Plexus Corp. (NASDAQ:PLXS) Q3 2023 Earnings Call Transcript

Plexus Corp. (NASDAQ:PLXS) Q3 2023 Earnings Call Transcript July 27, 2023

Operator: Good morning, and welcome to the Plexus Corp. Conference Call regarding its fiscal third quarter 2023 earnings announcement. My name is Benny, and I will be your operator for today’s call. [Operator Instructions]. I would now like to turn the call over to Mr. Shawn Harrison, Plexus Vice President of Communications and Investor Relations. Shawn?

Shawn Harrison: Good morning, and thank you for joining us today. Some of the statements made and information provided during our call today will be forward-looking statements, including without limitation, those regarding revenue, gross margin, selling and administrative expense, operating margin, other income and expense, taxes, cash cycle, capital allocation and future business outlook. Forward-looking statements are not guarantees since there 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 October 1, 2022, is 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 Jermain, Executive Vice President and Chief Financial Officer; and Oliver Mihm, 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?

Todd Kelsey: Thank you, Shawn. Good morning, everyone. Please advance to Slide 3. I’m pleased with the performance of our global Plexus team in the fiscal third quarter, including their ability to support future growth opportunities and deliver strong results while navigating a volatile demand and supply chain environment. Fiscal third quarter revenue of $1.02 billion met guidance amidst a number of cross-currents within the period. Markets were mixed with certain subsectors seeing demand strengthen, some seeing demand seemingly bottom and others beginning to show near-term weakness due to a variety of factors. Simultaneously, while we are seeing further modest improvement in component availability, certain lagging edge semiconductor lead times remain quite elevated, and we under-shipped demand by more than $100 million once again this quarter.

For the quarter, we delivered GAAP operating margin of 2.8% with GAAP EPS of $0.56 per share, including $0.14 per share of stock-based compensation expense and $0.76 per share related to an arbitration decision and non-recurring restructuring charges. Adjusted operating margin of 5.0%, which included 37 basis points of stock-based compensation expense, met the high-end of our guidance range. The team’s ability to mitigate supply chain challenges, along with improvements in manufacturing efficiency and better-than-anticipated performance from our engineering team contributed to the strong result. The fiscal third quarter represented our fifth consecutive quarter with operating margin exceeding 5%. Non-GAAP EPS of $1.32 per share, inclusive of $0.14 of stock-based compensation expense exceeded guidance, benefiting from the team’s focus on operational excellence and lower-than-forecasted taxes.

Our go-to-market team once again did an outstanding job in the fiscal third quarter, winning 30 new manufacturing programs, worth a record $321 million when fully ramped into production. Several of the program wins represented competitive share takeaways. We have exceeded $300 million in quarterly new program wins twice during the last 6 quarters, demonstrating the strength of our strategy and customer confidence in our value proposition. At the same time, we maintained a robust funnel of qualified manufacturing opportunities at $4 billion. This funnel again includes a greater than typical number of large opportunities in each of our market sectors, which we believe continues to position us well to maintain strong manufacturing wins momentum.

Finally, new engineering program wins and the funnel of qualified engineering opportunities expanded versus the prior quarter, both positive leading indicators of future manufacturing wins. Please advance to Slide 4. Late in our fiscal third quarter, we released our inaugural Sustainability Report, which highlighted the responsible and sustainable business practices that have long been ingrained in our culture and are core to our vision to help create the products that build a better world. I encourage everyone joining today’s call to review the report found on our sustainability web page. A few of our team’s fiscal 2022 accomplishments highlighted in the report include; achieving an 11.9% energy intensity reduction across Plexus manufacturing site; launching a third Employee Resource Group, donating in excess of $1 million globally through the Plexus Charitable Foundation; completing a third-party materiality assessment to understand stakeholder needs and enhancing our cyber-incident response preparedness.

We have many more efforts underway during fiscal 2023, including delivering more than 40 environmentally-focused projects, adding 2 additional employee resource groups and enhancing our volunteer time off and charitable matching programs. During fiscal 2022, we also formally deployed our differentiated suite of sustainability-oriented product lifecycle solutions, which is driving expanded customer engagement. A core component of these solutions is our lifecycle assessment capabilities. Through a consultative partnership with our customers, we develop a strategic roadmap of emissions reduction opportunities and, in some cases, cost reduction opportunities throughout the lifecycle of a product, including the design, manufacture, use, servicing and end of life.

We add substantial value to the process through our team’s deep understanding of our customers’ markets, supply chains and products. Further, our team’s expertise in product development, product commercialization, supply chain solutions and sustaining services are unique in helping Plexus partner with our customers to act upon the opportunities identified through the lifecycle assessment, ultimately creating products with improved sustainability. As we strive to build a better world, we realize the significant opportunity that exists to help our customers deliver more responsible, sustainable products to the market. We have completed assessments with 5 customers to date and are actively pursuing or engaged in 20 additional opportunities across our product lifecycle solutions.

Please advance to Slide 5. We are guiding fiscal fourth quarter revenue of $1 billion to $1.04 billion; GAAP operating margin of 4.7% to 5.2%, inclusive of approximately 53 basis points of stock-based compensation expense and GAAP EPS of $1.18 to $1.36. Our GAAP EPS guidance includes approximately $0.19 of stock-based compensation expense. I’m proud that given this guidance, we expect to finish fiscal 2023 with revenue growth exceeding 10% for the second consecutive year and adjusted operating margin exceeding 5%, a meaningful increase from fiscal 2022. Within the fiscal fourth quarter, we expect to continue to benefit from increasingly robust commercial aerospace demand and ongoing new program ramps. These positives are being offset by incremental weakness in semiconductor capital equipment, a market which seems to be finding a bottom, modest softening in some of our industrial markets and ongoing supply chain challenges, including those of our customers.

The flatter demand dynamic is negatively affecting cost absorption at some of our sites. Finally, I’d like to provide a look into early fiscal 2024. We see the current demand and supply chain dynamics holding steady as we enter fiscal 2024. We expect to follow this with accelerating revenue and profitability growth as a result of stabilizing demand in certain markets, increasing new program ramp momentum and lessening supply chain challenges. The latter includes continued technology enhancements our team is bringing to supply chain management and further gradual improvements in lagging edge semiconductor availability, creating the opportunity to reduce the ongoing unfulfilled backlog of customer demand. As a result, we remain confident in achieving our goal of $5 billion in revenue, with 5.5% GAAP operating margin by our fiscal 2025.

I also have continued confidence that Plexus is well positioned to deliver industry-leading revenue growth and profitability over the long term. Our best-in-class capabilities, focus on operational excellence and unique solutions to address the lifecycle of our customers’ products are resonating loudly as evidenced by our program wins momentum, competitive share gains and ongoing robust funnel of opportunities. I’ll now turn the call over to Steve for additional analysis of the performance of our market sectors and operations. Steve?

Steven Frisch: Thank you, Todd. Good morning. I will start on Slide 6 with a review of the fiscal third quarter performance of our market sectors, as well as our expectations for the sectors for the fiscal fourth quarter of 2023. Starting with the industrial sector, revenue declined 3% in the fiscal third quarter. The result was better than our expectation of a mid-single-digit decline. Improvements in supply chain, especially for our test and measurement subsector contributed to the stronger results. As we start this quarter, we are experiencing short-term forecast lateness with some test and measurement and communication customers, leading to a forecast for a mid-single-digit decline for the industrial sector for the fiscal fourth quarter.

Even with the slight decline this quarter, ongoing program ramps will mitigate the double-digit decline we are seeing in our semicap business to keep the industrial sector flat for fiscal 2023. As we anticipated, revenue in our healthcare, life sciences sector was down 7% for the fiscal third quarter. Continued supply chain challenges and modest end market softness were the main reasons for the decline. In the near term, the forecast fluctuations are relatively balanced. And that result is that we anticipate our healthcare, life sciences sector to be flat for the fiscal fourth quarter. For the full year of fiscal 2023, the healthcare, life sciences sector is on track for an increase in the range of 20%. Our aerospace and defense sector decreased 1% in the fiscal third quarter.

The result beat our expectations of a mid-single-digit decrease. Our supply chain team’s ability to improve deliveries with constrained components drove the stronger results. As we look to the fiscal fourth quarter, commercial aerospace demand remains robust and the actions that our teams have taken to improve material flow are creating positive impacts. As a result, we expect meaningful expansion of shipments with our top 6 aerospace and defense customers. The combined growth should yield an approximately 10% increase for the aerospace and defense sector for the fiscal fourth quarter. The strong finish to the year would put the fiscal 2023 growth for our aerospace and defense sector in the high-teens. Please advance to Slide 7 for an overview of the exceptional wins performance of our market sector teams.

We won 30 new manufacturing programs during the fiscal third quarter that we expect to generate a record $321 million in annualized revenue when ramped into production. Our wins benefited from an increase in strategic sourcing decisions by our customers. We were pleased to be selected by several customers as their partner of choice as they made decisions to either outsource their internal manufacturing or to consolidate their supply base. As a result of the strong wins, the trajectory of our wins momentum, which is defined as a trailing 4 quarter of wins, divided by the trailing 4 quarters of revenue, is trending back towards this historically strong level. Please advance to Slide 8. We can review a few sector and regional highlights of the manufacturing wins for the fiscal third quarter.

Our industrial team led the sectors of 18 new program wins with $193 million when fully ramped into production. The healthcare, life sciences team won 7 new programs valued at $90 million, while the aerospace and defense team had a very good quarter with 5 new program wins worth $38 million. The Americas wins were exceptional at almost $200 million. Our facility in Guadalajara were recipients of several of the strategic sourcing decisions as we anticipate $160 million of these America wins to be fulfilled by our team in Mexico. The APAC region benefited from strong wins from the industrial team as most of the $58 million of regional wins came from this sector. Finally, the EMEA region had another impressive wins result of $64 million. With the region’s trailing 4 quarter wins now surpassing $300 million, we have high expectations for meaningful growth in fiscal 2024.

Please advance to Slide 9 for highlights of the fiscal third quarter wins. I will start with 3 wins from our industrial sector. All 3 are examples of existing customers who are rewarding our teams for delivering customer service excellence and operational excellence on current programs. The first win is from a long-term communications customer. They have decided to consolidate a meaningful portion of their products from their internal manufacturing into our Guadalajara, Mexico facilities. We will start ramping some of these programs this quarter. The second example is from a semicap customer who recognize our team’s performance in Penang, Malaysia by expanding our relationship to include high-level subassembly production. Third example is very similar.

A customer focused on electrical vehicle rapid charging that we produced printed circuit board assembly for in Oradea, Romania, has awarded us the production of the finished product. The healthcare, life sciences team won a meaningful portfolio of programs from a new logo who produces defibrillators. The new customer selected our Guadalajara, Mexico location in which to consolidate their production. We will start ramping some of these programs this quarter. Finally, our aerospace and defense sector grew our market share with an existing aerospace customer. Given our performance with our current programs, they have decided to transfer to Plexus a meaningful portion of the business from one of our competitors. We expect to start the qualification process for these new assemblies in our Neenah, Wisconsin manufacturing site in early fiscal 2024.

As shown on Slide 10, our funnel of qualified manufacturing opportunities finished at a robust $4 billion in the fiscal third quarter. Further evidence that our customers are considering larger, more strategic sourcing decisions is supported by the new opportunities that were added to the funnel in the fiscal third quarter. The new potential programs include the outsourcing of internal manufacturing as well as supply-based consolidation efforts. We are confident that our focus on customer service excellence and operational excellence have us well positioned to be our customers’ partner of choice. A strong funnel and satisfied customers are key ingredients for maintaining robust wins performance. Next, I’d like to turn to operating performance on Slide 11.

During our fiscal third quarter, our supply chain team and operations teams once again demonstrated their commitment to finding solutions by adjusting to changes in customer forecast. They also drove supply of constrained materials and converted those materials into finished goods within the quarter. In addition, our engineering team outperformed expectations. The extra effort by the entire organization resulted in non-GAAP operating margin performance of 5%, a result that was at the high-end of our expectations and represents the fifth quarter in a row of operating margins above 5%. I will now turn the call to Pat for an in-depth review of our financial performance. Pat?

Patrick Jermain: Thank you, Steve, and good morning, everyone. Our fiscal third quarter results are summarized on Slide 12. While revenue came in at our midpoint, gross margin of 9.2% was towards the top-end of our guidance. Better performance from our higher value-added services, along with improved contribution margin in our APAC and EMEA regions drove the healthier-than-expected gross margin. Selling and administrative expense of $42.3 million was favorable to guidance, primarily due to lower stock-based compensation expense. As a percentage of revenue, SG&A was 4.1%, which was favorable to expectations and sequentially lower by 20 basis points. Non-GAAP operating margin of 5%, which excludes 220 basis points of restructuring and other charges was at the high-end of our guidance due to the improved gross margin and lower SG&A expense.

This result also included 37 basis points of stock-based compensation expense. Non-operating expenses were slightly unfavorable to expectations as a result of greater-than-anticipated foreign exchange losses. Non-GAAP diluted EPS of $1.32, which excludes $0.76 of restructuring and other charges, exceeded our guidance due to the factors previously mentioned. Also contributing to the EPS improvement was lower-than-expected tax expense due to discrete tax items recorded during the quarter. Turning to our cash flow and balance sheet on Slide 13. Relative to our initial expectations, we were pleased with our free cash flow performance this quarter. We delivered $18.8 million in cash from operations and spent $30.3 million on capital expenditures, resulting in fiscal third quarter cash outflow of $11.5 million.

This result included $20.3 million in payments related to one-time nonrecurring charges. During the quarter, we purchased approximately 150,000 shares of our stock for $13.5 million. We have approximately $9 million remaining under the current authorization and expect to purchase this amount during our fiscal fourth quarter. Next month, we’ll be reviewing with our Board of Directors our plans for a new program once the current authorization is completed. We believe Plexus is well positioned with a strong balance sheet. At quarter end, cash totaled $254 million, while total debt was $492 million. We also had over $200 million available to borrow under our credit facility and a conservative gross debt-to-EBITDA ratio of 1.8x. For the fiscal third quarter, we delivered return on invested capital of 13.5%, which was 450 basis points above our weighted average cost of capital.

Cash cycle at the end of the third quarter was 111 days, slightly above expectations and sequentially higher by 7 days. Please turn to Slide 14 for details on our cash cycle. We were encouraged to see our supply chain and regional teams drive a sequential reduction in gross inventory dollars. Despite the dollar improvement, inventory days sequentially increased by 5%, primarily due to lower revenue. More than offsetting the increase in inventory days was a 7-day increase in customer deposit days. With over $580 million in customer deposits, we now have over 35% of our gross inventory covered at the end of the quarter. Days in receivables sequentially increased by 7 days, primarily due to reduced activity under our receivables factoring program and changes in customer payment terms.

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 8.9% to 9.3%. At the midpoint, gross margin will be slightly lower than the fiscal third quarter. While our Bangkok facility is still impacting margins, we are seeing a steady improvement in earnings as we ramp new business in the site and expect continued improvement as we move to positive returns in fiscal 2024. We expect selling and administrative expenses in the range of $42 million to $43 million, essentially flat with the fiscal third quarter. Non-operating expenses are anticipated to be in the range of $9 million to $9.5 million, sequentially improved due to certain insurance benefits and the expected reduction in foreign exchange losses.

Our effective tax rate for the fiscal fourth quarter is expected to be in the range of 13% to 15%. Our expectation for the balance sheet is that working capital investments will modestly improve compared to the fiscal third quarter. Based on our revenue forecast, we expect this level of working capital will result in cash cycle days in the range of 106 days to 110 days, a sequential improvement of 3 days at the midpoint. We anticipate the improved cash cycle will generate free cash flow in the range of $10 million to $30 million for the fiscal fourth quarter, delivering positive free cash flow for fiscal 2023. Last, we expect capital spending for the fiscal year to be in the range of $115 million to $125 million, slightly lower than previous guidance.

With that, Benny, let’s now open the call for questions.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of David Williams of The Benchmark Company.

David Williams: Yes. I guess, first, on the funnel. Understanding there’s lots of puts and takes there, but it looks like this is the first time over the last maybe 7 quarters that we’ve seen that kind of come down, but it was up pretty big last quarter. Is this really just a function of some of that being pulled through or anything else that we should be thinking about in terms of the funnel?

Todd Kelsey: Yes. I think, David, you can certainly look at the program wins and say that there was — it had an impact on the funnel, but I’d still say at $4 billion, it’s the second largest funnel we’ve ever had in the history of the company. So, we’re feeling really good and view it as very much a robust funnel.

Steven Frisch: Yes. And if you look at the beginning of fiscal ’23, we came in at like a $3.4 billion funnel start in the year. So the prospect of finishing the year at something in the $4 billion range to Todd’s comment makes us feel pretty good about where we’re at.

Todd Kelsey: One of the things I’d add to is what we report to you is our qualified funnel. We also have an early-stage funnel and that’s actually at a record level right now. We’re not going to say what that is, but there’s quite a bit that’s percolating in the background as well.

David Williams: Okay. Great. And then maybe just on the incremental weakness that you talked about in the semicap equipment. I think you previously mentioned some of your customers were requesting more inventory held maybe for some upside demand that comes in. Are you seeing a change in that strategy? Or just maybe any color around the semicap equipment, the weakness that you’re seeing?

Steven Frisch: Yes. As we talked about throughout the year here, we’ve definitely seen it come down. I mean, Todd’s comment, we see some signs of it being bouncing around the bottom. So from our perspective, we are managing the inventories tightly with our customers. They all basically are talking about — when it comes back, they want to make sure they have the right inventory levels and mix of products available and ready. So, we are working with them to optimize that. A little early to predict exactly when the strengthening will happen. But I think the focus now is people talking about when it returns versus managing the downside. They’re talking about more being ready for the upside.

Todd Kelsey: A little bit of additional color that I’d add on semicap as well, David, is we’re really excited about when semicap recovers. And if you look at our past history, from ’15 to ’22, we had a 30% CAGR within semicap. During this downturn period, we’ve outperformed the market through share gains. And we’re really excited that when the market does recover, we think we’re going to have some substantial growth within that semicap subsector.

David Williams: Great. And just one more, if I might here. You’ve just been upbeat about the health care opportunity, and that’s been trending very nicely. It was a bit lower, I think, this quarter than we had anticipated. Anything noteworthy here that — or any updates maybe on the pause and ramp discussed a couple of quarters ago?

Todd Kelsey: I wouldn’t read too much into it. I think we did talk about one customer and a few program ramps, a couple of program ramps that were a little bit slower than what we anticipated. Part of that was driven by the customers’ end market supply chains. In other words, there’s disposables or single-use devices that they need for the product that they were having difficulty getting. So, that’s definitely muted a little bit of our growth. But I wouldn’t read too much into it. Little bit of volatility in a, I’d say, as people adjust their inventories and people are predicting what they need as we go into fiscal 2024. But again, we’re very optimistic yet in terms of where healthcare, life sciences are for us.

David Williams: Appreciate the color, and congrats on the progress.

Operator: [Operator Instructions]. The next question comes from the line of Melissa Fairbanks of Raymond James & Associates.

Melissa Fairbanks: Just kind of digging in — just kind of digging in a little bit more on the industrial. It would be helpful if you could give us a little more detail where you’re seeing the weakness outside of semicap? And is it safe to assume that these are just pushouts or delays by your customers? And then maybe if you could give us an updated revenue split between semicap and the rest of industrial?

Todd Kelsey: Yes. So Melissa, the 2 subsectors that we’re seeing the softness on within industrial space is test and measurement as well as communications. I think certainly, in the latter, what we’re seeing is the technology switch over there. So, we view that more as a pause. Test and measurement is slightly softer right now, but we do view that as recovering later. As we look at semicap, it’s about a little over 1/3, maybe 40% of our industrial sector. So it puts us kind of in the higher teens or mid- to upper teens range from overall Plexus revenue.

Melissa Fairbanks: Okay. Great. And then just on inventory, that’s one of my favorite topics. It’s interesting to see the days of inventory covered by customer deposits increased again. I was wondering if you could give us an update what you’re seeing in component hotspots, if it’s still the same usual suspects, pricing of some of those components and if we can expect to see overall inventories continue to decline?

Oliver Mihm: Yes, Melissa. This is Oliver. I’ll hit that. From an overall supply chain perspective, I’d really break it down to 3 lines, 3 stories. First is broadly across our commodity base, we are seeing normalization of lead times. Pricing tends to follow that. We see some suppliers trying to build inventory. And so just in general, the trend there continues to make incremental progress. In terms of our challenge spots, we still see constraints in both custom-engineered components and electrical mechanical commodities. And then as Todd earlier mentioned, within lagging edge semiconductors, you get into the lower volume specialized components really just from a handful of key suppliers. We’re still seeing quite inflated lead times, unexpected de-commits, essentially 0 inventory on the open market to enable a pull and a recovery.

So that’s one of the areas that we are working on. We are working with the suppliers to improve that dynamic. And then the third piece I’d talk to, and this was also alluded to a little bit earlier, is when our customers sometimes have supply chain challenges and in certain instances, we actually will engage with them to help them solve that as a partner. And I can think of one specific example that’s going on right now.

Patrick Jermain: And then, Melissa, from an inventory dollars perspective, where we think we can get to, for Q4, I was guiding cash cycle of the midpoint of 108, which would be a 3-day reduction from Q3. A lot of that’s related to inventory. Now there is some return of deposits that we’re anticipating in the fourth quarter. But we do expect dollars to reduce in the fiscal fourth quarter. And then going into fiscal ’24, I think there’s a lot of opportunity based on some of the comments that Oliver made to see further reductions in both dollars and inventory days.

Todd Kelsey: Yes. And maybe just to build on that, we do continue to make investments in both tools and processes relative to how our materials operations performs. And one piece of innovation that we’ve now deployed across all of our AMER manufacturing sites is building machine learning and predictive analytics into our planning algorithms. And so this is going to switch back to your question, which essentially enables us to optimize material positioning, so I think working capital relative to our customer demand. And it creates a more feasible production plan for our customers. Really, if you take a step back, that predictive analytics creates for us a more accurate feed or capture of true supply and availability. So as I open with, we now have that in place across all of our AMER manufacturing places and are now deploying that globally.

Operator: The next question comes from the line of Steven Fox of Fox Advisors LLC.

Steven Fox: I had two questions, if I could. First of all, if I’m understanding what you said about beyond this quarter for the early part of next fiscal year, it sounds like it’s going to start off kind of flattish with the September quarter levels. And I would assume that usually, you would have seen a little bit more growth into the end of the year. Am I reading those comments right? And if you could just sort of maybe put a little more color around what you’re seeing generally after this quarter?

Todd Kelsey: Yes. I think your interpretation there is accurate, Steve. And what I’d say is when we look at Q1, we view it as — it looks pretty similar to Q4 right now. I think as we get into Q2, we could begin to see some growth now. But remember, again, that, that quarter is typically a big challenge from a margin standpoint as we have seasonal cost increases. And then we see some strong acceleration as we get into the second half of the fiscal year as we see a bit more stabilization in markets. We make continued progress on new program ramps. We have a couple of very large ones that are in the queue right now, a couple of them that Steve alluded to. And then the supply chain continues to see incremental improvement. So, we’d expect that to continue over the second half of the year.

Steven Fox: And the reason Q1 is flat with Q4, it’s basically end markets, I guess? Or is there any kind of churn within your business?

Todd Kelsey: It’s basically the demand dynamics that we referenced in the call. So the continued softness in semiconductor capital equipment, the near-term softness in the industrial markets and then continuing to work through the supply chain. So, those are the nearer-term dynamics that are offsetting some of the positives that we have within the markets. Now if we saw the supply chain improve more rapidly than we expect or semicap effect gets a more rapid recovery as maybe some are starting to suggest it could, we would see upside from what we’re projecting here.

Steven Fox: Got it. And then just as a follow-up. You mentioned some competitive takeaways in the new win category. I was wondering — I’m assuming it’s across different types of products, but is there any sort of common thread to why maybe you’re taking business from competitors more recently?

Steven Frisch: Yes. This is Steve. I guess I’m not surprised by what our customers are doing as you came through COVID and you have supply challenges, everybody was focused on deliveries, just trying to get product. And now that those are starting to soften and basically, people are getting a little bit less worried about can I get my product. Now they’re starting to focus on who is the best provider of it. And so we kind of saw this building through the tail end of COVID here. And as the funnel of opportunities started to increase, we’re having more strategic conversations with our customers about what their long-term supply plan is going to be post COVID. And really proud of our team’s ability, both from a supply chain and operations standpoint, how they were able to deliver through COVID. And I think we’re getting rewarded for it. So, I do expect the next couple of quarters to continue to see these kind of opportunities come into the funnel and be part of the wins.

Todd Kelsey: The one thing I’d add too, to Steve’s comment there is it’s broad-based across our market sectors. We saw takeaways in each of our market sectors.

Operator: The next question comes from the line of Matt Sheerin from Stifel.

Matthew Sheerin: Yes. I wanted to follow up on Steve’s question regarding your outlook for the December quarter and beyond and how that plays into your $5 billion target for fiscal ’25, because it looks like based on what you said for Q1 and Q2, you’re going to be flat to down year-on-year. And it looks like you’re going to have to grow at least mid- to high single digits in order to — unless ’25 is a double-digit growth year. So trying to figure out how we bridge to that $5 billion number, given that you’re going to be flat to down in the first half of fiscal ’24?

Todd Kelsey: Yes. So what I’d say, Matt, is when we look at overall fiscal ’24, the 9 to 12 goal that we have will be difficult. We expect growth in it and reasonable growth, but to get to that range might be a bit challenge. But you should see the revenue accelerate to levels that make the $5 billion achievable as we’re into ’25. So, that’s the way we’d look at it.

Matthew Sheerin: Okay. Okay. And then just back to the… Go ahead.

Todd Kelsey: Yes. Again, Matt, it’s based off of the programs that are ramping and already won.

Matthew Sheerin: Okay. And is that skewed more towards the defense and health care spaces?

Todd Kelsey: No, across all 3 sectors.

Matthew Sheerin: Okay. Okay. And then on the supply issues, you talked about that $100 million number where you were unable to ship. And is that sort of the number that we’re looking at for the next couple of quarters? Or will you work that down that backlog as Oliver talked about some of the supply constraints easing?

Todd Kelsey: Yes. It’s coming down, and it’s come down from what it was 3 or 4 quarters ago and we would expect to see — continue to see it reduce as we move through fiscal ’24 in particular.

Operator: The next question comes from the line of Anja Soderstrom of Sidoti.

Anja Soderstrom: So, I’m just curious for commercial aerospace, it seems like that’s picking up for you again after being a big challenged. How much of that strength is due to backlog work through versus new growth?

Steven Frisch: Yes. This is Steven. I’ll start here. The demand from the commercial aerospace customers has been quite strong for a period of time here. The challenge was — is coming through COVID. The pipelining of materials wasn’t as sophisticated as some of the other sectors. And so a few quarters ago, we talked about the fact that we were really working with our customers hard to come up with a better plan for forecasting and getting a pipeline of materials slowing. The teams have been able to do that. And so what you’re seeing here is our ability to basically continue to meet kind of a backlog of demand. With that said, our team just returned from the Paris Air Show. And if you read through some of the press, orders being up and demand being up, it looks like in addition to the backlog that we have, it looks like going forward, there could also be additional strengthening in demand.

So feeling pretty optimistic about where commercial aerospace is going to be for us in 2024.

Anja Soderstrom: Okay. And also you seem pretty confident in your $5 billion target. What’s the biggest risk to reaching that?

Todd Kelsey: I’d say the biggest risk would be the macro environment and if things go south from a macro standpoint from where they are today.

Operator: Okay. Actually, it’s the last question. Last question comes from Chris Grenga of Needham & Company.

Christopher Grenga: The EMEA region has been demonstrating strength in particular in wins. I was just wondering if you could expand on what you’re seeing there, what’s been contributing to that strength?

Steven Frisch: I think it’s a market that we’ve continued to invest in over the years. I would say a few years ago, we kind of got to critical mass in our manufacturing facilities as well as investing in the team, and they’re just having a really good success with the value proposition. So, our value proposition is well based, both everything from the engineering standpoint with our design centers there, all the way through manufacturing and we added services there about 18 months ago. And so from that standpoint, it’s a great value proposition. We do believe and we are seeing suppliers or customers, I should say, in that market that are looking to bring things back from Asia to Europe, a little bit more regionalization and localization.

We’re benefiting from that. So, I think the combination of those couple of things is, again, it’s going really well as you see the wins number is exceeding really kind of our annual revenue number. So, our expectation for growth for that region are quite large as we look to 2024.

Christopher Grenga: Great. And with the new program wins, with those 30 wins, how many or to what extent did those wins begin as engineering wins? And I guess what I’m trying to get to is how is the engineering — as you ramp-up the number of engineering wins, how is that being flowed through into the new program wins?

Todd Kelsey: Yes. I don’t know that we have a breakdown for this quarter. I mean, typically, on the order of about 1/3 of our manufacturing wins tend to be heavily engineering-centric previously.

Steven Frisch: Yes. Just going through the data here again. As Todd said, I don’t have the numbers here in front of us. The wins this quarter were dominated a bit by the strategic sourcing decisions, where it’s more of a consolidation of supply base or competitive takeaways. So, there’s probably a few less this quarter that were driven by engineering. But again, I don’t have that data in front of me either. So…

Operator: Thank you. At this point, I would now like to turn the conference back to our CEO, Mr. Todd Kelsey, for closing remarks.

Todd Kelsey: All right. Thank you, Benny. I’d like to thank everybody, the shareholders, investors, analysts and our Plexus team members who joined us today on the call. As always, we appreciate your interest in Plexus. And I wish you all a very great day.

Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.