of $49 million was at the midpoint of our guidance, non-GAAP operating margin of 5.7% was at the top end of our guidance due to the strength in gross margin. Non-operating expense of $3.8 million is favorable to expectations due to improved foreign exchange performance and lower than anticipated interest expense. Non-GAAP diluted EPS of $1.66 exceeded our guidance due to the items mentioned and a slightly favorable tax rate. Turning to our cash flow and balance sheet on Slide 13. As shown across these financial metrics, our performance was strong and consistent with the fiscal first quarter. As a result, we delivered $36.7 million in cash from operations and spent $20.2 million on capital generating free cash flow of $16.5 million. This performance exceeded expectations and positions us well to meet our fiscal 2025 free cash flow projection of up to $100 million. During the quarter, we continued to return cash to shareholders through our share repurchase program by acquiring approximately 86,000 shares of our stock for $12.2 million. We have approximately $25 million available under the current $50 million authorization. We are taking advantage of our strong financial performance and robust balance sheet to hold an earlier review with our board of directors to discuss an additional buyback authorization once the current program is completed. This review is planned for next month. Similar to the prior quarter, we ended the fiscal second quarter in…

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening by loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Also, for this meeting, we request everyone to please limit your question to one question and one follow-up only. Thank you. Your first question comes from the line of David Williams from The Benchmark Company. Your line is now open.

Hey. Good morning, everyone. Thanks for I think the question congratulations on on just navigating this environment as well as you are here. Thank you, David. Yeah. So lots I think there's lots of things we could talk about here, but I guess first is really around the tariffs, and this has been obviously, a a a big topic of discussion. But you know, it in the past, you talked about your in-country, four-country kind of strategy that has helped there and you talked about hiring some logistics and and some support staff. But just can you talk maybe a little more about how the tariffs are impacting you, and and are you hearing anything from your customers you seeing their forecast shift? And and maybe what are those discussions that you're having today with them?

Sure. So, I mean, I mean, first of all, what I would say is we would all like to get to a steady state because I think that will help us plan for the future and move forward with our customers. Because right now, our customers are largely taking a wait and see type approach. We are doing a bit of modeling for some customers on potentially moving regions, although those are not necessarily to the US. They could just be to lower tariff jurisdictions or things such as that. But in general, we believe we are positioned really well as we move forward through this. One is the investments in trade compliance from a standpoint of people, tools, and process. Again, to remind everybody on the call, we pass the tariffs onto our customers so we do not absorb those costs ourselves. And that is moving forward fine as we would anticipate it to right now. And we think we are positioned well from a footprint standpoint and a services and tools standpoint that we will be able to adjust and help our customers achieve a successful solution regardless of what that final state is. We have available capacity in each of our regions, including within the US, so we are well positioned to be able to do that. We still think an in-region, four-region is the likely end state as this continues to migrate. We think that is the typical solution that we get towards, but we again, believe we are well positioned to continue to adjust as our customers see the final end state. One of the things from a standpoint of demand too, David, at this point, we are seeing no impact to demand, and that includes no demand degradation or no pull forward, into the current, into earlier time periods right now.

Okay. Very good. Certainly appreciate the color there. And and then maybe you talked a little bit about having excess capacity, but if you think about new facilities, if you were to build that, can you talk a little bit about that CapEx investment and then the timing in order to bring up a new facility? How quickly can that happen? Customer can do and said, hey. We want to move US. You can have capacity. Yeah. Well, the good news, David, this is Pat. We have got really good capacity in all three of our regions. As we mentioned, we have got the Penang, Malaysia, site coming on board this summer. We have got available capacity in Europe, and then it in Mexico and the US. So all three of those regions can handle any additional volume that is put into it. How quickly if if the need would arise in the future, you know, it is probably a four to six quarter period. To do that build. But with some of the improvements we are making within our facilities, and Oliver could talk more about this, but we are trying to expand capacity within our existing facilities through automation efforts and and a number of other initiatives that can delay the need for a new site after we put the one in in Malaysia.

Yeah. I can just expand on that, as we drive operational improvements into our manufacturing facilities, not only are we working on improvements that would reduce our cost basis, but also on our asset utilization. And so Pat mentioned automation. That could be process automation, material handling automation. As a specific example there, we have automated our warehouse in Penang last fiscal year, and through doing that, we saw a 60% reduction in space utilization as we automated that warehouse. 300% increase in pick rate, and also better labor efficiency. And so we are now replaying that through another three facilities this fiscal year, and that is a way that we can continue to make and create additional capacity with the existing bricks and mortar that we have.

Your next question comes from the line of Melissa Fairbanks with Raymond James. Your line is now open.

Hey, guys. Thanks so much. Pat, I just wanted to touch on the cash cycle days since this is the last topic that you spoke about before we went into Q&A. We have seen it leveling out around 68 days. Obviously, a significant improvement from where we were a year ago. Just wondering, understanding that there is going to be some flex and but wondering what your longer-term target is for those cash cycle days.

Yeah. Thanks, Melissa. I mean, it has changed a bit because as you recall last year, I was probably in kind of low seventies to mid-seventies. And then we were, frankly, a bit surprised ending the fiscal year in 2024 at 64 days. And we have kind of continued in the sixties, and that is where I am guiding the fiscal third quarter. I think we have opportunity though to get back into kind of the mid to low sixties. Think that is a good target for us. I think there is opportunity around gross inventory to bring that down, but we do have to recognize we have sizable customer deposits also, offsetting that gross inventory that some of that is going to be returned to customers in 2025 and 2026. But keep in mind that every one of those days that we are able to reduce, frees up $10 million of cash flow for us. And it has been a huge improvement to our balance sheet from a borrowing standpoint and ability to a our buyback and other growth initiatives.

Yeah. Absolutely. Absolutely. Oliver, I had a follow-up for you. One thing that you said was kind of interesting, in the aerospace and defense segment, you noted that you won some new product launches. Two of which had previously been done in-house by the customer. Correct me if I am misunderstanding what you said. But I am curious what some of the dynamics are. You know, this is kind of something that we have talked about a lot of outsourcing of manufacturing, if it is in aerospace and defense, that is always an area that tends to move very, very slowly. And so I am curious that some of the dynamics behind two of those wins or or some of the your newer product launch wins was.

Yeah. I think just Melissa, in general so you did hear correctly. And just in general, I think as customers are experiencing different external market conditions, as well as if they have significant changes in capacity. So or relative to demand, sorry, I should say, significant changes in demand relative to their capacity. Those are the types of instances that we have historically seen them cause the question, hey. Should we take this outside? Inside? I think the other piece here that we also talked about the aerospace and defense sector, largest-ever engineering design win. And as we have talked about historically, as we do that engineering product development, we are often then doing well, basically, all the time doing the production on the tail end of that. And so that would be another circumstance would cause that production to come to Plexus Corp.

I think one of the things from a broader trend standpoint that we are seeing is more of an openness to outsource. I mean, these are long-term historical industrial companies that are becoming that have manufacturing assets that are becoming much more open to outsourcing. See the benefits of it. So think it is a good long-term trend for us.

Your next question comes from the line of Steven Fox with Fox Advisors LLC. Your line is now open.

Hi. Good morning, guys. I had two questions also. First of all, was wondering if you could provide a little bit more color on the healthcare sustainable services program that you highlighted. Think you said you are doing in Guadalajara, but can you give us a sense for just sort of what exactly you are doing, how it ramps, and what it could mean for other ones in the future, then I have a follow-up.

Yeah. So we cannot get into a lot of details around the product itself, Steve. I mean, other than to say it involves a single-use aspect of a piece of capital equipment is what I would say. The potential the program has potential to ramp though over a two to three-quarter time period, and the volumes could be fairly large.

And does it open up for any other opportunities if you prove yourself capable of ramping it?

Well, it is definitely follow on with the similar program. So the volumes that we are considering right now could go up from there. And could result in future wins. And the relationship with the customer itself is a very strong and very long-term partnership with one of our top healthcare customers.

Understood. Thank you. And then just as a follow-up, I could not help but notice that, like, your June quarter guidance for operating margins at the high end has a six handle. And I thought after the September quarter, we were sort of assuming you want to get back to, like, 6% margins to the fourth quarter of this fiscal year. Is there any reason for thinking that can happen sooner than previously assumed or anything else we should think about with the high end of the guidance? Thanks.

Yeah. I think it is on two fronts, Steven. It has to do a lot with what we saw in the results for Q2, but I think we are seeing the benefits of our operational efficiencies flow through quicker than we had anticipated. We are also seeing a nice mix of services with engineering and sustaining services being quite strong. So I think the two of those are leading to us accelerating margin growth a little bit faster than we had anticipated. So we think Q3 is certainly a potential that it could start with a six as is Q4.

Your next question comes from the line of Ruben Roy with Stifel. Your line is now open.

Thank you. Hi, guys. Todd, I wanted to have a quick follow-up on your tariff answers to David's questions. And obviously, a lot of uncertainty out there at this point, a lot of moving pieces. But in terms of it sounds like you have had some discussions with how the cost would look like and pass-throughs, etcetera. Have you gotten any feedback on movement? Of products, you know, based on tariffs at this point, or is that still on the come?

Yeah. It is still pretty early, Ruben. What we are seeing is there is a handful of customers that I would say we are doing some modeling on about potential movement of product. There is a small amount of product that we are relocating. We are moving out of China into different geographies right now. But it is relatively limited, I would say, at this point. And I think in general, our customers are waiting to see what the end state looks like before they make any decisions or really push too far in that area.

Got it. Thank you, Todd. And then a quick follow-up as well for Oliver. On the industrial commentary, Oliver, in the green shoots, it sounded to me like, you know, that was sort of a statement that it had to do more with inventory than demand. Or or, you know, sort of new programs, etcetera. Is that the way to think about it? Or are you actually, you know, starting to see some movement in terms of demand on some of your industrial from some of your industrial customers?

Yeah. I guess I can play those two. Right? And so I think what we had been seeing over prior quarters was customers had a lot of extra inventory in the channel, and that was muting their demand to us. So now that that inventory it seems like we have maybe bottomed out and asked about of our broader industrial portfolio, and then that that manifests to us as a stronger demand signal. So does that answer the question?

Hey, Ruben. It is Shawn. I would say there are some pockets where we believe the end demand is strengthening above some of the moderation in inventory headwinds. But it is small pockets right now. You know, it is spring in the Midwest, so green shoots is an appropriate term.

Again, if you would like to ask a question, please press star one on your telephone keypad. And your next question comes from the line of Chris Grenga with Needham. Your line is now open.

Hi. Good morning. This is Chris on on for Jim. Thank you for taking the questions. As you are approaching the opening of the new Penang site this summer, it sounds like the capacity is filling up and particularly with the MRI assembly win and others. Do you see any gross margin headwind as that facility ramps over the course of the next few quarters?

Yeah. Chris, this is Pat. We will see a little, but it is going to be very minimal. And Asia, especially Malaysia, has a great track record of getting up to profitability within a three to four-quarter period. And then getting to corporate averages soon after that. So I am pretty confident in that. And, I mean, occasionally, we have this. We had that with Thailand. And so it is something we factor into our margin targets that we will be expanding periodically. But I think in this case, it will come pretty quick.

Got it. Thank you. And just just looking at the funnel chart, know, healthcare it bumps around, but it looks like it ticked down a bit sequentially in Q2. And just wondering how we should think about that relative to the improvements that you are seeing in underlying demand. And new program ramps.

Yeah. So I think just talking about the funnel couple of things. I have mentioned this in prior calls, but have not maybe talked about in a while. We do not manage funnel and wins to quarterly boundaries like we would, say, operational results. And so you will see some ebb and flow from one quarter to the next. I would also highlight for healthcare, versus prior year, the funnel is up. Sorry. Our wins are up 8% versus prior year. And yeah. So just generally, I think we continue to be optimistic about ability to grow there. We have also mentioned with the extra demand increases we are seeing from customers, we expect that to flow through to additional decision making, which would then flow through to additional wins.

Great. Thank you very much.

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Your line is now open.

Thanks. Good morning. I wanted to go back to industrial. If you exclude semi cap equipment, is the net effect of the other industrial submarkets showing growth, or is that still flat or down? And any specifics you can give around heavy equipment, power management, automation would be great.

Yeah. Steve, good morning. This is Todd. So just to give you a little bit of insight, the balance of industrial except excluding semi cap is down. And it is down fairly reasonably because our semi cap business is up I would call it in the high teens for the fiscal year. So the sectors that are seeing some pressure are test and measurement, heavy equipment, energy, electrification. So it is pretty broad-based. Of seeing headwinds right now with maybe the exception being communications, which is a bit volatile though as well.

That is great. I appreciate it. And I understand the comments about maybe seeing inventory stabilization. You said there has not been demand degradation or pull forward. I guess, to the extent that you know, are you seeing any uptick in aftermarket service business for industrial products, meaning end users maybe slowing CapEx decisions and that is driving an uptick in MRO? And if that did happen, what is the margin benefit for you? Or the margin impact?

Yes. Steve, it is Shawn. So just to put a fine point on Todd's comments, that was on a year-over-year basis quarter over quarter, you know, the non-semi cap industrial is looking up. We are not seeing any kind of sustaining services uptick for that market sector. Or incremental demand of someone trying to sweat the assets. In a time of uncertainty, this is either, you know, less inventory headwinds or or better pure demand.

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

Hi. Thank you for taking my question. I am curious within the engineering wins that you mentioned that was very strong helped by diversification efforts. Can you elaborate on what those are?

Yeah. So, historically, our engineering wins had a were dominated by the healthcare market sector, and we saw some, over recent quarters, some substantial diversification with those markets where it is really hitting all of our sectors. Oliver had mentioned the very large aerospace and defense win that we had, which was our largest ever. We had a large life sciences win this quarter, and we performed very well. And in both industrial and semi cap as well. So it has been pretty broad-based, and it is like I say, it is a good sign for the future in that we see that diversification because engineering wins lead to manufacturing wins as well.

Thank you. And also you mentioned share gains. Who are you taking shares from?

It is broad-based. And so based upon end market, based upon submarket, we are seeing share gains based upon as Oliver highlighted, you know, the strength of our executive relationships, the strength of our execution, our focus on our customer success. In some cases, with the one example Oliver highlighted, we were the sole EMS company our customer engaged with just because of the strength of the relationship. So not going to put a fine point and make it that easy for you on where we are winning share gains, but I would say it is broad-based across our market sectors and subsectors.

Okay. Thank you. And I am also curious in terms of the weakening dollar. Are you hedging for that? Or how are you thinking about the current volatility there?

Yeah. We are hedging. We do a portion of our non-US currencies hedging. So we do have some exposure. And with the volatility, especially, that we saw the last month, we could see some impact on our P&L but we are hedging for it, and we will watch for it.

Okay. Thank you. That was all for me.

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Your line is now open.

Thanks for taking the follow-up. Really good to hear semi cap is running up mid-teens. Can you talk through what you are seeing for leading-edge metrology versus memory versus trailing edge?

Yeah. It is better than mid-teens, Steve, so not to dilute the strength we are seeing. But where we are seeing is, you know, as Oliver highlighted, growth across semi cap in terms of wins with customers. We play front end to back end. We are seeing, you know, growth across the customers in all areas. In some customers, maybe they were a little over inventory the past two years, and so demand is coming back there as well. But I would not put it into a single bucket of technology. Or front end or back end where we are seeing strength. It is pretty broad-based, and I would just go back to the fact that we have won a lot of market share over the past couple of years. From competitors as well as new programs coming to market. We had had an effort, as highlighted in engineering, but also in manufacturing to diversify. And that is bearing fruit as well. And so it is really broad-based strength for us. I hesitate to characterize it as one area of semi cap versus another because it is broad-based.

Got it. Okay. And then one last one. Some of the semi cap names have been talking about a memory tool upgrade cycle rather than new tool build. If that happens, do you get that business if it was your original build?

Yes.

Perfect. Thanks.

That concludes our question and answer session. I will now turn the conference back over to Mr. Todd Kelsey, President and CEO, for closing remarks.

Alright. Thank you, Angela. I would like to thank shareholders, investors, analysts, and our Plexus Corp. team members who joined the call this morning. Concluding with a few summary comments, with our investment in talent, technology, facilities, and tools, we believe Plexus Corp. is well-positioned to enable our customer success in this dynamic environment in support of our vision to help create the products that build a better world. Evidence of this view is the breadth of our new program wins across our solutions, markets, and technologies. Further, while acknowledging the macroeconomic uncertainty, we continue to anticipate meaningful EPS growth in fiscal 2025 driven by revenue growth in each of our market sectors, strong operating margin performance, and continued free cash flow generation used to create additional shareholder value. Thank you again, and have a nice day.

Ladies and gentlemen, that concludes today's conference. Thank you all for joining. You may now disconnect.