Plexus Corp.

If you would like to withdraw your question, please press star 1 again. Thank you. I would now like to turn the call over to Mr. Shawn Harrison, Vice President of Investor Relations. Please go ahead.

Shawn Harrison, Vice President of Investor Relations, Thanks, Liz. Good morning, and thank you, everyone, 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 guaranteed since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of factors that could cause actual results to differ materially from those discussed, please refer to the company's periodic SEC filings, particularly the risk factors in our Form 10-K filing for the fiscal year ended September 28, 2024, is supplemented by 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 at Plexus' website at www.Plexus.com, clicking on Investors at the top of that page. Joining me today are Todd Kelsey, President and Chief Executive Officer, Oliver Mim, Executive Vice President and Chief Operating Officer, and Pat Germain, Executive Vice President and Chief Financial Officer. With today's earnings call, Todd 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, Sean. Good morning, everyone. Please advance to slide three. Our team's agility and responsiveness in support of customer success enabled strong operating performance in the fiscal first quarter and robust financial results to begin fiscal 2025. We continue to forecast revenue growth across each of our market sectors for fiscal 2025. This growth is driven by new program ramps and share gains as trends in our sectors remain mixed associated with shifts in the timing of certain customer program ramps and changes in customer forecasts. We continue to build upon our efforts to drive sustained improvement in working capital efficiency and now forecast fiscal 2025 free cash flow of up to $100 million, which we will continue to utilize to create additional shareholder value. We remain confident in achieving meaningful non-GAAP EPS growth in fiscal 2025, benefiting from revenue growth in each of our market sectors, continued strong operating margin performance, and free cash flow deployment toward debt reduction in our share repurchase program. Please advance to slide four. Our team continues to execute at a high level. Fiscal first quarter revenue of $976 million met our guidance. As the quarter progressed, we experienced stronger demand with some customers in our industrial and healthcare life sciences market sectors, but also demand degradation with other customers in these sectors. In our aerospace and defense market sector, we experienced negative forecast adjustments related to well-publicized reductions in near-term commercial aerospace production rates. With our team driving incremental operating efficiencies, non-GAAP operating margin of 6.0% was near the high end of our guidance range and met our long-term goal. Non-GAAP EPS of $1.73 exceeded our guidance, benefiting from strong operating margin performance, further reduction in interest expense, and a slightly favorable tax rate. In addition, we delivered $27 million of free cash flow, significantly better than our expectations entering the quarter. Please advance to slide five. For the fiscal first quarter, we won 30 manufacturing programs worth $212 million in revenue annually when fully ramped into production, while expanding our funnel of qualified opportunities to $3.6 billion. Included in the wins result is another strong quarterly contribution within our healthcare life sciences market sector of $130 million, and exciting new growth opportunities for our aerospace and defense and industrial market sectors. In addition, our engineering solutions team delivered a win total that approached a two-year high, while our funnel of engineering opportunities continues to see increased diversification. We believe both are strong leading indicators of future Plexus revenue growth. Please advance to slide six. As part of our commitment to sustainable and responsible business practices, we engaged in a materiality assessment with our key stakeholders that helped identify important priorities and inform our fiscal 2025 areas of focus. These initiatives include Furthering the development of innovative capabilities to design, manufacture, and service products to be more sustainable for our customers, including product lifecycle assessments and creative packaging solutions. Continuing efforts to reduce our own environmental impact and operational efficiencies through setting enterprise emissions, waste, and water reduction goals. And building deeper intelligence on our suppliers related to the environment, labor, human rights, and ethics. Additionally, I'm proud to highlight our continued recognition as an employer and partner of choice. Since our update last quarter, we were recognized as one of the best employers in Penang by the Employers' Provident Fund of Malaysia. And we were awarded HR Asia's Best Companies to Work For in Asia for the third consecutive year. We were named a finalist for Wisconsin Manufacturers and Commerce Manufacturer of the Year. Our Kelso Scotland team was shortlisted for the Business of the Year Award and received Scotland's Developing the Young Workforce Champion Award. Finally, last quarter we highlighted the amazing engagement of our team members within their local communities through our volunteer time off charitable giving program. Through this program, we made financial donations to 24 global charities voted on by our team members in the fiscal first quarter. Thank you to our Plexus team, partners, and local communities whose commitment and dedication leads to our ongoing success and our ability to fulfill our vision to build a better world. Please advance to slide seven. Considering current market sector dynamics and typical seasonal cost pressures, we are guiding fiscal second quarter revenue in the range of $960 million to $1.0 billion. non-GAAP operating margin of 5.3% to 5.7%, and non-GAAP EPS of $1.46 to $1.61. As we consider fiscal 2025, I would highlight the following. Our outlook reflects the trends revealed through our constant dialogue with our customers and the current status of global trade policies while acknowledging an evolving geopolitical environment. At Plexus, we have and will continue to invest in tools, technology, people, and capacity to ensure we are proactive in supporting the needs of our customers in any of the regions we operate with a non-negotiable focus on zero defects and perfect delivery. Our historic focus on organic growth is a competitive advantage that provides a consistent OnePlexus experience to our customers in any of our global sites. Looking at the remainder of fiscal 2025, we expect to deliver sequential revenue growth during the back half of the fiscal year with strong operating performance as our ongoing focus on operational efficiency bears incremental dividends. In addition, we expect another year of solid free cash flow generation, which will deploy to create additional shareholder value. We continue to expect year-over-year growth from our aerospace and defense market sector, albeit more subdued than anticipated entering the fiscal year. We expect new program ramps and share gains to offset a more challenged near-term commercial aerospace market and our continued conservatism in forecasting that market. We continue to expect moderate growth in our healthcare life sciences market sector as we navigate through any remaining inventory corrections while benefiting from new program ramps, share gains, and a modest rebound in healthcare market demand. We continue to expect growth in our industrial market sector. This expectation reflects robust growth in semi-cap associated with an increasing contribution from new program wins and share gains realized during the past few years, but a broader global industrial market that remains challenged by inventory corrections and weak demand. Finally, we anticipate meaningful EPS expansion in fiscal 2025, leveraging revenue growth in each of our market sectors ongoing strong operating margin performance, and continued deployment of our substantial free cash flow generation to create additional shareholder value. I will now turn the call over to Oliver for additional analysis of the performance of our market sectors.

Oliver. Thank you, Todd. Good morning. I will begin with the review of the fiscal first quarter performance of each of our market sectors. Our expectations for each sector for the fiscal second quarter and some directional sector commentary for fiscal 2025. I will also review the annualized revenue contribution of our WINS performance for each market sector, and then provide an overview of our funnel of qualified manufacturing opportunities. Starting with our aerospace and defense sector on slide eight, revenue decreased 13% sequentially in the fiscal first quarter, below our expectation for a high single-digit decline. Near-term market challenges in the commercial aerospace subsector and a delay in the ramp of a recent manufacturing win more than offset strength in the space subsector. We expect revenue for the aerospace and defense sector to be up high single digits in the fiscal second quarter, reflective of the broad-braced increases in customer demand more than offsetting the near-term commercial aerospace market challenges. Our wins for the fiscal first quarter for the aerospace and defense sector were healthy at $29 million. As evidence of our growing success and momentum in supporting our U.S. defense customers and those of our allies, wins included our largest single award with any defense prime contractor. We also won the engineering development of a control unit for a defense aerospace program, reflecting our diversification efforts for our engineering solutions to enable growth. And finally, our position as the partner of choice for an existing customer was further strengthened with the award of a product line expansion for advanced air mobility and markets. Although we anticipate a stronger second half of fiscal 2025, the reduction in near-term commercial aerospace production rates is limiting the anticipated growth contribution from our ongoing wins and share gains. Long-term, we remain optimistic in delivering robust growth in the commercial aerospace subsector, given a substantial backlog of demand for new and more fuel-efficient airplanes. As such, for fiscal 2025, we now anticipate modest growth for our aerospace and defense market sector, with strong defense and space subsector demand being substantially offset by the commercial aerospace market production challenges and conservatism in our forecasting process. Please advance to slide nine. Revenue in our healthcare life sciences market sector was down 10% sequentially for the fiscal first quarter, below our expectations of a high single-digit decrease driven by demand softening inside the quarter. For the fiscal second quarter, we expect the healthcare life sciences sector to grow revenue high single digits, driven primarily by strength and new program ramps. Fiscal first quarter healthcare life sciences sector wins of $130 million marked the third consecutive quarter of strong performance. Wins included a substantial expansion of our engagement with an existing customer, which also establishes Plexus as a strategic supplier for this customer's ultrasound products. We will build this assembly in our Guadalajara, Mexico campus. We also won a substantial follow-on award for a monitoring device in our Penang, Malaysia campus. An existing customer provided a significant award for our team in Scotland. The product is an AI-enabled surgical visualization guidance system that supports robotic surgery. we will now be engaged with this customer in all three regions. All three of these awards resulted from our focus on operational excellence, which we define as zero defects and perfect delivery. As we look to our fiscal 2025, we remain optimistic for a return to growth for the healthcare life sciences sector, driven primarily from the strength of program ramps and share gains. Advancing to the industrial sector on slide 10, Revenue decreased 2% sequentially in the fiscal first quarter. The result was above our expectation of a mid-single-digit decrease and primarily driven by inside-the-quarter demand increases from customers in our semi-cap and test and measurement subsectors. Our fiscal second quarter outlook for the industrial sector of a high single-digit to low double-digit revenue decline reflects continued soft-end markets more than offsetting growth in the semi-cap subsector. The industrial market sector wins for the fiscal first quarter were $53 million. Included in this result is a significant win with a new customer for an enhanced industrial vision technology product to be built in our Guadalajara, Mexico campus. We awarded the work based on our proactive engagement and the breadth of our offering, including engineering product development and automation services. Our wins also included the addition of sustaining services for an existing manufacturing customer in the energy management subsector. This product is built in our Appleton, Wisconsin facility. We are also awarded a new product launch with an existing Semicap customer. The product will be built in our Penang, Malaysia campus. This strategic award is a reflection of the responsiveness and success we've demonstrated on prior product launches. Supporting our outlook of growing semi-cap momentum for Plexus, our wins this quarter included awards from all of our top five semi-cap customers. Our expectation of growth for the industrial sector in fiscal 2025 remains unchanged. Share gains and new program ramps are driving growth for our semi-cap subsector, while the broader industrial markets continue to reflect instability and soft demand. Please advance to slide 11. for a review of our funnel of qualified manufacturing opportunities. The funnel of qualified manufacturing opportunities remains robust at $3.6 billion and reflects a mid-single-digit sequential increase. In summary, the strength conveyed through our shared needs and multiple new program ramps, positive leading indicators from our engineering solutions, and a robust qualified funnel of manufacturing opportunities creates optimism for growth. even as many market subsectors are currently experiencing uncertain near-term outlooks or demand softness. I will now turn the call over to Pat.

Pat? Thank you, Oliver, and good morning, everyone. Our fiscal first quarter results are summarized on slide 12. Gross margin at 10.3% was toward the top end of our guidance and consistent with the previous quarter. Selling and administrative expense of $49 million was slightly above our guidance primarily due to additional stock-based compensation expense. Non-GAAP operating margin of 6% was also toward the top end of our guidance and delivered on our target margin of 6% or above for the second consecutive quarter. Our regional teams drove operational efficiencies and managed spending, which helped mitigate the impact of losing substantial fixed cost leverage given the lower sequential revenue. Non-operating expense of $3.4 million was favorable to expectations due to improved foreign exchange performance and lower than anticipated interest expense as we deployed free cash flow to reduce debt. Non-GAAP diluted EPS of $1.73 exceeded the top end of our guidance due to the previously mentioned factors and a slightly favorable tax rate. Turning to our cash flow and balance sheet on slide 13, We were extremely pleased with our free cash flow performance to start fiscal 2025. We delivered $54 million in cash from operations and spent $27 million on capital expenditures, resulting in free cash flow of $27 million. This result was above our expectations and represented our best fiscal first quarter cash flow performance in five years. We utilized our strong free cash flow to continue support of our share repurchase program, acquiring approximately 85,000 shares of our stock during the quarter for $13 million. We have approximately $37 million available under the current $50 million authorization. Similar to the prior quarter, we ended the fiscal first quarter in a net cash position. We had $15 million outstanding under our revolving credit facility with $485 million available to borrow under the facility. In addition to increasing our cash balance, we have also reduced our borrowing by more than half over the past year. Our gross debt to EBITDA ratio is conservative at less than one. For the fiscal first quarter, we delivered return on invested capital of 13.8% which was 490 basis points above our weighted average cost of capital. Our invested capital base is significantly lower due to our efforts to drive sustained improvements in working capital. This combined with improved operating performance drove better ROIC over the comparative periods. Cash cycle at the end of the fiscal first quarter was 68 days, five days favorable to expectations, and sequentially higher by four days. This result represents close to a 30% improvement in our cash cycle days from one year ago. Please turn to slide 14 for details on our cash cycle. Lower revenue was a leading factor to the sequential increase in several cash cycle categories. While days in inventory sequentially increased, gross inventory dollars continued to decline this quarter by over $20 million. This reduction represents the fourth consecutive quarter of decline, with gross inventory now $360 million lower than the fiscal 2023 high point. Days in accounts payable sequentially increased by 10 days due to the lower revenue and timing of supplier payments and inventory receipts. With the return of close to $85 million in customer deposits, we experienced a three-day reduction in advance payment days. As Todd has already provided the revenue and EPS guidance for the fiscal second quarter, I'll review some additional details, which are summarized on slide 15. Fiscal second quarter gross margin is expected to be in the range of 9.7 to 10%. At the midpoint, gross margin would be approximately 50 basis points lower than the fiscal first quarter. This reduction is primarily due to our typical seasonal compensation cost increases, and the reset of payroll taxes for U.S. employees. We expect selling and administrative expense in the range of $48.5 to $49.5 million, which is consistent with the prior quarter despite seasonal compensation headwinds of more than $1 million. Note that the estimate for selling and administrative expense is inclusive of approximately $6.2 million of stock-based compensation expense. Fiscal second quarter non-GAAP operating margin is expected to be in the range of 5.3% to 5.7% exclusive of stock-based compensation expense. Non-operating expense is anticipated to be approximately $4.5 million. We continue to anticipate low interest expense with our reduced borrowing. For the fiscal second quarter, we are estimating an effective tax rate between 14% and 16% and diluted shares outstanding at 27.7 million. In support of anticipated program ramps, our expectation for the balance sheet is that working capital investments will increase compared to the fiscal first quarter. Based on our revenue forecast, we expect this level of working capital will result in cash cycle days in the range of 69 to 73 days. At the midpoint, cash cycle days would be sequentially higher by three, but lower by 20 days compared to last year's fiscal second quarter. With investments to support anticipated program ramps, we expect breakeven to a slight usage of cash for the fiscal second quarter. Fiscal 2025 capital spending is still expected to be in the range of $120 to $150 million, increased from the $95 million spent in fiscal 2024. Despite higher capital spending and investments in working capital to support growth, our strong fiscal first quarter free cash flow positions us to now generate up to $100 million of free cash flow for fiscal 2025. With that, Liz, let's now open the call for questions.

At this time, I would like to remind everyone in order to ask a question, please press start and the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of David Williams with Benchmark. Please go ahead.

Hey, good morning, gentlemen. Thank you for taking my questions. I guess maybe first, if you could talk a little bit about the industrial segment. And you talked about the SEMICAT being strong, but the degradation in some of the demand trends in the broader sector. areas. Can you maybe run through that a little bit deeper, maybe some puts and takes, and where you're seeing that weakness, and is this something you expect to continue through the year, or is this more short-term? Just any color there I think would be helpful.

Yeah, David, this is Todd, and good morning. I'll start with a discussion around SemiCap, and then I'll turn it over to Oliver, and he can get into some of the broader dynamics within the industrial markets. So semi-cap, we're expecting a really strong growth here. I would say high teens on order for us as we look at it right now. Now, we realize and understand that's above market growth right now, but it continues a trend we've had over the past near decade of outgrowing the market because of share gains and new program wins. So we expect to continue that trend, and it's supported by Even further out, as Oliver mentioned, through the program wins that we had this quarter that are reflected across all five of our top customers.

Yeah, and it's reflecting on the broader industrial markets, really. I mean, we're seeing it across, David, most of our other subsectors. So communication, system measurement, electrification, automation, all seeing softer demand. We do anticipate that in the longer term that will rectify. But as Todd noted, that's currently offsetting some of that semi-cap growth.

Great, thanks. And then maybe secondly, I know that aerospace and defense has been an area that you've been really optimistic about, just the growth trends there. And it seems like clearly the Calm Arrow is having some way or weighing that down this year. But is there anything else we should be thinking about there? It feels like maybe that Boeing business should come back. this year and just wondering if there's any catch up there and then if there's anything else within that aerospace and defense outside of that that you're seeing real weakness in that gives you any indication that it's going to be a softer year this year. Thank you.

Yeah, I think David, you're hitting on some of the key points. I think long term the dynamics in our aerospace and defense sector are fantastic and we're really bullish about the long term growth prospects for the sector. We had been quite bullish about fiscal 25 entering the year, But with some of the production challenges and challenges getting production rates up within some of the OEMs in that space, it's had a dampening of demand for this fiscal year that's offsetting some of our other sectors. So if we look at our other subsectors, excuse me, if we look at those which defend space and security, all are showing nice growth trajectories this year, particularly defense and space. Longer term outlook is great for the whole sector. I mean, one of the things I'd like to come back to is when we look at commercial aerospace, there's actually an 11 and a half year backlog with the OEMs in that space. So that demand, it'll pick up as the production rates pick up. One other point too is we've taken a conservative bias in our forecasting as well too, because we really don't want to get caught by another slowdown of production within that space.

Great. Thanks so much. Certainly appreciate it. I'll jump back in the queue.

All right. Thanks, David.

Go ahead. Your next question comes from the line of Jim Riccitti with Needham & Company. Please go ahead.

Hi, good morning. A question just I'm sure you've been getting quite a bit from investors. How are you guys, as well as your customers, just thinking about tariffs, which admittedly is a moving target? And maybe you can remind us of the impact during the first go-round with this administration and possibly the differences we might see this time around. Again, recognizing that this is still pretty fluid.

Yeah, so Jim, good morning.

This is Todd. I'm going to start, and I'm going to talk about how we're thinking about tariffs today. And then I'm going to pass it over to Oliver, and he can provide a little bit more detail as to what we did previously. But I would say, as you mentioned, it's very fluid. So what we do is we're continuing to monitor it very closely. One of the things we've done over the course of the past year is we've invested quite heavily in our trade compliance organization to monitor and help our customers. So we've invested in people, organization, and tools to be better equipped to provide great solutions on that front. A couple of things, though, just to remind people of is, one, From a footprint standpoint, we're in really good shape. So if we need to move products around based off of tariffs, as they would potentially occur, we're well positioned to be able to do that. Also, I'd point out that when we look at the cost of tariffs, those are costs that we pass on to our customers. So we're cognizant that it could impact demand overall, but we shouldn't bear those costs directly within our business. So again, we're continuing to monitor it very closely and just taking a wait and see, but we'll respond very rapidly as things occur and change.

Yeah, this is Oliver. Maybe just to add a little more color and support of Todd's commentary there. Todd talked about our global trade organization. We've aligned that all under one global trade organization. And one of the things that enables us to do is be very nimble, consistently execute across the globe and flow resources to wherever they're needed. Todd also mentioned investment and tools, so specifically their trade management system. And what that enables us to do is our folks are more efficient and they can focus on value add activities for our customers. By way of example, we can assess their supply chain risk of a customer's bomb and then offer scenario planning back to the customer. And then the last thing I'll mention is the fact that just with our strong playbook and recent history here, we've got really strong customer engagements. trade organization leadership to trade organization leadership, and we think that will bear out well here in the coming quarters.

A couple of points I'll add on to Jim, your comments about how did we address the tariffs last time. We ended up moving facilities on a few different products, not a huge amount. We certainly sourced components into different regions, and these were primarily China-impacted tariffs at that point. So we did that. But also, again, going back to the whole cost of tariffs, we did not absorb cost when it came to tariffs.

Got it. Thank you. And I wanted to go back to the earlier question just about industrial and SEMICAP. You know, there are clearly some areas of strength and weakness in industrial, which I think we appreciate. It's a little interesting to hear you guys talk about the robust growth you're anticipating in Semicap. Just given the increased uncertainty around the WFE market in the last couple of months, are you having, I assume you're having ongoing conversations with customers. Has anything changed with respect to what you're hearing from some of those customers?

Yeah, I wouldn't say it's changing. Markedly. And I think when we look at semi-cap on a customer by customer basis, I think some are bullish and some are maybe a little bit more conservative based off of what their markets are. You know, we're certainly not betting on WFE and wafer fab equipment. And a lot of this, again, comes back to share gains that we've been able to take over the course of the last couple of years.

Got it. Okay, thanks. I'll jump back in the queue.

Your next question comes from the line of Stephen Fox with Fox Advisors. Please go ahead.

Hi, good morning. I was wondering if you could talk a little bit about, excuse me, trends in Europe. It looks like your revenues in Europe are down particularly strong. You just turned the corner in terms of turning that region profitable. So what was driving most of the decline? How are What's the outlook for profitability out of the region this year? And then I had to follow up.

Yeah, I'll start and then see if any of my colleagues want to add anything. And this is Oliver. Yeah, just in terms of our outlook at Europe, what you're seeing is essentially the same trends that Todd's talked to from our various subsectors in Europe with the extra dynamic that I would say that the industrial softness that we're seeing on a macroeconomic basis is hitting Europe harder than our other regions. And so I think that's what you're seeing in the numbers there.

Yeah. Steve, from a profitability standpoint, I mean, we have seen improved utilization. We have done some restructuring in that region. We've had a real focus on profitability with customers. And I think that's starting to show through with the profitability and our expectations for the remainder of this year.

That's helpful. And then just as a follow-up, I know it's early days with the new Trump administration, but is it affecting maybe what type of end markets look attractive to you? Maybe over the next couple of years, obviously, you've had some electrification wins, policies changing, maybe diverting resources based on that or based on what your customers are saying. Is that something we should be watching for as maybe this year unfolds? Thanks.

Yeah, I think it's potential there, Steve, that it could impact markets. I mean, one of the things that we're seeing in electrification in particular is there's extreme softness in Europe. There's actually a bit of a growing demand in the U.S. just from the standpoint that it's starting from zero, in essence. So while it may slow the ramp, I think Um, I think it'll help us from a end market standpoint, but we're going into our strategy planning process right now. And we're looking pretty deeply at, at markets and, you know, where do we think we need to potentially expand our markets and our market focus a bit, a bit further than what it's maybe been today. And, and that'll certainly have an impact on, on what happens within the Trump administration and what I would say becomes more favored industries.

Great. That's all helpful. Thank you.

Your next question comes from the line of Steve Barger with KeyBank Capital Markets. Please go ahead.

Hey. Good morning, gentlemen. Hey, Steve. For SemiCap, I hear you on outgrowth due to share gains, but for your existing programs, does this seem like a really durable demand increase, or does it feel like some of these orders are in excess of demand? to build some inventory?

Yeah, I don't think it seems an excessive demand. Now, as I mentioned, though, Steve, it varies on a customer by customer basis. I mean, certain process steps and certain customers have more bullish demand than others do, and it varies. So I wouldn't call it necessarily a strong demand environment in Semicap right now, but it's certainly stable on aggregate.

And presumably sequentially increasing as you think about the back half of the year? Modestly. Okay. And then you mentioned conservatism in your guidance for aerospace and defense several times. Can you just talk about what that means from an internal modeling process? How are you approaching those assumptions and staging the production arm relative to that conservatism?

Yeah, I'm going to start here, Steven. Sean may have some stuff he wants to add as well, too. But when we look at the aerospace and defense sector, I mean, we have a really good understanding of what we build, what plane it goes on, in essence. So we understand where it's headed, what the end markets are. And when we talk about conservative, what we do is we look at production rates for certain models, and we de-rate those based on what we think could be more of a Call it a worst-case scenario.

Understood. Sean, anything? Todd hit it right on the head. Nothing to add to that. Thanks. Thank you.

Your next question comes from Ruben Roy with Statefield. Please go ahead.

Yes, hi. Thank you for letting me ask a question. Todd, you talked, I think, probably about my question a bit here. So sorry if I'm repeating, but I did want to tie back some of the commentary around customer discussions, tariffs, et cetera, to one of the comments you made in your prepared remarks, which was you were seeing some changes in customer forecasts. So you talked about aerospace and defense being down a little bit more than you had expected. And then Oliver talked about demand softening inside of the quarter in healthcare and life sciences. Just wondering, If that's driving the bulk of the changes in customer forecast, or if it was broader based, if the customers are pausing a little bit, you know, given some uncertainty out there, would love a little more detail around that comment. Thank you.

Yeah, I mean, what I'd say, Ruben, is that there's just a fair amount of volatility, particularly around, well, the healthcare and the industrial sectors, some ups, some downs, probably slightly biased to down. And then aerospace is really commercial aerospace is the trend that has been impacted and that's just a result of production rates that are going on within commercial aerospace right now.

Yeah. Hey, Ruben. It's good to hear you on the call, Sean. I would say of the volatility, the variances we had seen in customer forecast in the quarter, there was almost no mention of the change in administration or tariffs or anything of that nature either. pushing out demand, pulling in demand. It was a rounding error if that occurred. And so the changes we've seen in forecasts are more based around the market fluctuations Todd mentioned than any other factor.

Great. I appreciate that. Just a quick follow-up. It's great to hear about the engineering solutions getting to a two-year high. Wondering, you did talk about increasing diversification. I would imagine that gives you a little more visibility as well into sort of revenue, albeit it could be further out. But am I thinking about that correctly? As you get involved on the solution side, are you gaining kind of more visibility into timing of program ramps and that type of thing?

Yeah, definitely, Ruben. I mean, one of the things that's –

important is that when we take on an engineering program, it's almost a near certainty that we're going to manufacture that program as well, too. So it tends to be a nice predictor for, call it, future manufacturing wins and future manufacturing growth. And we particularly like the increased diversification from a couple of different fronts. One is I think it gives us an ability to be able to grow that that service faster, and it's also high margin in addition to driving revenue growth. And it also gives us better insights into the rest of our markets as well too.

Good stuff. Thank you. Thank you, Reuben.

Your next question comes from the line of Anja Satterstrom with Siddhoti. Please go ahead.

Hi, thank you for taking my question. I'm wondering about the cap expense for the year. You have guided that to be up this year compared to last year. Do you still expect that? And how should we think about that for 2026?

We do expect that, Anya. And we had mentioned last quarter that we do have a new facility going up in Malaysia. And that's about 60 million of that range of 120 to 150. For 26, I think we'll see that come back in line. And if you look at capital spending the last couple years, the way I look at it is trying to peg between 2.5% to 3% of revenue. Fiscal 23 and 24 were below that range. Fiscal 25 may be slightly above that range on average. We'll be with pretty much right in the middle of that 2.5% to 3% range. I would mention, though, I think it's important to note that even with that higher capital spending and some investments in working capital for our program ramps this year, we're going to deliver a really nice free cash flow year of up to $100 million. So pleased with the results this year, especially coming off the year last year where we saw a lot of reductions in working capital.

Okay, thank you. And then just in terms of the gross margin, it seems like that's going to be hit a bit this quarter from the Merit Pays or Stock Place Compensation. How should we think about that for the second half?

Yeah, we typically, I mean, this quarter we're going to be hit with about 60 basis points of margin from the compensation and payroll reset. We typically start to see productivity improvements even this quarter. to help absorb that impact. And so growing the margin back up to around 10% gross margin the rest of the year, I think is reasonable to model.

Okay, thank you. That was all for me.

Okay. Again, if you would like to ask a question, press star one on your telephone keypad. And your next question comes from the line of Jim Ricciotti. with Neatham and Company. Please go ahead.

Yeah, I wanted to go back to some of the larger program wins you alluded to. Congrats first on those. What I'm trying to understand is, you know, I assume that this also started with engineering services activities you had with these customers. You know, when did the original work start to the point where you actually are in a position now where you see the program, you see the size of the programs? I mean, trying to get a better understanding of that lag that you guys have talked about between engineering services and seeing those program revenues.

Yep. Yeah, Jim, this is Oliver. I'll start, and then if any of my colleagues want to add anything in. I would say that for some of the specific programs that I've mentioned here today relative to the larger wins, those were not engineering developments. And then the other thing I'll point out is that from a sales cycle, it can be long. So from the first mention with the customer that there's something there that they might have interest for us to produce for them to the point at which we have that closed, a contract, a forecast, and we can announce that to yourself as a win could be multiple quarters.

And then, Jim, you know, once we announce that manufacturing win, it can be from a year and a half to three years before, you know, we're producing product close to the expectation of normalized volume, depending upon the regulatory dynamics associated with the product, where it's being launched. And so just because we win something today, the likelihood of it actually affecting fiscal 25 is low, but 26, 27, you know, gives us a lot of momentum. And so if you think back to last year of all those healthcare wins, that provides us a lot of momentum, let's say, for example, within the healthcare life sciences sector in years to come.

Yeah, just building on that provided example. Just one real quick, Jim, specific example of what Sean is talking about there. is if you compare a win with a customer versus a target with a customer, it's likely they might have engaged us earlier to start allowing us to pipeline the supply chain, which can obviously be a number of quarters long. Whereas if it's a new customer to Plexus, we're only going to start that after we get the program award. So that could also cause some variation across programs.

Some of the major things you talked about today potentially could impact the business in fiscal 26.

David Miller- You definitely correct definitely could even it could even be a little bit late 25 but it'll be it'll be small compared to 26.

David Miller- Okay, and then final question from me at the improvement that you. David Miller- are seeing cash flow just relative to a few months ago, how much of that is due to can just keep one being better. Or is it, and I assume it's principally due to greater working capital efficiencies? Would you think about the year as a whole?

Yeah, I'd say that's the case, Jim. I mean, we were really pleased with the first quarter around activities around past due receivables, aged inventory, collections from customers for deposits, a lot of effort put in and I think the last four years we've seen negative free cash flow in the fiscal first quarter, and this is the first time in five years we've seen positive. So there is some movement probably from Q2 to Q1 of that improvement, but we're still overall improving the full year for free cash flow, so.

Just to add a little extra color there, this is Oliver. Part of what we're experiencing today is the sustained work and benefit from the focus that we put on free cash flow across the organization in fiscal 2024. So we talked about some of that previously. We really drove organizational awareness and education down into the organization at the decision-making level. Lots of good visual management tools to help connect action to outcome. And all of that, I think, you know, created momentum for us. And part of what we're experiencing here is the continued momentum from us as we built that into our systems of management. Thanks a lot.

Your next question comes from the line of Melissa Fairbanks with Raymond and James. Please go ahead.

Hey, guys. Thanks so much. At the risk of belaboring a subject, I wanted to kind of dig in a little bit on what you're seeing in industrial. On the SEMICAP side of things, excuse me, are you willing to quantify how much SEMICAP and maybe or maybe SEMICAP plus test is as a percentage of the total industrial revenue?

Yeah, it's right around half of the overall industrial revenue.

Okay, great. That's super helpful. On the comm side of things, I know that that business, you know, you had seen a little bit of tailwind there. That business tends to be a little bit more cyclical than maybe some of your other companies. broader based or less mature end markets. I was just wondering if you could give a little bit of detail what you're seeing there on the comp side. I know it's a relatively smaller piece of the business, but still obviously impactful.

Yeah, it's a small chunk. Probably the best way to describe it, if I was going to use a word, would be choppy.

There's been periods of up and periods of down is kind of the way I would call it. So We're looking at that. I mean, there's still the potential of some of the efforts around the BEAT initiative, too, that could provide some upside as we look further out.

Okay. How short cycle does that business tend to be? I mean, do you get at least a little bit? I've dealt with choppy in that end market for my whole career, but it tends to be a little bit shorter cycle than some of the things that you see in aerospace or the rest of industrial.

Yeah, this is Sean. As you well know, forecasts change inter-quarter. Okay. That market, there is a long-term trajectory there. There's technology transitions, which we are participating. But the inter-quarter and quarter-to-quarter dynamics can be, as Todd said, choppy.

Okay, great. Good to know that hasn't changed. Maybe one quick question for Pat, just looking at the tax rate. you had a little bit of a favorable tax rate benefit in the December quarter, March quarter, we're looking at full tax. Is that geographic mix-based, or is there something going on there that we need to contemplate going forward?

No, you're right. It's geographic. There is nothing significant that jumps out in the last couple quarters impacting that tax rate. It's more the profitability we're recognizing in certain countries that may have a benefit from a tax holiday. And obviously, we're watching closely the new administration and what that could mean for tax legislation over the next several years.

Okay, great. Thanks, guys. That's all for me.

All right. Thanks, Melissa. Thanks.

There are no further questions at this time. I will now turn the call back over to Todd Kelsey. President and CEO for Coase and Remark.

All right. Thank you, Liz. I wanted to take us back to our expectations around fiscal 25 before exiting the call. And what I want to point out is that our expectations haven't changed much from what they were a quarter ago, other than the exception of commercial aerospace. So we're still expecting low to mid single digit revenue growth in the year and growth across each of our market sectors. We started off the year in Q1 with hitting our target margin of 6% non-GAAP, and we anticipate that we'll get back to that level as we move through the fiscal year. And that's despite the 70 or so basis point headwind that we face from merit and U.S. payroll in Q2, of which we've already overcome a piece of that as we're entering into Q2. The other thing I want to remind is our free cash flow is looking strong and approaching 100 million dollars so when you combine all those factors together we're expecting solid eps leverage throughout the fiscal year and finally again i'd like to thank everybody who joined us today our shareholders investors analysts and our plexus team members so we appreciate your support ladies and gentlemen that concludes today's call thank you all for joining you may now disconnect