Everyone, I'm Matt Sheerin, a senior analyst here at Stifel, and got Plexus Corp with us this afternoon, one of the major EMS providers. And representing the company is Shawn Harrison from IR, Pat Jermain, CFO, and Oliver Mihm, who's EVP and COO. So welcome, everyone. And I think Shawn is gonna start off with a quick intro, and- Sorry, Matt, go ahead. And then we'll go into, Yeah, I'll make it brief. Just for those that don't know us, Plexus Corp, EMS provider, headquartered in Neenah, Wisconsin, about 45 years old. We are six design centers globally, seventeen manufacturing sites. We're the leader in highly complex products and demanding regulatory requirements within the EMS landscape. Our vision is to help create the products that build a better world. The way we execute that vision through our strategy is tied to our mission, which I just stated. Where we do that is within the Aerospace and Defense, which is about 20% of our revenue, the healthcare life sciences, which is about 40% of our revenue, and then the industrial market, which has a variety of subsectors, which is about 40% of our revenue as well. We have a relatively small customer base, about 150 customers globally. The way we grow and the way we've outgrown the industry over the past five years, we grew at an 8% revenue CAGR, 250 basis points in excess of the revenue of our peers, and in many cases, 2-3 times. The revenue growth rate of our peers is through execution to our strategy, quality products, on-time delivery. We've been able to pick up market share and expand our exposure to our customers. One last point in terms of defining a little bit who we are and how we execute ourselves. We pay ourselves in two ways in our variable compensation. Full payout, 12% revenue growth annually is about 40% of our compensation. Another 40% is tied to achievement of a 15% ROIC. And so we're focused in on both delivering industry-leading revenue growth as well as profitable revenue growth. Okay, terrific. Thank you, Shawn. So I guess maybe the first question, before we get into some of the demand trends within your various sectors, obviously, since 2020, we've had sort of a crazy cycle, strong demand. And within that, in the last couple of years, you've had some eventful quarters where you've missed revenue because of supply chain issues and lack of components. You've had some margin pressures, you've had some nice improvements, and you're targeting improvements over the next few quarters. But could you just walk us through the last couple of years and maybe lessons learned and how you're preparing for the future? I'll take that, Matt. Reflecting back on the last few years, we really kind of view it as a bit of a rolling recession, and more specifically, that would imply that either a specific market or market subsector entered in a period of demand correction or inventory reduction. That volatility certainly impacted our ability, our profitability, and our ability to consistently generate free cash flow, especially given the challenges as that demand fluctuated, and it was right amidst a very extended component lead time dynamic. As we highlighted in our April earnings call, with the tailwind from a number of ongoing actions, we see a path towards continued improvement of profitability towards our greater than 6% non-GAAP operating margin goal during our fiscal 2025. And so just reflecting back more specifically, you know, COVID, Commercial Aerospace saw a deep correction. Now we're seeing robust growth. Our A&D business grew 17% during fiscal 2023, and we're suggesting that we can exceed that, anticipating that we can exceed that in fiscal 2024. And in addition to that robust Commercial aerospace demand that's driving that growth, we also see strong performance in market share gains within that specific sector. And while defense growth is healthy, we haven't seen any specific tailwinds per se, due to current geopolitical dynamics or spending from, say, Western countries on defense markets. That brings us then reflecting back again, you know, semi-cap business, where I'll note that we support both front-end through back-end, grew at 30% CAGR from our fiscal 2015 to 2022, more than 2x the market. But that saw a correction as we entered our fiscal 2023 due to export regulations. We outgrew the market during that correction, and we're currently seeing a gradual recovery. It's aided by some share gains over the past two years, in addition to new program ramps. In addition to that, we've focused specifically over the past few years in expanding our exposure within logic with some new customer additions. And so all that said, we expect to be able to outgrow the market again as we look forward here once the semi-cap market corrects and rebounds. That brings us then to last year, our broadband communications subsector saw a bit of a muted demand signal ahead of a technology transition that was certainly deeper, I think, and longer than our customers anticipated, and we're just now starting to see green shoots in that marketplace. And then healthcare, I think, you know, had a few great years post-COVID, nicely outgrowing the market. But our customers began to trim forecasts back in late fiscal 2023, adjusting to a demand environment that was less robust relative to their COVID, post-COVID expectations and excess inventory they had built up as they were trying to react to that expected stronger demand amidst an extremely tight supply chain environment. Recall also from prior earnings calls, we've talked about this, our healthcare space specifically is experiencing a 5%, 500 basis point revenue headwind due to the normalization of procuring components at above average prices relative year-over-year basis. We've been winning significant amount of business in this market from new outsourcing as well as share gains, as we continue to perform well for our customers. And then finally, in our most recent quarter, we saw some correction in other aspects of our industrial business, specific around some inventory challenges relative to commercial EV charging systems in Europe and the deployment thereto, and then excess inventory at customers focusing specifically on factory and industrial automation. And we see that continuing likely through the end of fiscal 2024. Okay. So, your comment on the healthcare and the 500 basis points headwind, in other words, your bill of materials now is, for those customers, are 5% lower because- Mm. -because the component costs are lower, and you were passing that through, and that elevated, the revenue- Right. because of the pass-through. Yeah. It also put a little pressure on your gross margin, right? Because components, as a percentage of cost of goods or the BOM was higher. Is that right? Right. Those, the extra— Yeah -revenue there- Yeah from that inflated price would have come through with no margin associated. That's right. Yeah. Yeah. Yeah. Okay. And at the same time, I guess the point of my question was you had some supply chain issues, seemed to be more pronounced than some of your competitors. It could be because of the markets that you served in. We know, A & D legacy parts were very hard to get. Same thing in medical. Yeah. But in terms of the way you run a supply chain, your engagement with distributors, with suppliers, how has that changed in terms of the lessons you learned during that period? Yeah. I'll, I'll mention a couple of things. One, so Shawn led with the fact that we're focused specifically on highly complex products, demanding regulatory environments, and so that does tend to, tend to have products that last quite some time in the end marketplace, right? So anywhere between 5, 8, 10 years, perhaps, life cycle for these products. In Aerospace and Defense, that can be even longer, even as long as 15 or 20 years. And so that then ties through to those products often have lagging edge semiconductor technology. And so we- I think that was certainly a, a more difficult dynamic. And even today, as we look at the semiconductor lead times now normalizing and coming down, the lagging edge is coming down slower than the rest of it is, right? So that continues to, to provide some-- to, to exacerbate that dynamic. Yeah, I mean, just in terms of what we've learned from an overall supply chain perspective, we've optimized certainly internal processes, processes with respect to how we're engaging our customers. But just as an example, one of the things that we've recently done, a bit of technology we've deployed internally, is we've recognized that the lead times that we are getting from our suppliers are often inaccurate and inflated. And so that causes us to be able to be less flexible for our customers. It causes extra inventory to accumulate. What we've taken is we have a ton years of historical data relative to actual component purchases and then actual receipt time frames. And so we've taken all that, and we essentially built an AI model around that. And are forecasting what our supplier's lead time is gonna be, as opposed to relying on the data that we're getting from our supplier. It's often quite a bit reduced relative to what the supplier is telling us. That's helped to bring our overall lead time profile down, helped to bring our inventory down, our working capital down, and we're able to be more nimble on behalf of our suppliers. So I think that's a good example of how we've adjusted post that dynamic to improve our service level for our customers. Okay, great. And the other change during this cycle is that your customers are giving you more, you know, cash deposits against the inventory. I think it was high as 30% or so. Yeah. Yeah. But now, with lead times down and they can get, what, 95% of what they need, like, tomorrow, you would think that they would want that cash back as you reduce that inventory. So how does that play, Pat, into the cash flow? Sure. And the free cash flow? Yeah, maybe I'll break it up between gross inventory, what we've seen in the last several quarters, and then cash deposits, what that means. Obviously, we've been really pleased with our progress over the last several quarters. Looking just at the March quarter, we brought inventory, gross inventory down $56 million sequentially. That's the lowest level we've been at in two years, and that helped drive, for the quarter, for the March quarter, $65 million of free cash flow, which we used to pay down some debt. We supported our share repurchase program with $18 million of purchases during the quarter. Year to date now, we're at positive free cash flow of north of $30 million, and I did increase the projection for the full year free cash flow from... It was originally up to $50 million, to now $100 million for the full year. So that's gonna help us, again, support the remainder on the share repurchase program, bring down debt. And to put it in perspective, if we're reducing debt by about $100 million with interest rates where they're at right now, that's about a $0.20 improvement to EPS that we can. In lower interest expense, you mean, or? Exactly. Uh-huh. Yep. Looking at it from a days perspective, we ended the March quarter at 91 days, so that was a sequential improvement of 4 days. The guidance for the June quarter is to reduce it by additional 5 days. And I think there's opportunity as we get to the end of the year to reduce it even further. Each one of those days represents about $10 million of free cash flow we can free up. So we're going from a high at the end of the first quarter of 95 days to potentially ending the fiscal year in the low 80s. So it's significant free up of cash and working capital. I think the last point I make, so to your earlier point, Matt, yeah, as we're bringing down gross inventory, we are gonna see customer deposits being returned. I think the more important metric is the net cash cycle days to look at, not just gross or cash deposits. Huge focus on free cash flow for us, especially the back half of this year. We've actually changed a portion of our incentive compensation plan. Shawn mentioned to open up. We've got two main components of our incentive compensation: revenue growth, 40%; ROIC, 40%, then there's another 20% of personal objectives. We've changed that 20% personal objectives for the last half of this year to be completely focused on free cash flow generation. That's both for the executive team and the majority of the participants in the incentive compensation plan. So a lot of focus on free cash flow. Okay. Interesting. And you talked about bringing inventory down, particularly with lead times pretty low. The last two sessions I had Avnet, a huge distributor, and then a big component supplier, Littelfuse, and both have talked about customers like you, obviously cutting. They're seeing way below seasonal demand, but their concern is that as you cut to the bone and you get, you know, five or six end markets are depressed, you get three or four of those come back. Before you know it, lead time stretch, and you can't get components again. And I'm sure you're having that discussion with customers, but you don't wanna- Yeah -finance that. So how do those- Yeah discussions, and I mean, are they coming up yet, or is it like, okay, the new back to normal, which is, I can get what I want tomorrow, and I don't have to worry about it? Yeah, I'll start. I don't think we're getting back to that point. I mean, when I reflect back on fiscal 2022, our cash cycle days were in the low 70s. I think, again, our goal this year is to get to the low 80s and then maybe eventually into the mid-70s. I think customers have changed their thinking around buffer stock and expectations to have that inventory on hand, and in those cases, that's fine. We can, again, work with them to secure customer deposits to help offset that investment. Okay. Yeah. Okay, great. Any questions from anyone? No. Okay. I wanna drill down a little bit more into your core segments. Oliver, you talked about industrial, some of what you're seeing there. Maybe start with semi-cap, 'cause it is a big part of that business, and that's been depressed, but would give you a lot of leverage as that volumes come back. We're hearing from other EMS players, mixed. Some are seeing demand come back, new program wins, some reshoring opportunities. Others are saying, I think Jabil actually said at a public conference, two weeks ago, that, you know, they don't see some of that recovery coming back until next year. What are you seeing from your customers there? Yeah, I'll start, and then, Shawn, you can add anything if you want. I think first, I'll start by saying our semi-cap portfolio, I view it as quite balanced. So front end to back end, logic versus memory, we've got good balance. That's been a deliberate, intentional, deliberate effort from our go-to-market team to achieve that balance in the portfolio. So typically, I think we have seen in the past, back end comes back a little bit before front end, so the fact we got that balance there plays in our favor. I also would note that we've enjoyed some share gains, and so, for instance, as a specific example, relative to semi-cap, if we think back when export controls first hit, we did not produce—we were not producing any semi-cap inside China, but some of our peers were. And so as our customers repositioned production, our footprint in Southeast Asia, in both Penang, Malaysia, as well as Bangkok, Thailand, was the beneficiary of that. So we increased some wallet shares as a result of that. So I think that gives us good optimism looking forward. I know our wins, as you noted, I'll reiterate that for ourselves. Wins have been strong, funnels particularly strong, and so the strength of the market share gains, the some of the new product launches that we recently won, plus our historical perspective of having outgrown the marketplace, gives us optimism as we look forward here. Mm-hmm. Yeah. And can you- Yeah, I wouldn't say, Matt, that we're calling any recovery in the market per se. Mm. Most of it is either, you know, customers that may be tied to a cycle in memory, be it high bandwidth or memory demand, just bouncing back. Some of it is tied to everything Oliver mentioned as well, relative to the semi-cap cycle is in a big upswing. Semi-cap, as it does come back, will be a margin benefit to us. You know, we opened a new facility in Bangkok, Thailand, that had a lot of exposure to semi-cap, right as the cycle rolled over. That site just reached break even, recently, and so as we flow more revenue through that site, you will see, a benefit to the, the margin profile of Plexus. Can you tell us whether you're involved in sort of the AI part of semi-cap and in terms of customers that are working with those big customers, those semi-cap? Matt, I can address some of it. So, Yeah, being front end to back end, you know, with all the leading players within, you know, that market, we are seeing some benefit from High-Bandwidth Memory from AI as well. We're also seeing, customers that are really making a focus on gaining share in High-Bandwidth Memory, and supporting that infrastructure for them as they build that out. We're seeing some tailwind from that as well. So, you know, right now, for a lot of Plexus, I would characterize AI as, for us, we're an enabler, through some of the technologies. We are seeing some opportunities around power, within AI, potentially within the data center, but also power generation. You know, last quarter, Oliver highlighted on our call a new win, with a multinational company, around power generation. We see kind of the needs of AI driving more power consumption. We'll have the ability to facilitate that a little bit as well. More of an enabling dynamic, I think, for us, at least within our industrial sector. Some other sectors, it's probably more on the come, particularly within healthcare. That side of it, it's more getting products to market more quickly, in the fact that you'll be able to run your algorithms through, you know, these big machine learning engines and be able to bring product that, you know, to market that have a higher chance of success and a lot more quickly. We're very strong in new product introduction, you know, particularly with our engineering solutions business. And so as we're able to see the OEMs within healthcare and life sciences bring product to market more quickly, because of our leading position within that marketplace, we'll be a long-term beneficiary. Okay. Okay, great. And then, just also within industrial, you talked about other areas, factory automation, others, where there's an inventory digestion and, weakened demand, EV, charging infrastructure, you talked about that too. You're not the only one. How are you positioned within, within EV and infrastructure, and how long do you see sort of this, this down period? Yeah, I mean, so we have a number of different businesses there. So we do some large inverters and then large hundreds of kilowatt charging stations for commercial earth-moving heavy equipment. And that is in a fine spot. Specific to commercial EV chargers, we're engaged in both Europe and the US. Europe, obviously, as a market, is out in front relative to the US. And what we've seen is, and while the end demand might be there in Europe, they're just, their ability to build out the infrastructure or have the labor to facilitate the install of the actual charging equipment is lagging, and so that just needs to catch up. Certainly, the U.S., there's—I mean, we're still in infancy, I think, in terms of commercial EV charging deployment, and so the ability to see some upside there certainly exists in the future. Okay. And then, the last part of that industrial business, unless I'm missing one, is the communications, which is the smaller part. You moved that in, and that's mostly broadband. It sounds like you, in your opening remarks or Shawn talked about that industry going through a transition. Is there a line of sight for the recovery there? Yeah, so that broadband communications is somewhere between 10% and 15% of our industrial sector. And so as we noted previously, seeing a bit of a pause as the anticipation of the technology rollout is still coming. We saw some green shoots here quarter-over-quarter. We mentioned that in our Q2 earnings call, which gives us optimism that it's the inventory correction has bottomed out, but exactly the time frame and the shape of that recovery, still difficult to discern. Okay. Okay, in healthcare and life sciences, you talked about inventory digestion going on there as well. But I know over the years, you've really broadened your skill sets across healthcare. Mm-hmm. Can you talk about the breadth of your skills that you have and what you can do for customers, and then the opportunities going forward? Yeah, certainly. So thinking about our engineering, development, and design services, that has historically been overweight towards healthcare life sciences. And so literally engaging with our customers, they give us the concept for a product. We're designing that whole product. We're designing the supply chain for the product. We're manufacturing that product, and as well, in instances, we're doing the aftermarket sustain services for that product. So that's full value stream support for our customers. It's a very high value add engagement with the customer, strong partnership for our customers. And certainly, our capabilities there, I'd say, are unmatched in our industry. Mm-hmm. And, and, in terms of, new product, I know you've got a pipeline there. Mm-hmm. What kind of things are you looking at in terms of opportunities, any specific areas of healthcare? Maybe if I can answer, Oliver. So Matt, we're with 14 of the 15 largest healthcare life science OEMs globally. A really broad, you know, representation across the top 50. And so be it from therapeutics, single-use surgical tools, surgical robotics, diagnostic testing, you know, imaging equipment, you know, kind of broadly, we have strong positioning. And so I wouldn't say it's one technology or one application. Given the breadth of the exposure and the engineering engagement Oliver highlighted, historically, you know, we've outgrown the market by 2 or 3 times, and we don't see, you know, anything in the pipeline or, you know, with the customer engagements that would suggest we'd not be able to do otherwise going forward. Okay. Okay, great. Thank you, Shawn. And then on the defense and aerospace, could you remind us what percentage is commercial versus military and the growth dynamics of both? I know commercial market has been very strong post pandemic, and you've got the drivers you talked about on the defense side, but could you drill down a little more there? Sure. So within Aerospace and Defense, about 50% of that sector is specific to Commercial Aerospace, another 20% is defense. And then the remainder is across security and space. Yep. And within Commercial Aerospace, we're well represented across the major OEMs there, and then well represented on both large and narrow body frames. Mm-hmm. Mm-hmm. Okay. And, got it. Okay, okay, great. Yeah, just back to AI and the opportunities you talked about in data center. Some of your peers and obviously, your different, you know, EMS model than some of your peers, but several of them have had big opportunities with hyperscale customers, both in terms of traditional EMS, building out the racks for the data centers, but also power management, liquid cooling. Are there any opportunities you talked about your power skill sets, any opportunities there within a hyperscale and cloud customers? Yeah, I think there's opportunity probably within power and cooling, Matt. You know, we have a strong history of, you know, complex designs. We have history in fluidics, we have history in power management, and so I think there's applications where we can be a participant, where, you know, won't be building the servers themselves, but I think there's areas as the data center gets built out that we can engage in. I think there's, as I mentioned earlier, some opportunities in our funnel within industrial, on both within the data center and then power overall, and supporting kind of, you know, the power needs represented by AI. But there's an area where we can surely play. Is that building products from the OEM customers that have those solutions, or doing your own custom? It would be building for OEMs, partnering with OEMs. Yeah. Our model is we, you know, either help co-design or, you know, the manufacturing side and the commercialization of the product, following our traditional strategy. Okay. Okay, great. And then, I wanted to talk about M&A, because that's something that Plexus doesn't really do. You haven't really been acquisitive. You've been growing on your own in organic growth. But are there any opportunities? Have you looked at whether buying a smaller EMS company with skill sets that you don't have or other requirements, or is that just not part of your DNA? We will look at M&A. M&A is a revenue enabler, not just for revenue. Historically, within the space, as you well know, Matt, I know, you know, one plus one trying to just buy revenue did never equal two. That, let's say, our sustaining services business, a make or buy decision. For us, what we could acquire versus what we could build internally, it felt more a better return on building it internally. Single-use surgical devices, let's say, in that same instance, we looked at a make or buy decision, decided to build that up internally. Geographic opportunities as well, you know, is there an opportunity to get in there through a small acquisition to give us a beachhead to build out kind of our brand and our exposure? But it's really around capabilities and revenue enablement, and we do look at it from time to time, but it won't be just solely to add, you know, a certain amount of revenue to our number. But it's always make versus buy, and we're going to run an ROIC, you know, analysis on each decision. Okay. Okay, great. And then I wanted to talk about the issue of reshoring, and you're seeing that. You talked about some of the semi-cap customers moving out of China. Are you seeing it in other markets, and given your geographic diversification, is that a benefit for you? Are you seeing more business because of that? Yes, but not specifically related, related to reshoring. So what we've seen is really, customers are not moving product per se, except for the example I gave you around China and the semi-cap business. What we're seeing customers do is be very thoughtful about what region they're picking as they launch new products, and so they're really looking to put that in the region where their end market is, so in region, for region. And so certainly, where we've enjoyed gains there is by having our global footprint. For example, there's a specific large medical OEM customer I'm thinking of. Historically, we've executed for them out of two of our three regions, and recently they've added the third region because they want to make sure that they're in a region, for region with new product launches, right? So the global footprint and the approach, the partnership, I mean, specifically to that customer, the focus on delivering quality products on time and strong executive partnership and engagement, helping them to solve problems whenever they come up, enabled us to add that revenue, so we got a bit of extra share gain as a result of that, but really not seeing customers actively moving product. Not in the middle of a production cycle- Right. but for new products, you're seeing that. Yeah. Yeah, exactly. Okay. Yeah. Okay. Okay, any other questions, Shawn, that you didn't ask or anything else coming up in your one-on-ones worth mentioning? No, I think you covered most of it, Matt. It's most around the demand cycle, margin expansion opportunity, and our Pat highlighted the increased focus on ensuring that the free cash flow generation is greater and more consistent. Yep. Okay. Okay, I would close this by underscoring our optimism here as we look forward, our ability to hit our 9%-12% revenue growth, hitting our greater than 6% non-GAAP operating margin goal in FY 2025. And that's all backed up by our historical outperformance relative to our peers from a growth perspective, strong wins. The funnel's in a healthy spot. Our early stage funnel also looks to be strong, and I think all that together gives us a lot of optimism here as we look forward. Okay. Okay, great. Thank you, everyone. Thanks, Matt. Thank you. Thanks.