Plexus Corp.

After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one in your telephone keypad. Thank you. I would now like to turn the call over to Mr. Sean Harrison, Vice President of Investor Relations. You may begin.

Good morning and thank you for joining us today. Some of the statements made and information provided during our call today will be forward-looking 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 10K filing for the fiscal year ended September 28, 2024, is supplemented by our Form 10Q filings in the Safe Harbor and Fair Disclosure Statement and our press release. We encourage participants on the call this morning to access the live webcast and supporting materials at Plexus's website at .plexus.com, clicking on Investors at the top of that page. Joining me today are Todd Kelsey, President and Chief Executive Officer, Oliver Minn, 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 commitment to our customer success during dynamic market environments is enabling a growing breadth of new program wins across Plexus's solutions. During our fiscal second quarter, we achieved our largest ever win for our sustaining services and our best quarterly engineering solutions wins performance in more than five years. In addition, our continued progress with initiatives to increase our operational and working capital efficiency resulted in robust fiscal second quarter financial performance. We see this momentum sustaining as we drive actions to navigate the current environment. In order to proactively help customers navigate current market complexities, we are strategically investing in talent such as our trade compliance and logistics organization. We also continue to invest in technology, including our growing internal use of AI, facilities, including our new site in Malaysia that will open this summer, and advanced capabilities, including numerous tools focused on process automation, efficiency, and achieving zero defects. As we look ahead, we continue to anticipate up to $100 million of free cash flow for fiscal 2025. Our substantial liquidity and robust free cash flow generation provides the opportunity to create additional shareholder value. Finally, while conservatively assessing the remainder of the fiscal year and acknowledging the uncertainty associated with tariffs, we continue to anticipate achieving meaningful EPS growth in fiscal 2025, capitalizing upon revenue growth in each of our market sectors, sequential revenue growth for the remainder of the fiscal year, robust operating margin performance, and ongoing free cash flow deployment. Please advance to slide four. Revenue of $980 million met our guidance. As the fiscal second quarter progressed, we saw signs of incremental strengthening and outlooks from healthcare customers, which offset modest reductions in other markets. Non-GAP operating margin of .7% met the high end of our guidance range. Our operational efficiency efforts and stronger performance from our engineering solutions and sustaining services helped to offset a portion of the typical seasonal cost headwinds. Non-GAP EPS of $1.66 exceeded our guidance, benefiting from strong operating margin performance, as well as slightly favorable tax rate and lower than anticipated non-operating expenses. Finally, we delivered $16.5 million of free cash flow, significantly better than our expectations. Please advance to slide five. For the fiscal second quarter, we won 42 manufacturing programs worth $205 million in revenue annually when fully ramped into production. During the quarter, we closed our largest ever sustaining services win in support of creating success for an industry-leading healthcare customer. Also included in the quarterly wins are exciting manufacturing share gains and opportunities to support growth technologies in all of our market sectors. Furthermore, we generated the highest quarterly wins performance for our engineering solutions since the fiscal fourth quarter of 2019. The engineering wins performance reflected strong engagement across all of our market sectors, highlighting the extensiveness of our capabilities and effectiveness of the team's diversification efforts. The breadth of this quarter's wins performance across our solutions, market sectors, and technologies is a strong leading indicator of future Plexus revenue growth. Please advance to slide six. Our commitment to sustainability is integrated with our core value of innovating responsibly as we boldly drive positive change and promote a sustainable future. Our people are the heart of who we are and what we do. I'm therefore incredibly proud to share that Wisconsin manufacturers and commerce selected Plexus as manufacturer of the year mega category in recognition of our innovation, philanthropy, technological advancements, commitment to customer satisfaction, financial performance, and creation of quality jobs. Thank you to our incredible team members, partners, and local communities whose contributions support fulfilling our vision of helping to create the products that build a better world. We also continue to deliver innovative solutions to create customer success. During our fiscal second quarter, our Plexus Xiamen team celebrated a new partnership with GE Healthcare China to advance the green supply chain ecosphere initiative by focusing on maximizing the recycling and reuse of valuable medical equipment and promoting sustainability. We also recently partnered with our customer Bevy to celebrate Earth Day. Bevy's mission is to unbottle the future through their smart bottle-less water dispensers. Throughout our partnership, Bevy's smart water dispenser, which is manufactured at our Appleton, Wisconsin facility, has saved the equivalent of over 218 million plastic water bottles from landfills. Our commitment to delivering excellence includes reducing our environmental impact. Our team members in Aradia, Romania, joined the Planning HOPE initiative, working with over 100 volunteers to plant 1,000 trees. And finally, we are excited to announce the release of our annual sustainability report later in the fiscal third quarter. The 2024 report highlights our continued commitment to innovating responsibly as we've always been driven to do more for our customers, our team members, and the world. Please advance to slide seven. We're guiding fiscal third quarter revenue of $1.00 to $1.04 billion, non-GAAP operating margin of 5.7 to 6.1 percent, and non-GAAP EPS of $1.65 to $1.80. While conservatively assessing the remainder of the fiscal year and acknowledging the uncertainty associated with tariffs, we continue to anticipate sequential revenue growth for our fiscal fourth quarter, combined with another quarter of strong operating margin performance. This outlook supports a continued view that Plexus will achieve meaningful EPS growth in fiscal 2025 with revenue growth in each of our market sectors, robust operating margin performance, and ongoing free cash flow deployment. We continue to expect -over-year growth for our aerospace and defense market sector, supported by robust demand for our solutions supporting defense and commercial space products. Growth forecasts improve slightly in our health care life sciences market sector. We continue to benefit from new program ramps and share gains, while health care customer demand is improving after a prolonged period of inventory correction. We continue to expect growth in our industrial market sector. This expectation reflects robust growth in semi-GAAP associated with contributions from new program wins and share gains amidst an outlook of modest semi-GAAP market growth. In addition, we see some early signs that inventory corrections may have peaked in the broader industrial market. Finally, Plexus uniquely supports customer success, leveraging our comprehensive product lifecycle solutions and passion for operational excellence delivered through our globally united team. Our ongoing strategic investments in talent, technology, facilities, and advanced capabilities position Plexus to proactively navigate evolving landscapes and dynamic market environments to enable our customers' success. 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 a review of the fiscal second quarter performance of each of our market sectors, our expectations for each sector for the fiscal third quarter, and some directional sector commentary for fiscal 2025. I will also review the annualized revenue contribution of our wins performance for each market sector, and then provide an overview of the funnel of qualified manufacturing opportunities. Starting with our aerospace and defense sector on slide eight, revenue increased 8% sequentially in the fiscal second quarter, meeting our expectation of a high single digit increase. Continued softness in the commercial aerospace subsector was offset by demand increases in both the defense and space subsectors. We expect revenue for the aerospace and defense sector to be up mid single digits in the fiscal third quarter, reflective of broad based increases in customer demand and an increase in volume for a new product ramp. Our wins for the fiscal second quarter for the aerospace and defense sector were healthy at $27 million. Reflective of our continued strength of execution, we received awards for products currently manufactured in-house at two of our customers in the defense subsector. We also received an award for further new product launch builds for a customer that continues to invest in their space product portfolio. Plexus is the sole provider for these new product launch builds. And our focus to expand our engineering design services with aerospace and defense customers continues to build momentum with the award of our largest ever aerospace and defense sector design project. Consistent with our outlook last quarter, we expect continued sequential growth as we finish the fiscal year, resulting in modest growth for our aerospace and defense market sector in fiscal 2025. Strength in the defense and space subsectors is being substantially offset by reduced near-term demand in the aerospace subsector, meeting the impact of robust underlying long-term commercial aerospace market demand and the anticipated growth contribution from our ongoing wins and share gains. Please advance to slide nine. Revenue in our healthcare life sciences market sector was up 10% sequentially for the fiscal second quarter, beating our expectation of a high single-digit increase. Inside the quarter, demand increases across a number of customers contributed to the strong result. For the fiscal third quarter, we expect the healthcare life sciences sector to grow revenue mid-single digits, driven primarily by increased end-market demand and supported by strength from new program ramps. Fiscal second quarter, healthcare life sciences sector wins of $118 million included our largest ever award for sustaining services. This substantial award from an existing customer marks a shift in the strategy from in-house to outsourced services. Our strong history of execution with this customer and the strength of our executive relationships contributed to the award. This product will be serviced in our Guadalajara, Mexico campus. Our wins also included sub-assemblies for a customer's next generation MRI support equipment. Again, our historical strength of execution and executive partnerships contributed to the award. In this instance, our customer engaged exclusively with Plexus on this opportunity. These assemblies will be built in our Penang, Malaysia campus. Our Penang, Malaysia campus also received an award to build sub-assemblies in support of an orthopedic robotic assisted surgical system. As we look to the full year, our outlook for fiscal 2025 for the healthcare life sciences sector has slightly improved on the strength of new program ramps and multiple customers increasing demand. Advancing to the industrial sector on slide 10, revenue decreased 10% sequentially in the fiscal second quarter. The result was in line with our expectation of a high single digit to low double digit revenue decline. Near term demand increases across a number of customers for both existing and new product production offset other forecast changes in the portfolio. Our first goal third quarter outlook for the industrial sector of a low single digit increase reflects demand strength in our semi-cap sub-sector and new program ramp strength in our energy management sub-sector. The industrial market sector wins for the second quarter for 60 million dollars. As a result of the continued non-linearity of the new technology transition within the broadband communication sub-sector, our customer has awarded us further production of legacy products as some end customers invest to optimize their installed infrastructure. We also expanded our engagement with the leading construction and mining equipment customer as they awarded us production for a safety system that was part of a recent acquisition. Flexus' ability to support the resulting transition reflects a high value-add offering and the strength of our partnership. Finally, our wins performance continue to show strength across the portfolio of our semi-cap customers with both new program wins and share gains. Our expectation of growth for the industrial sector in fiscal 2025 remains unchanged. Share gains and new program ramps are driving robust growth for our semi-cap sub-sector while despite some early green shoots, trends remain generally uneven across the majority of our industrial sub-markets. Please advance to slide 11 for a review of our funnel of qualified manufacturing opportunities. The funnel of qualified manufacturing opportunities remains robust at 3.5 billion dollars. Our positive outlook for funnel health is in part supported by strength of early stage opportunities in our industrial and aerospace and defense sectors. In summary, after considering current dynamic market conditions, our share gains, program ramps, continued strength in certain sub-sectors, and increased demand in recently challenged sub-sectors, we continue to forecast sequential revenue growth during the second half of fiscal 2025. Before turning the call over to Pat, reflecting on the recent tariff volatility, I'd like to take a moment to recognize and appreciate the efforts of our trade compliance team and our global Plexus team as we continue to provide agile, proactive, and complicated analysis and responses in support of our customer's success. Our customers have noted their appreciation and we'd like to add our appreciation to theirs. Thank you. I will now turn the call over to Pat.

Pat. Thank you, Oliver, and good morning everyone. Our fiscal second quarter results are summarized on slide 12. Gross margin of 10% was at the top end of our guidance due to a favorable mix of service offerings and better fixed cost leverage. Productivity improvements associated with operational efficiency initiatives help to reduce the impact from our typical seasonal compensation cost increases. Selling an administrative expense of $49 million was at the midpoint of our guidance. Non-GAF operating margin of .7% was at the top end of our guidance due to the strength and gross margin. Non-operating expense of $3.8 million was favorable to expectations due to improved foreign exchange performance and lower than anticipated interest expense. Non-GAF diluted the EPS of $1.66 exceeded our guidance due to the items mentioned and a slightly favorable tax rate. Turning to our cash flow and balance sheet on slide 13. As shown across these financial metrics, our performance was strong and consistent with the fiscal first quarter. As a result, we delivered $36.7 million in cash from operations and spent $20.2 million on capital expenditures, generating free cash flow of $16.5 million. This performance exceeded expectations and positions us well to meet our fiscal 2025 free cash flow projection of up to $100 million. During the quarter, we continued to return cash to shareholders through our share repurchase program by acquiring approximately 86,000 shares of our stock for $12.2 million. We have approximately $25 million available under the current $50 million authorization. We are taking advantage of our strong financial performance and robust balance sheet to hold an earlier review with our board of directors to discuss an additional buyback authorization once the current program is completed. This review is planned for next month. Similar to the prior quarter, we ended the fiscal second quarter in a net cash position. We had $15 million outstanding under our revolving credit facility with $485 million available to borrow. Given our available capacity, we anticipate borrowing under this facility when our $100 million private placement notes mature this June. We will take market conditions into consideration if and when we would refinance any amount longer term. For the fiscal second quarter, we delivered return on invested capital of 13.7%, which was 480 basis points above our weighted average cost to capital. Our invested capital base is significantly lower than the prior year due to our efforts to drive sustained improvement in working capital. This combined with improved operating performance drove the expansion in ROIC over the prior year. The cash cycle at the end of the fiscal second quarter was 68 days, three days favorable to expectations and consistent with the fiscal first quarter. This result represents a 25% improvement in our cash cycle days from one year ago. Please turn to slide 14 for details on our cash cycle. With a continued sequential reduction gross inventory dollars, this quarter by $10 million, we experienced a two-day improvement in inventory days. We have now reduced the dollar value of inventory for five consecutive quarters with gross inventory $370 million lower than the fiscal 2023 high point. For days in advance payments, we experienced a two-day reduction with $14 million being returned to customers during the fiscal third quarter. As Todd has already provided the revenue and EPS guidance for the fiscal third quarter, I'll review some additional details which are summarized on slide 15. Fiscal third quarter gross margin is expected to be in the range of 9.9 to 10.2%. At the midpoint gross margin would be slightly improved from last quarter. We expect selling and administrative expense in the range of $50 to $51 million which is fairly consistent with the prior quarter. Note that this estimate is inclusive of approximately $6.4 million of stock-based compensation expense. Fiscal third quarter non-GAAP operating margin is expected to be in the range of 5.7 to .1% exclusive of stock-based compensation expense. Non-operating expense is anticipated to be approximately $4.5 million. We continue to anticipate lower interest expense consistent with our reduced borrowing. For the fiscal third quarter, we are estimating an effective tax rate between 14 and 16% and diluted shares outstanding of approximately $27.6 million. In support of anticipated program ramps, our expectation for the balance sheet is that working capital investments will increase compared to the fiscal second quarter. However, based on our anticipated sequential revenue growth, we expect our cash cycle days to remain consistent with the fiscal second quarter. Hence, we are guiding a cash cycle range of 66 to 70 days. With investments to support anticipated program ramps and higher levels of capital spending associated with completing the build out of our new facility in Penang, Malaysia, we expect break even to a slight generation of free cash flow for the fiscal third quarter. Fiscal 2025 capital spending is expected to be in the range of $110 to $130 million, slightly lower than our previous guidance. Once again, given our improved performance through the first half of the fiscal year, we anticipate generating up to $100 million of free cash flow for fiscal 2025. With that, Angela, let's now open the call for questions.

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

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

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

Okay, very good. Certainly appreciate the color there. And then maybe you talked a little bit about having excess capacity, but if you think about new facilities, if you were to build that, can you talk a little bit about that CapEx investment and then the timing in order to bring up a new facility? How quickly can that happen if a customer came to you and said, hey, we want to have capacity?

Yeah, well, the good news, David, this is Pat. We've got really good capacity in all three of our regions. As we mentioned, we've got the Penang, Malaysia site coming on board this summer. We've got available capacity in Europe and then in Mexico and the U.S., so all three of those regions can handle any additional volume that's put into it. How quickly, if the need would arise in the future, it's probably a four to six quarter period to do that build. But with some of the improvements we're making within our facilities, and Oliver could talk more about this, but we're trying to expand capacity within our existing facilities through automation efforts and a number of other initiatives that can delay the need for a new site after we put the one in in Malaysia. Yeah,

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

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

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

Yeah, thanks Melissa. I mean, it's changed a bit because as you recall last year, I was probably in the kind of low 70s to mid 70s, and then we

frankly

were a bit surprised ending the fiscal year in 24 at 64 days, and we've kind of continued in the 60s, and that's where I'm guiding the fiscal third quarter. I think we have opportunity though to get back into kind of the mid to low 60s. I think that's a good target for us. I think there is opportunity around gross inventory to bring that down, but we do have to recognize we have sizable customer deposits. Also offsetting that gross inventory, some of that's going to be returned to customers in 25 and 26. But keep in mind that every one of those days that we're able to reduce, frees up $10 million of cash flow for us. It's been a huge improvement to our balance sheet from a borrowing standpoint and ability to support our buyback and other growth initiatives.

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

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

I think one of the things from a broader trend standpoint that we're seeing is more of an openness to outsource. These are long-term historical industrial companies that have manufacturing assets that are becoming much more open to outsourcing and see the benefits of it. I think it's a good long-term trend for us.

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

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

Yeah, so we can get into a lot of details around the product itself, Steve. Other than to say it involves a single use aspect of a piece of capital equipment is what I think it's going to be. I think it's going to be a very, very long-term project. It's going to be over a two to three quarter time period, and the volumes could be fairly large.

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

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

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

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

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

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

Yeah, it's still pretty early, Ruben. What we're seeing is there's a handful of customers that I think are moving out of China into different geographies right now. But it's relatively limited, I would say, at this point. And I think in general, our customers are waiting to see what the end state looks like before they make any decisions or really push too far in that area.

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

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

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

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

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

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

Got it. Thank you. Just looking at the funnel chart, health care, it bumps around, but it looks like it ticked down a bit sequentially in Q2. Just wondering how I think about that relative to the improvements that you're seeing in underlying demand and new program ramps.

Yeah, so I think just talking about the funnel, a couple of things. We've mentioned this in prior calls, but haven't maybe talked about it in a while. We don't manage funnel and wins to quarterly boundaries like we would say operational results, and so you'll see some ebb and flow from one quarter to the next. I'd also highlight for health care versus prior year, the funnel is up. Sorry, our wins are up 8% versus prior year, and so just generally I think we continue to be optimistic about ability to grow there. We've also mentioned with the extra demand increases we're seeing from customers, we expect that to flow through to additional decision making, which would then flow through to additional wins.

Great, thank you very much.

Your next question comes from the line of P. Barger with Key Bank Capital Markets. Your line is now open.

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

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

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

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

Your next question comes from the line of Anja Soderstor with Siddoti. Your line is now open.

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

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

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

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

Okay, thank you. I'm also curious in terms of the weakening dollar, are you hedging for that or how are you thinking about the current volatility there?

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

Okay, thank you. That was all for me.

Thanks.

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

Great, thanks for taking the follow-up. Really good to hear SemiCap is running at mid-teens. Can you talk through what you're seeing for leading edge metrology versus memory versus trailing edge?

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

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

Yes.

Perfect. Thanks.

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

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

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