This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Good morning and welcome to the Plexus conference call regarding its fiscal third quarter 2022 earning announcement. My name is Tanya and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open the conference call for questions. The conference call is scheduled to last approximately one hour. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Sean Harrison, Plexus Vice President of Communications and Investor Relations. Sean? Sean?
spk07: 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, future business outlook, and the impact of COVID-19 on the company's business and the results of operations. 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 filings. The fiscal year ended October 2, 2021, as 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 Germain, Executive Vice President and Chief Financial Officer, and Oliver Mim, 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?
spk05: Thank you, Sean. Good morning, everyone. Please advance to slide three. As we establish our fiscal fourth quarter guidance, I'm pleased that Plexus is in position to deliver $1 billion in quarterly revenue, which would be a first for our company. While understanding that the macroeconomic outlook is uncertain and that challenging supply chain conditions remain, we anticipate further revenue growth and GAAP EPS expansion in fiscal 2023. Our customers remain bullish for the products we produce and many report backlogs covering calendar 2023. In addition to the strong demand, our optimism for continued growth stems from the strength of multiple substantial early stage new program ramps, our leading position in the secular growth markets of commercial space, warehouse and factory automation, and robotic assisted surgery, our strong historical wins performance, and our commitment to operational excellence, including increasing success and resolving supply constraints. Please advance to slide four for a review of our fiscal third quarter results. For the quarter, we achieved record revenue of $981 million, a result that exceeded our guidance range of $885 to $925 million, and represented 21% year-over-year growth. All three of our market sectors were up sequentially, and healthcare life sciences and industrial exceeded our expectations entering the quarter. This was largely a result of our team's increasing success in mitigating the impact of constrained component supplies through improved processes and the benefit of strong customer partnerships. We delivered gap operating margin of 5.1%, a 110 basis point increase from the fiscal second quarter, and a result that was above the high end of our guidance range of 4.4 to 4.9%. This result was achieved through increased volume leverage, a return to normalized operations in Malaysia following the COVID-19 related challenges of the previous quarter, and the team's success in mitigating the impact of COVID-19 related disruptions in China. The combination of strong revenue and operating margin led to gap diluted earnings per share of $1.33 exceeding our guidance range of $1.02 to $1.18. The EPS result included 21 cents of stock-based compensation expense. Our manufacturing and aftermarket services wins totaled $201 million, down from our exceptionally strong fiscal second quarter result. In light of supply chain constraints, some customers delayed new sourcing decisions as they focused on clearing supply issues with legacy programs. Our funnel of manufacturing opportunities held at a record $3.4 billion, and our team is confident we will continue to win our fair share of these programs going forward. With trailing four-quarter wins, holding in excess of $1 billion, and sustained strength in the funnel, we are well positioned for future revenue growth in support of our 9% to 12% annual goal. Finally, engineering wins remained healthy in the fiscal third quarter. Please advance to slide five. We continue to scrutinize customer projections for signs of demand deterioration, but at this time, forecasts for the program we support remain strong and our unfilled backlog remains significant in excess of $100 million. We are guiding fiscal fourth quarter revenue of $980 million to $1.02 billion, which reflects the success of ongoing new program ramps and customer demand that continues to substantially outpace supply. In recognition of our support provided during one of the in-process program ramps, we recently received a Service Excellence Award for our outstanding performance. Incremental investments to support robust customer growth projections, supply chain and other inflationary pressures, and increased incentive compensation expense are modestly burdening GAAP operating margin, resulting in a fiscal fourth quarter forecast of 4.7 to 5.2%. We are addressing inflationary impacts with our customers and believe all the previously mentioned items are near-term in nature. We remain focused on achieving our industry-leading GAAP operating margin target of 5.5% as we progress through fiscal 2023. At the guided revenue and operating margin levels, we expect to deliver GAAP diluted earnings per share of $1.19 to $1.35, including $0.22 of stock-based compensation expense. Our EPS guidance is also impacted by greater interest and tax expense as compared to the fiscal third quarter. In support of the strong growth potential represented by our funnel of opportunities, our new facility in Bangkok, Thailand continues to progress according to plan. We completed qualification builds for our first customer at the site in the fiscal third quarter. We will begin shipping production product in the late fiscal fourth quarter or early fiscal first quarter. We also have multiple existing programs planned to transition from our Penang campus as well as new business that will launch directly into the site. We continue to experience strong customer interest and expect the building to be the first of multiple in Thailand as we further our campus strategy and create a platform to support future growth in our APAC region. Next, a few thoughts regarding our longer term outlook. Even when taking a relatively conservative view of customer forecasts, we anticipate continued revenue growth into fiscal 2023 that will enable expansion in gap operating margin and EPS. Looking at our end markets, our industrial sector demand is strong, led by semi-cap and communications. While supply is challenged, we continue to make progress as reflected in our fiscal third quarter results, through a multi-quarter effort focused on alleviating component availability issues by leveraging improved processes and strong customer partnerships. Within healthcare life sciences, we have stable demand in aggregate and several major program ramps underway that will positively impact the next several quarters. Finally, within aerospace and defense, while supply chain constraints are muting revenue growth, we see a strengthening of demand in aerospace as well as significant opportunity with commercial space programs. In summary, we are well positioned in desirable end markets with innovative solutions and the right team in place to serve our customers' highly complex program needs and further cultivate enduring partnerships. In the long term, we remain optimistic in our ability to deliver industry-leading financial results, representing a 9% to 12% revenue CAGR, 5.5% gap operating margin, and 15% return on invested capital. I will now turn the call over to Steve for additional analysis of the performance of our market sectors and operations. Steve.
spk01: Thank you, Todd. Good morning. I will start on slide six with a review of performance by market sector for the fiscal third quarter, as well as our expectations for the market sectors for the fourth quarter of fiscal 2022. The performance across all market sectors was strong in the fiscal third quarter. Although we still see continued supply chain constraints, especially in higher-node, lagging-edge semiconductors, our efforts in early fiscal 2022 to enhance our processes and to obtain longer-range forecasts from our customers are having a positive impact with the materials pipeline. Reviewing the details by sector, I will start with the industrial sector results. The sector grew revenue by 10% in the fiscal third quarter. The exceptional result was significantly above our expectations of a flat to low single-digit increase. Shipments for 16 of the top 20 customers exceeded forecasts, mainly due to better than anticipated material supply. As we start the fiscal fourth quarter, we are mindful of the broader economic uncertainties. However, customer demand remains robust across most of our industrial subsectors. As a result, we expect a low single-digit increase in the industrial sector for the fiscal fourth quarter. At this level, the sector would achieve solid fiscal 2022 revenue growth in the range of 10%. Our healthcare life sciences sector achieved exceptional growth of 13% in the fiscal third quarter. The results significantly exceeded our expectations of a mid-single digit increase. An improved materials pipeline for new program ramps, as well as for existing programs, enabled stronger than forecasted shipments for 17 of our top 20 healthcare life sciences customers. Looking ahead, we expect program ramps to drive further growth in the sector. As a result, we expect a mid-single digit increase for our healthcare life sciences sector for the fiscal fourth quarter. Achieving this result would mean the sector sequentially grew all four quarters in fiscal 2022, and they would finish the fiscal year with an outstanding revenue growth in the range of 15%. Our aerospace and defense sector grew 4% in the fiscal third quarter. The result was in line with our expectations of a mid-single digit increase. The demand outlook in commercial aerospace is strong. However, the improvements in mid to longer range customer forecasting and the result of material pipelines are not as mature as other sectors. As such, supply constraints are muting growth in the near term, and we anticipate a low single digit decline in the aerospace and defense sector for the fiscal fourth quarter. As we look to fiscal 2023, we expect to be able to capture further demand in commercial aerospace as we realize the improvements we are driving with material planning with our customers. Please advance to slide seven for an overview of our wins performance. We won 47 new manufacturing programs, mostly from existing customers during the fiscal third quarter that we expect to generate $201 million in annualized revenue when fully ramped into production. The wins result was down compared to the near record wins of $313 million for the fiscal second quarter. However, a trailing four quarter wins of more than $1 billion remains healthy. Our winds momentum, which is defined as the trailing four quarters of winds divided by the trailing four quarters of revenue, at 29% remains above our 25% goal and supports our compounded annual growth rate target of 9% to 12%. Next, we can review a few sector and regional highlights of the manufacturing winds for fiscal third quarter on slide eight. Industrial and healthcare life sciences sector each had solid quarterly winds $85 million and $86 million respectively. Approximately two-thirds of the industrial sector wins, more than one-half of the aerospace and defense sector wins, and about 40% of the healthcare and life sciences wins are targeted for the Americas. This broad demand for our capabilities in the Americas yielded $108 million of total wins in the fiscal third quarter. The EMEA region's strong wins result of $53 million benefited from a strategic opportunity in our healthcare and life sciences sector as well as market share gains with customers in the industrial and aerospace and defense sectors. The wins in the EMEA region, which all came from existing customers, are a direct result of the team's ability to deliver on our commitment to operational excellence and customer service excellence for these customers. Please advance to slide nine for highlights of the fiscal third quarter wins. Starting with the industrial sector, the wins include a high-power inverter that is used in the electrification of heavy equipment. The product will be added to a portfolio of complex assemblies being built in our Appleton, Wisconsin facility. In addition, the industrial team continued to expand our engagement with a large semiconductor cap customer. Although the relationship started a few years ago in the United States, our ability to produce complex, high-quality products around the globe enabled further expansion into Mexico and now into Malaysia. With the award of 12 new assemblies, we are building subsystems for this customer in all three countries. Our healthcare life sciences team won two next generation products. The first is the manufacturing of a point of care life sciences product that is used in monitoring blood gases. The second is the production of an ultrasound platform targeted for women's health. These wins are strategic as we expect to leverage both of them into future opportunities with these customers. Included in the aerospace and defense wins is a program that expands our market share with an existing aerospace customer. The product is a new platform used for Wi-Fi communications and commercial aircraft that will be manufactured in Malaysia. Finally, the aerospace and defense team won the production of a platform used to test secure 5G communication systems. This program will be produced by our team in Amaya. We can proceed to slide 10 for highlights of our funnel of qualified manufacturing opportunities. As we exited the fiscal third quarter, the funnel held at a record level of $3.4 billion. The healthcare life sciences team continued their funnel expansion and exceeded $2 billion for the first time. New opportunities in diabetes care, imaging products, and cardiac care all contributed to the growth of the healthcare life sciences funnel. Next, I would like to turn to operating performance on slide 11. In the first half of fiscal 2022, we highlighted that we had an organization that was built to support at least $1 billion in quarterly revenue with a greater than 5% gap operating margin. I am pleased that with the strong revenue performance in the fiscal third quarter, our teams captured this revenue potential and generated gap operating margin of 5.1%. I'm also pleased that as we guide $1 billion of revenue at our midpoint for the first time, we're also guiding strong gap operating margins of 4.7% to 5.2%. As we look to fiscal 2023, our teams remain committed to realizing our enduring goals of revenue CAGR of 9% to 12%, and GAAP operating margin of 5.5%. I will now turn the call to Pat for an in-depth review of our financial performance. Pat?
spk06: Thank you, Steve, and good morning, everyone. Our fiscal third quarter results are summarized on slide 12. Gross margin of 9.5% was above the top end of our guidance and sequentially higher by 90 basis points. For the fiscal third quarter, we experienced significant fixed cost leverage as revenue increased 10% while fixed manufacturing expenses remained consistent with the fiscal second quarter. Productivity improvements across all three of our manufacturing regions also contributed to the better result. Selling an administrative expense of $44 million was above guidance primarily due to additional incentive compensation linked to higher revenue and operating performance for the quarter. As a percentage of revenue, SG&A was 4.5%, which was consistent with expectations and sequentially lower by 10 basis points. Inclusive of approximately 60 basis points of stock-based compensation expense, we delivered GAAP operating margin of 5.1%, which exceeded the top end of our guidance. Non-operating expenses were above expectations as a result of foreign exchange losses and higher factoring expenses. GAP diluted EPS of $1.33 was above our guidance due to the strong revenue and operational performance. Turning to our cash flow and balance sheet on slide 13. As anticipated for the fiscal third quarter, we made investments in working capital to support our customers' strong demand and as a result of the continued supply chain constraints. Cash investments and operations and capital expenditures both totaled $21 million, creating a $42 million usage of cash for the quarter. During the quarter, we completed our $50 million share repurchase authorization by purchasing approximately 149,000 shares of our stock for $12 million. Next month, we will review with our board of directors the opportunity for a new authorization. Our goal remains to return all excess cash to our shareholders. On June 9th, we refinanced our senior unsecured credit facility to take advantage of favorable pricing and improve our financial covenants. In addition, the maximum commitment under the credit facility was expanded from $350 million to $500 million, and the maturity of the facility was extended to June 2027. Our quarter-end balance sheet included $278 million of cash, sequentially lowered by $31 million, due in part to working capital investments. Total balance sheet debt was $435 million, while net debt was approximately $157 million. We had $260 million available to borrow under our amended credit facility. Cash cycle at the end of the fiscal third quarter was 102 days, consistent with our expectations and sequentially higher by four days. Please turn to slide 14 for details on our cash cycle. Sequentially inventory days increased by six. The steady increase in days over the past several quarters reflects the continuation of supply chain challenges during a period of robust customer demand. In addition, we have supported new program ramps, which drove revenue upside for the fiscal third quarter and are anticipated to deliver higher revenue in the fiscal fourth quarter. We continue to have over 25% of our inventory covered with customer deposits. Days unreceivable sequentially improved by two days, primarily due to the timing of shipments and payments. As Todd has already provided the revenue and EPS guidance for the fiscal fourth quarter, I'll review some additional details which are summarized on slide 15. Fiscal fourth quarter gross margin is expected to be in the range of 9 to 9.4%. At the midpoint, gross margin would be approximately 30 basis points lower than the fiscal third quarter. A portion of this reduction is due to higher variable incentive compensation expense. We also expect a near-term impact on margins due to investments in fixed costs, including our new Thailand facility, in order to support our strong growth outlook. We expect selling and administrative expenses in the range of $42.5 to $43.5 million, slightly lower than the fiscal third quarter. Non-operating expenses are expected to be in the range of $7 to $7.4 million, sequentially higher primarily due to rising interest rates. Our expectation for the balance sheet is that working capital investments will increase compared to the fiscal third quarter. Based on our revenue forecast, we expect this level of working capital will result in cash cycle days of 96 to 100 days. A SEQUENTIAL IMPROVEMENT OF FOUR DAYS, PRIMARILY DUE TO A REDUCTION IN NET INVENTORY DAYS. WE ANTICIPATE THE IMPROVED CASH CYCLE WILL GENERATE BREAK EVEN POSITIVE FREE CASH FLOW FOR THE FISCAL FOURTH QUARTER. FINALLY, WE EXPECT CAPITAL SPENDING FOR FISCAL 2022 TO END IN THE RANGE OF $110 TO $120 MILLION, WHICH INCLUDES APPROXIMATELY $40 MILLION FOR OUR NEW TITLE IN FACILITY. With that, Latonya, let's now open the call for questions.
spk03: Certainly. As a reminder, to ask a question, you will need to press star 1 1 on your telephone. Please stand by while we compile the Q&A roster. One moment. And our first question comes from Anja Soderstrom of Sedoti. Your line is open.
spk00: Yes, hi, thank you for taking my question. Congratulations to a great performance here. I'm just curious, and you might have touched on it, but I might have missed your commentary about the lower margins for the fourth quarter and what gives you confidence in your projection for fiscal 2023?
spk05: Yeah, so Anya, this is Todd. I'll start this, and then I think Pat's likely going to want to add in some commentary. But if we look at the fourth quarter, and again, I mean, at the midpoint, we're only guiding down 10 basis points, so it's not much. But the areas where we're seeing a little bit of pressure is continued growth investments. So our customer demand remains substantially above what our guidance range is. And then we're seeing some level of inflationary pressure on both the labor and materials when it's on spot buys that we have in place with us. And we're working with our customers in particular around the labor issue and having good success with that. So we view that as a nearer term issue. And the materials, obviously, there will come a time when the supply chain stabilizes and And then the final area is increased incentive compensation costs because of the improving financial performance that we've had during fiscal 22. And maybe I'll pass it along to Pat to talk about the longer term.
spk06: Yeah, and just one other comment on Q4. So I had mentioned gross margin is down 30 basis points. Anya, we are gaining about 20 basis points of operating expense leverage. So to Todd's point, we're down about 10 basis points. at our midpoint. Longer term, as we move through fiscal 23 with additional revenue and fixed cost leverage, I think we'll be approaching our target of 5.5%. So we do expect to see improvements in margins in fiscal 23. Okay, great.
spk00: That was helpful. I think you noted in your press release that EMEA included some strategic opportunities from customers. Can you just elaborate on those strategic opportunities?
spk01: Yeah, this is Steve. I'll comment on this one. The EMEA team has been doing an exceptional job through 20 and 21 with COVID in terms of driving performance for customers in spite of some of the challenges, and that's paying dividends. They had some pretty significant wins here in the quarter for that team. And it's all driven from existing customer relationships. So our ability to deliver for these customers in 21 and in the beginning of 22, we're definitely being recognized. The exciting part for us is in all of the wins that I talked about, each of them are either new platforms for where these customers are going with their future products. And so we're pretty excited about the opportunity of how the team has done to build the relationship with the customers and the fact that we're winning these new platforms It's kind of a leverage point for us as we move forward. So expecting continued good things out of the team and those customers in EMEA.
spk00: Okay, thank you. And then just in general, you know, as we see the weaker economy or potential recession, what do you see among, how has the sentiment or sort of discussions with your customer changed at all?
spk05: In general, they haven't changed much. I mean, there's a customer here and there that we're seeing some impact from, but I would say, you know, in a typical environment, I mean, that's typical in a normal environment that you're going to see up and downs with customers. And there's a number of them that just continue to report very strong demand. And as I mentioned in the prepared remarks, we have several customers that are reporting demand or backlog of their product through calendar 2023. So right now, in the markets that we serve, the demand still remains quite strong.
spk00: Okay. And just to remind us again that you're exposure to China and how you might be affected if it becomes more severe there.
spk05: Yeah, about just a little over 10% of our revenue comes out of China. So it's relatively small impact to China. And we've had no impact from any of the COVID lockdowns.
spk02: Okay, great. That was all from me. Thank you. One moment. Our next question.
spk03: And our next question comes from Stephen Fox of Fox Advisors. Your line is open.
spk10: Thanks. Good morning, everyone. First question, I just wanted to get back and talk a little bit about working capital and cash flows. So it sounded like you made some progress on the supply chain front during the quarter, but working capital is still a drag, a little bit worse on inventory days. Pat, can you just sort of talk about the path out of this sort of inventory hole, maybe over the next 12 months, if that's a reasonable target, and, you know, whether there's any momentum coming out of this quarter to start generating positive cash flows again. And then I had to follow up.
spk06: Yep. Yeah, I do see that coming out of this quarter in Q4. We do see positive free cash flow, and that is from an improvement in inventory days. I think as we go through 23, we'll see continued improvement. I mean, as I mentioned, Steve, we've been pretty successful with securing customer deposits to offset that inventory exposure. But I do see improvements as we move through 23, and I do expect strong free cash flow generation in 23.
spk04: Yeah, I'll just add this to Oliver. I'll add something there. I think it's good to reflect on what's driving that inventory. You have a number of dynamics. It could be used to offset supply chain risk. It could be used to – it's certainly being driven by extremely long lead time components. And then over that lead time, if our customer and forecast varies, and also in support of new program ramps. And so as those lead times could potentially pull back in the future, you'll see some change in that dynamic. As Pat mentioned, our customers are quite reciprocating back to us with customer deposits up to $26 million quarter over quarter. We are having more success with unlocking supply, as you saw with the strong Q3 revenue performance. And then lastly, I'll close by noting that we have some internal initiatives that give us optimism that we will be able to drive lower inventory days going forward.
spk10: Great. That's helpful. And then given that maybe healthcare could be the least economically impacted of your business segments, and I'm not saying that the others necessarily have to be cyclical, but can we maybe step back a little bit and just reset on, given all the new wins, et cetera, and market share gains, you know, what are the major sort of macro drivers, you know, equipment versus personal diagnostics, et cetera, et cetera, life sciences. You know, what are we thinking about in terms of what is the growth behind that healthcare and where could we still see maybe some capex pressure or not, if that makes sense?
spk01: Yeah, so this is Steve. Two parts of that. One is Todd talked about and I did as well in terms of new program ramps. We do have uh, you know, through those winds, some nice new program ramps that are happening. And so in spite of kind of the, some of the macro economic questions, um, you know, that revenue is growing. And so that's, what's giving us a one part of the optimism. The second part is we talk to our larger healthcare life sciences customers and they talk to their customers. Um, the, the inventory for finished goods in a lot of places is still depleted. And so, um, you know, even if there's a little bit of slowdown from, uh, an end market demand standpoint, the CapEx spending, and I think we've been hearing this a little bit, the CapEx spending still seems like it's going to be at a robust level to basically backfill some of those challenges that they've had in terms of getting all the equipment they needed over time. And so, you know, we're quite optimistic in terms of, you know, the forecast we're seeing, again, as Todd highlighted, a lot of customers are talking about demand needs going all the way into, you know, into 23. And so, you know, these Secular markets, especially in robotics and stuff like that, are all still doing quite well.
spk05: One thing I'd add, too, Steve, is if you went back to the last recession, the 2008-2009 timeframe, we were heavily dominated by imaging within our healthcare business, which I think was... probably some of the most economically sensitive pieces of equipment because of the investment that's there. That's a significantly lower piece of our business, somewhere around 30% or so of our healthcare sector. And if you look at now, there's a significant more life sciences within the portfolio, robotic assisted surgery, Things such as neurology. So the portfolio, I would say, is much more recession resistant, I think, than it was in the 2008-2009 timeframe, which it didn't even perform too badly then.
spk10: Right. That's super helpful. Thank you.
spk03: And our next question will come from Melissa Fairbanks of Raymond James. Your line is open.
spk11: Hi, guys. Great quarter. Really impressive execution, and I'm really thrilled to see it. I just had a quick question on the unfulfilled backlog of around 100 million. What are your expectations of when that could be cleared? Is it something that the Thailand facility will help to ease, or is this still just a function of supply constraints?
spk05: It's really a function of supply constraints, Melissa. So, I mean, we expect it to continue to roll out. So even though we had good success in the fiscal third quarter of clearing supply issues, which resulted in the revenue upside, we still saw demand that more or less backfilled what we were able to clear. So it continues to roll at this point. And until lead times get to a more normalized level, particularly For those legacy components that Steve had talked about, we're going to see a backlog.
spk11: Okay, great. Then from a modeling standpoint, how should we expect appreciation expense to trend now that Thailand is coming on? And then maybe one last question after that. And then to the extent that you're funding working capital investments with the balance sheet, would we eventually get to a more normalized interest expense as that inventory is cleared?
spk06: Yeah, Melissa, this path. So starting with depreciation, we do see that coming up. So in 23, you know, I think, let me back up. In 22, I think we'll be around $63 million of depreciation. Going into 23, I think it will be in the low 70s. So we will see that ticking up. And then to your point around interest expense, We are seeing a pretty significant impact from rising interest rates. So that's a large component of the increase. But to your point, as we free up cash, through liquidating inventory, we'll be bringing down our revolving borrowing, and that will benefit our interest expense. So I think if from a modeling standpoint, you want to use something similar to the Q4, fiscal Q4 guide, maybe on that lower end of $7 million per quarter, I think that'd be reasonable at this point.
spk02: Okay, great. Thanks very much. It's all for me. One moment.
spk03: And our next question comes from Paul Chung of JPMorgan. Your line is open.
spk08: Hi. Thanks for taking my question. So if you could talk about the kind of revenue boost from, you know, the new Thailand facility, you know, what's the contribution in the September quarter? And, you know, how do we think about contribution in kind of the next couple quarters as well in 23? And then I guess the new OpEx run rate and CapEx level move into fiscal year 23 as the facility ramps. But I think you also mentioned that you may be expanding the time of facility. So any initial guide on CapEx for fiscal year 23 would be helpful.
spk01: Yeah, this is Steve. I'll start and turn it over to Pat for some follow-up.
spk08: facility, so any initial guide on CapEx for fiscal year 23 would be helpful.
spk01: Yeah, this is Steve. I'll start and turn it over to Pat for some follow-on. You know, in terms of revenue with customers for the Thailand facility, it's kind of as Todd highlighted, we successfully passed through our first qualifications with our first product for a customer, and we'll begin shipments here in late Q4, beginning at Q1. So, from a revenue standpoint, it's minimal at this point. However, with that said, We have several customers and programs that we are looking to transition from our Penang facilities into Thailand. And so as we go through 23, we expect by the end of 23, the back half of 23, that that facility is, from a revenue standpoint, getting to a corporate level where it's basically absorbing all the expenses that we have that we're going into the facility. So the 23 will be a growth year for us, but Again, the prospects are pretty quick here, which is kind of what's giving us the view and the look. We actually have some visibility to what happens in the 24 and beyond where that facility, you know, could fill quicker than what would be normal for us. And so the strategy planning in terms of looking into 24 and 25 and beyond of what we need to do, we do see Thailand as being a growth location for us. We've been very happy with the employees we've been able to attract. The team's been doing an excellent job with its initial execution, and so kind of a mitigation strategy for Southeast Asia, we see it as a perfect place for us to continue to grow. Pat, maybe we'll turn it over to you then.
spk06: Yeah, from a P&L perspective, Paul, starting with fiscal 22, there's about a 10 basis point impact on overall margins from Thailand investments. As we move into 23, the first half will still – be a drag on margins. But as we move into the second half of fiscal 23, we'll turn that into profitability for that facility. And then I think you may have been asking about overall OPEX expense. And I had guided Q4 around 4.2%, 4.3%. And as we move into 23, I think 4.3% of revenue is a good number to use because we're going to want to still be investing in our people and in our systems. So we'll see the dollars increase, but I think the additional revenue will keep that percentage around 4.3%. Okay, great.
spk08: Very helpful. And then just on the manufacturing lens, you're still pretty comfortably above that billion dollar level on a trailing four quarters. Sounds like your visibility into 23 is quite good. So any comments there on wind momentum after kind of record levels in the second fiscal quarter?
spk05: Yeah. So I think in general, we feel really good about the winds in the funnel. And I mean, we wanted, because we dropped from the The large quarter in Q3, we thought it was important to at least address it, but we tend to not think of the wins as quarterly wins. We tend to look at trailing four quarters, and we believe we're positioned well with the size of the funnel to continue to stay above a billion dollars and then to drive further momentum as we look out into fiscal 23.
spk01: Yeah, this is Steve. One thing that's really important to understand is that we do not incentivize the business development teams to a quarterly wins number. Because the reality is that when we win an opportunity, it takes a couple of quarters for it to ramp into revenue. And so if we drove the teams to achieving a quarterly wins number, we believe that would drive bad pricing behavior. And so that's why we really stay focused on and working with the teams on what a trailing four quarter and an annual number kind of looks like. And so Again, that's a significant by design reason why we do that.
spk08: Understood. Very helpful. And lastly, you mentioned wins from existing customers kind of driving most of the funnel here. Are you displacing mostly in-house manufacturing or are these more competitive wins? And as we think about your longer term kind of growth outlook, if you could expand on that dynamic between existing customer expansion versus new customers and how that trend would be very helpful. Thank you.
spk01: Sure. Maybe the second part first, if you go back to 20 and 21, we had a pretty conscious effort to add new logos to the portfolio. And we talked about adding, I believe the number was like 22 in fiscal 21. And we're very pleased with that initiative and what we did. We are still looking to add new logos, but maybe not to the same extreme. And so they've come down a little bit. But again, very purposeful and pleased with the way the strategy is being executed. As we look to what are we winning with customers, it is a mix of new program ramps, and that's really where the execution by our operations helped significantly. We call that the execution dividend because when you execute really well, you get a really good chance of winning the next programs and the teams, especially like we talked about in Maya. THIS QUARTER, THEIR EXECUTION THROUGH 22 HERE IN THE BEGINNING OF 22 HAS REALLY HELPED THEM DRIVE UP THEIR WINDS PERFORMANCE. WE ARE TAKING MARKET SHARE GAINS WITH CUSTOMERS. I THINK OUR EXECUTION THROUGH COVID IS HELPING US. AND THEN LASTLY, YOU KNOW, THERE ARE CUSTOMERS THAT ARE, YOU KNOW, CONTINUE TO LOOK AND TALK TO US ABOUT, YOU KNOW, EXITING THEIR EXISTING MANUFACTURING. I'D SAY CURRENTLY THAT'S A LITTLE BIT LOWER THAN WHAT IT'S MAYBE BEEN IN HISTORICAL PAST. With macroeconomic uncertainties, especially as the thing starts to downturn a little bit, those conversations have a tendency to pick back up, which could be another opportunity for us. And so it's been a mix between the three, and I wouldn't say there's a trend right now in either one, but it is an active thing that we continue to manage, and we're pretty pleased with the way our market sector teams are really kind of driving it today. So as Todd kind of highlighted, pretty optimistic in terms of what we look like with our funnel going into 23.
spk08: Great, thank you so much.
spk03: Again, ladies and gentlemen, if you do have a question, please press star one one on your touch tone telephone. Again, please press star one one for any additional questions. And our next question will come from Matt Shearing of Stifel. One moment.
spk09: Good morning. Yeah, hi, good morning. I wanted to just drill a little bit more into really basically the dramatic change in terms of your operations, your ability to provide a significant upside in revenue the last two quarters compared to the previous three where you were missing numbers because of the supply constraints. One difference, obviously, is the fact that you've built a lot of inventory, but you also talked in the commentary about about changes in processes, changes in supply chain strategies. So could you talk a little bit more about what changes have been put into place and how that strategy plays over the next few quarters?
spk05: Sure. So one of the things I just want to bring us back to in some of the quarters that we had challenges, they were kind of twofold. There were some supply challenges, but there was also some pretty significant COVID impacts, particularly around Malaysia, which is a big chunk of our footprint. But what I'd say we've addressed on the supply issue is we're taking an approach that's much more focused around supply versus demand when we look at what our projections are, because we've historically had really good success regardless of what the demand is of meeting that demand. And with the current environment being what it is, that just doesn't occur anymore. So we're taking a much more supply-focused approach with our forecasting. So that's probably step number one. Step number two is just around the processes that we're driving in that – We're using a lot of automation, for instance, to find components on the open market. We've got some excellent processes in place with our customers to drive longer term forecasts, put long lead purchase orders in place, things such as that to be able to get supply in earlier. And then the approach we're taking, I think it has us focused on escalating the right parts as well, too, so that We're focused on the activities that can drive the most impact. So that's why, in the case of this quarter, we far exceeded our guidance. I mean, we were able to drive some components that we didn't have a line of sight to as we began the quarter because we were focused on the right things.
spk09: Okay, great. And you also mentioned on this call that some constraints are easing Could you talk about areas where you're still seeing issues, what types of components, and where you're seeing a little bit better supply?
spk04: Yeah, this is Oliver. I'll take that. Currently, across our commodity base, we're not really seeing any segments that are easing that I would put a trend to. I think if there was a glimmer of good news in the whole dynamic, I would say it's not getting worse. And the fact that it's been consistent here for the past couple of quarters, and then coupled in with the points that Todd made about the pivots we've made internally to ensure success, that's what helped create that revenue upside in Q3.
spk05: Yeah, the one thing I'd add too that I probably should have earlier is just the efforts of the team. We've got an excellent team that's working incredibly hard. We've added some great talent to it as well. So feel really good about the supply chain talent that we have in the organization.
spk09: Okay, thanks for that. And I also wanted to talk or ask Pat about the gross margin. One of the other EMS companies last night talked about some gross margin pressure due to the fact that there's a higher materials pass-through because of the component cost inflation, and that's just a one-for-one pass-through which drives up materials as a percentage of COGS. And are you still starting to see that at all as an issue, Pat?
spk06: Yeah, I mean, we saw some of that last quarter too, Matt. And fortunate for us, we've been able to earn through that with productivity improvements and the additional revenue with fixed costs. You know, is it 10, 20 basis points probably margin impact to us because we're not achieving profit on that inflated price at this point?
spk05: But what I'd say is we don't see that having any further negative impact to us moving forward. It's Basically, it is what it is, and it's factored into our projections.
spk06: Yeah, and I said earlier, of us moving towards that target of 5.5%, we continue to believe that even in this environment.
spk09: Got it. Okay. And then on the inventory cash deposit that you're getting at 25% of inventory, it's certainly a nice improvement from what we've seen historically in but you're still financing a lot of that inventory and working capital yourself. You're seeing that impact your bottom line through higher interest expense. So are there discussions with customers, particularly if these customers want to sort of behave in a more conservative manner going forward where they want to carry more inventory, or will you have discussions where maybe that number should go up? Maybe it should be 50% or a higher number.
spk01: Matt, this is Steve. Most definitely. Both in inventory as well as some of the inflationary costs, we're definitely having conversations with customers that, quite frankly, I've never had before in our industry as we're facing these dynamics. So, yeah, it's a continuing conversation about what is the right inventory level. If they want to have a higher inventory level, there's a deposit. There's also conversations about, you know, is there a carrying cost that gets associated with some of this. So it varies by customer and different discussions. But, yes, we are having those conversations.
spk09: Okay, very helpful. Thanks so much.
spk03: And I am showing no further questions. I would now like to turn the conference back to Todd for closing remarks.
spk05: All right. Thank you, LaToya. I would also like to thank everybody who joined our call today. We appreciate your support and your interest in Plexus.
spk03: This concludes today's conference. Thank you for participating. You may now disconnect.
spk00: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
Disclaimer