Plexus Corp. (PLXS) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the Plexus Fourth Quarter 2026 and Fiscal 2026 Earnings Conference Call. [Operator Instructions] On the call today to answer your questions after the presentation are Todd Kelsey, President and CEO; David Abuhl, CFO and Senior Vice President; and Oliver Mihm, Executive Vice President and COO. I will now hand the conference over to Shawn Harrison, VP of Investor Relations. Shawn, please go ahead.

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, as 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 September 27, 2025, and 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 Mihm, Executive Vice President and Chief Operating Officer; David Abuhl, Senior Vice President and Chief Financial Officer. With today's earnings call, Todd will provide summary comments before turning the call over to Oliver and David for further details. Before turning the call over to Todd, please note that Plexus will attend Bar its Global Industrial Conference in Chicago on November 11. And Raymond James TMT and Consumer Conference in New York City on December 7. With that, let me now turn the call over to Todd.

Thank you, Shawn. Good morning, everyone. Please advance to Slide 3. I Plexus delivered an outstanding fiscal 2026 that exceeded expectations. Our differentiated value proposition anchored by unmatched quality and delivery creates significant opportunities for new and expanded customer relationships, positioning Plexus to generate robust financial returns and shareholder value. Plexus generated record fiscal fourth quarter revenue of $1.43 billion. This resulted in fiscal 2026 revenue increasing 23% year-over-year to approximately $5 billion. We are now forecasting fiscal 2027 revenue growth in the mid- to upper teens. Our wins performance remains strong while our funnel of qualified manufacturing opportunities reached another record level, expanding $1.2 billion year-over-year to nearly $5 billion supporting our diversified and accelerating revenue growth momentum. We delivered fantastic operating performance that exceeded our guidance. Fiscal fourth quarter non-GAAP operating margin of 6.7% increased 40 basis points sequentially and nearly 100 basis points year-over-year. Plexus exceeded its 6% non-GAAP operating margin goal for fiscal 2026, expanding non-GAAP operating margin 30 basis points to 6.2%. We're introducing a new non-GAAP operating margin goal of 6.5% to 7%, given our expectation of continued revenue growth and ongoing dividends from efficiency investments and our continuous improvement culture. Finally, fiscal 2026 ROIC exceeded our 15% enduring goal, supported by continued robust working capital efficiency and disciplined capital investment. We anticipate another strong ROIC result for fiscal 2027 and at the anticipated revenue growth rate, continue to forecast free cash flow for fiscal 2027 exceeding $100 million. Please advance to Slide 4. Record revenue in the fiscal fourth quarter of $1.43 billion substantially exceeded our guidance range and increased 9% sequentially and 35% year-over-year. Excellent performance by our supply chain and operations teams helped our customers gain market share and Plexus capture stronger-than-anticipated end-market demand. In addition, non-GAAP operating margin of 6.7% and non-GAAP EPS of $2.84 and substantially exceeded our guidance ranges on strong operating leverage from the revenue upside and continued efficiency gains. Please advance to Slide 5. Our go-to-market team secured 36 fiscal fourth quarter new manufacturing wins worth $290 million in annualized revenue when fully ramped into production. Each market sector delivered strong performance and secured exciting new customer programs and relationships that Oliver will discuss in more detail. With the strong fiscal fourth quarter performance, Plexus captured new manufacturing wins for fiscal 2026 worth nearly $1.2 billion in annualized revenue when fully ramped into production. This outstanding result reflected share gains with long-standing customers, the addition of exciting new customers that support growth technologies and continued expansion into attractive secular growth markets such as aerospace and defense, where we generated fiscal 2026 manufacturing wins of nearly $0.5 billion. The team generated these very strong wins while also expanding Plexus' funnel of qualified manufacturing opportunities by an exceptional $1.2 billion or 33% year-over-year to reach another record of $4.9 billion. The combination of our strong manufacturing wins performance and significantly expanded funnel of qualified manufacturing opportunities positions Plexus to sustain our diversified and accelerating revenue growth momentum. Please advance to Slide 6. Plexus' culture is foundational to our success and embodied by our team as they live our vision to help create the products that build a better world. Supporting our customers as the most trusted partner is central to our strategy. During the fiscal fourth quarter, Eaton recognized our team for operational excellence and honored Plexus with the Supplier Excellence Award at its global supplier conference a distinction granted to only 30 of Eaton's 30,000 global suppliers. And early in fiscal 2027, GE Beovu's Hower and conversion and storage business honored Plexus with its Lean Manufacturing Excellence Award. GE Bernier recognized the strong execution continuous improvement culture and exceptional delivery performance by our sites in Oradea, Romania and Xiamen, China. I'm also incredibly proud to share that our Kelso, Scotland operations were named Manufacturing Business of the Year at the 2026 Scottish Borders Business Excellence Awards, while also earning high commendations for both innovation and business and large business of the year. These recognitions celebrate our Celso team's operational leadership, technological innovation and role as an employer and partner of choice in the EMEA region. Our team members' dedication also extends deeply into our communities. For fiscal 2026, our global team shared its time and talents with various local causes donating approximately 35,000 hours of paid volunteer time off. Further, the Plexus Community Foundation granted $1.5 million in charitable donations to nonprofits globally expanding our community impact and demonstrating how we actively live our vision of building a better world. Finally, we continue to take proactive steps to reduce our environmental impact. In fiscal 2026, we generated an incredible result and reduced our absolute Scope 1 and Scope 2 greenhouse gas emissions by more than 50% across our global manufacturing sites compared to our fiscal 2023 baseline. I continue to be immensely proud of our global team members as we deliver excellence, live our values and create a lasting positive impact for our customers, our communities and the world. Please advance to Slide 7. For our fiscal first quarter, we are guiding revenue of $1.41 billion to $1.46 billion, representing 1% sequential and 34% year-over-year growth at the midpoint. We anticipate strong year-over-year revenue growth from each of our market sectors with sequential revenue expansion in aerospace and defense, and health care life sciences market sectors, balancing a demand normalization in our industrial market sector. We're also guiding non-GAAP operating margin of 6.0% to 6.4% and an increase of 40 basis points year-over-year at the midpoint and non-GAAP EPS of $2.46 to $2.62. We remain focused on expanding operating margin and delivering robust returns even as we are increasing our investments in our people and technology to support stronger-than-anticipated revenue growth. Fiscal 2027, we are increasing our revenue growth forecast to reflect our robust fiscal 2026 finish, stronger end market demand and continued program ramps. We now anticipate to deliver mid- to upper teens revenue growth with expansion in operating margin and sustained working capital efficiency. We continue to see exceptionally strong growth from our aerospace and defense and industrial market sectors, including semiconductor capital equipment associated with our support of growth technologies and the benefit of ongoing market share gains. In addition, we now anticipate stronger growth from our Healthcare/Life Sciences market associated with increased end market demand, particularly from new programs we launched during fiscal 2026. Finally, through our aligned focus on innovation and continuous improvement culture, Plexus is creating customer success, scaling the company for the future and developing substantial long-term efficiencies that will generate robust financial returns and 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. For each of our market sectors, I will discuss our fiscal fourth quarter and fiscal year performance, our expectations for our fiscal first quarter, review the annualized revenue contribution of our quarterly wins performance and offer growth commentary for fiscal 2027. I will also provide an overview of our record funnel of qualified manufacturing opportunities. Beginning with our aerospace and defense sector on Slide 8. Fiscal fourth quarter revenue decreased 4% sequentially compared to our expectation of approximately flat performance as timing dynamics with materials more than offset strength in new programs and customer demand poolings. We anticipate capturing any deferred demand during our fiscal first quarter. Fiscal 2026 saw the aerospace and defense sector revenue grew 23%. And Growth was driven by remarkable strength in the defense and unmanned subsectors, a return to growth in commercial aerospace and new program ramps in the security and space subsectors. For our fiscal first quarter, we expect revenue to be up high single digits sequentially on strength in the defense and space subsectors. Fiscal fourth quarter wins for the aerospace and defense sector was strong at $90 million. This quarterly result reflects a 67% year-over-year increase and brings the total fiscal year wins for the sector to an extraordinary $490 million. For comparison, this fiscal year's aerospace and defense sector wins performance exceeds the combined wins in this sector for fiscal years 2023, 2024 and 2025. Our team in Nina, Wisconsin, is excited to welcome on customer to Plexus with a win of a product that supports defense pilot combat training. The partnership our teams developed over the past 18 months as they work together to ensure a smooth product launch supported the win. In addition, our historically strong execution and depth of knowledge contributed to the award of a flight refueling system from an existing customer for our team in Kelso, Scotland. Looking ahead to our fiscal 2027, we continue to see the potential for another year of robust revenue growth for our aerospace and defense sector -- we expect revenue growth both to exceed 20% [Audio Gap] Exceptional growth from our defense. Please advance to Slide 9. Healthcare/Life Sciences market sector revenue increased 6% sequentially for our fiscal fourth quarter. The result exceeded our expectation of approximately flat revenue due to improved demand from our customers and our team's ability to pool in the required materials to support the growth. Our Healthcare/Life Sciences market sector, grew a robust 19% for fiscal 2026, well ahead of our estimate of a mid-single-digit market growth rate. The therapeutics and imaging subsectors drove the strong performance. For our fiscal first quarter, we expect revenue growth to be up low single digits on strength in the therapeutics and monitoring subsectors from demand increases and program lands. Healthcare/Life Sciences sector wins for the fiscal fourth quarter were $74 million, representing a 35% year-over-year increase. Our wins for the fiscal fourth quarter included the addition of 3 new customers to Plexus. Our team in Chicago, Illinois welcomes 1 of these new customers and will be building a light imaging product that supports robotic surgical procedures. Our proactive engagement and our ability to support the customer with product design, manufacturing production and aftermarket sustaining services contributed to the win. Another of the new customers will be supported by our team in Bangkok, Thailand as they were awarded the production of a Class III registered FDA device for cardiac defibrillation. The customer noted that Plexus' medical device and regulatory competence as well as our regionalization expertise drove the award. Looking ahead to fiscal 2027 for our Healthcare/Life Sciences sector, we now see the potential to grow revenue high single digits, exceeding market growth which we estimate to be mid-single digits. Our updated outlook is supported by existing and new program ramps and general demand increases led by the strength in the therapeutics and monitoring subsectors. Advancing to the industrial sector on Slide 10. Fiscal fourth quarter revenue increased 17% sequentially, well ahead of our forecast for high single-digit to low double-digit growth. Driving the upside was the ability of our supply chain and operations teams to quickly react and support semi cap, industrial equipment and communications customers and capturing stronger demand and market share gain opportunities. Our industrial sector grew 27% in fiscal 2026. This extraordinary result was driven substantially by our semi-cap subsector, where revenue increased 50% year-over-year. As well as growth in our industrial equipment subsector. Market share gains, new program ramps and customer demand increases all contributed to the outstanding result. For the fiscal first quarter, we expect revenue for the industrial sector to be down low single digits. Semi cap subsector revenue increases are being offset by customer program timing dynamics and demand normalization in our communications sector following fiscal fourth quarter upside. Wins for the industrial market sector was strong for the fiscal fourth quarter at $126 million. Our team in Boise, Idaho won a substantial award from a new customer for the production of a clean tech battery energy storage system supporting smart grid applications. The customer noted the strength of our collaboration and our cultural alignment is contributing to the award. In addition, our team in Penang, Malaysia won a substantial follow-on award from an existing semi cap customer based on the strength of our historical execution. We continue to see the potential for a very strong fiscal 2027 for our industrial market sector. We expect revenue growth to exceed 20%, supported by continued robust growth from our semi cap subsector as well as growth from our Test & Measurement, robotics and automation and energy subsectors. Please advance to Slide 11 for a review of our funnel of qualified manufacturing opportunities. The funnel reached another record this quarter. The strength of our funnel was positive to influencing by a number of factors, including the breadth of our service offering, our commitment to creating strong partnerships with our customers, and our relentless focus on providing unmatched quality and delivery. At $4.9 billion, the funnel reflects a 33% year-over-year and 10% sequential increase driven by record contributions from our aerospace and defense and industrial market sectors. The funnel growth is remarkable, considering the strong fiscal 2026 wins performance of $1.2 billion. I will now turn the call over to David. David?

Thank you, Oliver, and good morning, everyone. Our fiscal fourth quarter results are summarized on Slide 12. Gross margin of 10.2% met our guidance, benefiting from leverage on higher revenue and continued operational efficiency gains. Selling and administrative expense of $59.7 million included typical stock-based compensation as well as expenses related to executive retirement. Excluding these expenses, we gained 30 basis points of sequential leverage. Our fiscal fourth quarter non-GAAP operating margin of 6.7% exceeded our guidance, benefiting from end of year fixed cost leverage on the stronger-than-anticipated customer demand, operational efficiencies and continued cost discipline. . Non-GAAP diluted earnings per share of $2.84 exceeded the top end of our guidance due to higher revenue and the other items mentioned, partially offset by a tax rate at the upper end of guidance. Turning to our cash flow and balance sheet on Slide 13. For the fiscal fourth quarter, we delivered better-than-expected free cash flow of $6 million. reflecting $29 million in cash from operations and $23 million in capital expenditures. We repurchased approximately $21 million of our stock in the quarter, completing the expanded 2026 share repurchase program. The 2027 share repurchase program was approved by our Board in August for $100 million, all of which is available for fiscal 2027 and our repurchases are underway. We ended the fourth quarter in a net cash position, and we had $159 million outstanding under our revolving credit facility with over $340 million available to borrow. Return on invested capital was 15.8% in the fiscal fourth quarter, 680 basis points above our weighted average cost of capital. Our fiscal fourth quarter result was the highest in nearly a decade and above our goal of 15%. While continuing to increase invested capital to support our robust revenue growth, we anticipate to continue to generate healthy ROIC for fiscal 2027 from our expanding margins and working capital efficiency. Now turning to working capital trends on Slide 14. We ended fiscal 2026 at a 62-day cash cycle, our best performance on record. And down 1 day compared to the prior year. I'm very pleased with how our teams are partnering closely with our customers and suppliers and driving improvements across all areas of working capital, while continuing to make the investments needed to fuel our robust revenue growth. Please advance to Slide 15. I would like to take a moment to commend our teams on delivering a really great year, and I'm especially pleased to see the progress on expanding our margins. For fiscal 2026, we delivered non-GAAP operating margins of 6.2%, a 30 basis point increase from the prior year, including a tremendous result in the fourth quarter. Going forward, having consistently exceeded our previous 6% goal, we are introducing a new non-GAAP operating margin goal of 6.5% to 7%. This new goal will be supported by our strong operational momentum. Continued anticipated revenue leverage and a balanced ongoing approach to our investments in growth, people and technology. We take a methodical approach to setting our financial goals. And our expectation is to consistently meet and then progress through the goal. We expect to deliver on our 6.5% to 7% non-GAAP operating margin goal from continued revenue leverage and operational efficiencies. While we expect a fairly muted impact from price and mix. We will balance these benefits with continued investments in our people, technology, capacity and capabilities. This new target represents a larger step-up than we have historically provided as we have growing confidence in the dividends from our efficiency and automation initiatives and our continuous improvement culture. Over the past 2 years, our team's efforts have driven a greater than 10% gain in our equipment efficiency, allowing our operations to generate greater revenue and profitability without significantly expanding capital spending. We've also seen revenue per team member expand by approximately 20% over the same time period. And while the revenue outlook is an important backdrop for our new margin goal, we are seeing dividends from our investments in operational efficiency, and we expect to continue to accrue benefits. Now let me turn to our fiscal first quarter guidance summarized on Slide 16. As Todd has already provided the revenue and EPS guidance, I will review some additional details. Fiscal first quarter gross margin is expected to be in the range of 9.7% to 10%, including expansion of investments in people and technology. For fiscal 2027, we expect gross margins to remain at approximately 10%. Our outlook for selling and administrative expense for the fiscal first quarter is in the range of $61 million to $62 million. including stock-based compensation. Excluding these expenses, we expect the percent of revenue to be flat compared to the prior quarter, while for fiscal 2027, we expect to gain leverage on higher revenue and continued cost discipline. Fiscal first quarter non-GAAP operating margin is expected to be in the range of 6% to 6.4%, exclusive of stock-based compensation. At the midpoint, this would represent a sequential decline compared to the fiscal fourth quarter as we expand investments in people and technology given the improved fiscal year revenue outlook. Given the timing of the investments in our revenue momentum, we currently anticipate minimal to no decline in our fiscal second quarter operating margins from typical seasonal cost increases. And finally, for fiscal year 2027, we continue to expect our ongoing investments will result in operating flow-through at the low end of our 8% to 12% target range driving expansion in non-GAAP operating margin compared to the prior year. We're estimating a non-GAAP effective tax rate of between 16% and 18% for the fiscal first quarter and a similar range for fiscal 2027. In support of our accelerating revenue momentum, we continue to strategically increase our working capital investments and expect our fiscal first quarter cash cycle to be in the range of 66 to 70 days. We typically experience around a 6-day sequential increase in our fiscal first quarter cash cycle days associated with the end of many of our customers' fiscal years. For fiscal 2027, we continue to expect cash cycle days to be in the low to mid-60s. Turning to capital expenditures. Long term, we continue to target spending in the range of 2% to 3% of revenue. Given our robust revenue growth trends, capital expenditures for fiscal 2027 will likely fall towards the upper end of that range. We remain committed to deploying capital diligently and are pleased with the very strong returns on our investments and capabilities capacity and technology are generating. As a result of these factors and the timing of our working capital investments, we are forecasting a use of free cash flow in the fiscal first quarter, including the annual payments for our incentive compensation program. For fiscal 2027, we still expect to generate in excess of $100 million of free cash flow, benefiting from our sustained robust profitability and our focus on working capital efficiency. With that, Jen, let's open the call for questions.

[Operator Instructions] [Audio Gap]

The surprising thing is typically, we take more share during the downturn, as Todd mentioned, and you see less share gains during an upturn as customers are just looking to secure demand and fulfill demand. And so the fact that we're taking share during an upturn is a positive sign. And we would expect, as we've seen in last cycles to be able to outperform the market because of the share capture we generate.

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets.

I wanted to start with free cash flow. You expect $100 million in FY '27 despite raising revenue to the upper -- mid- to upper teens. If demand exceeds that outlook again, does free cash flow necessarily decline because of working cap? Or -- are you seeing customer funding and operating efficiency that kind of changes that relationship and you can maintain that level on revenue upside?

Steve, this is David. Yes, we're pleased with the outlook at the moment. And if you looked at the delivery on cash cycle days, and we ended at a record low -- our teams are really performing well in terms of the efficiency of the capital investments we're making in working capital. And we usually say we need about $0.15 to $0.20 of working capital for revenue growth -- and that's -- we're right in that maybe 17% range. In fact, we've added nearly $1.5 billion of revenue growth in the last year on an annualized basis, but we've added $250 million of working capital to support that. And so as we go through the year, we're confident in generating that $100 million of free cash flow, and let's see how we do as we rerate the year. But so far so good, and I think we're pretty confident in this business is generating great free cash flow this year.

And Steve, it's Shawn. Just to follow up on that, like we and the team are very diligent in trying to offset investments in working capital with corresponding commensurate investments by our customers in that inventory to make sure that we're continuing to hit these record low cash cycle days, which, as David said, is the best we've seen in on record. So it was a fantastic result. .

Yes. That's good outcome. And just thinking about the operating margin goal of 6.5% to 7% on -- can you frame up what brings you to the low versus the high end? Is it mix versus leverage or Penang maturation? Or just what are the swing factors that you see in that range?

Yes, Steve, on these targets, we like to consistently exceed but then progress through these targets. We have a track record of doing that with the last couple that we've set. And in the moment, you'll see our flow-through rate we stayed at 8% to 12% flow-through on revenue growth. And at the moment, we're tracking toward the lower end of that given the investments we're making and with the -- to support accelerating revenue momentum. And so as you model in that flow-through rate, I think that will get you a pretty good balance of what we think margins will look like for the quarter, for the year, et cetera. But our teams are really working hard to consistently meet this next target and then progress through it. But I'd say that the growth elements are there. The up elevators as I like to call them on margin are strong in terms of leverage on revenue growth. The operational efficiency gains are really coming through strong as well. And then we just need to balance that with the investments needed for the kind of the next chapter of growth that's ahead of us. But overall, it's upward momentum for us, and we'd like to progress through this target. So I'd say the answer to that it's watch that 8% to 12% kind of closely as the investments are the balancing factor there.

[Operator Instructions] Your next question comes from the line of Melissa Fairbanks with Raymond James.

I would wish you congratulations on the brewers we last night, but I'm still a little bit store as a race ban. So anyway, congratulations on a great quarter. I have a question probably for Oliver. Looking into the aerospace and defense, some of these new wins, I think a quarter or a couple of quarters ago, some of the commentary had been that you haven't yet seen an uptick in spending. Wondering what some of the dynamics are there if these are new spending -- understanding that these are very long term, but if these are new spending programs or if this is just an extension of newer technologies that are moving into this space?

Yes, I'll say it's a bit of both. So we do see that defense spending flowing through to an extent -- but then as we noted, some of the technology wins here that we had recently in this past quarter, also seeing new technology, new entrants One of the things that we like is our engagement with Neo primes, I'll say, within this space. We think that's a really good fit and a tailwind as we look forward here. And then I'll put that also over to Europe and say, from an EU side, still early days and still seeing a potential tailwind as we look forward from an EU perspective and we think we're well positioned there as well.

Okay. Perfect. And maybe I'll kind of stretch that same question into the health care life sciences business. We know that historically, you guys have had really strong engagements on the imaging and the diagnostics and surgical side. It sounds as though you may be extending into newer types of engagements. I wondering if you could comment there?

Yes. A couple of things there. I think our optimism, our confidence in our growth outlook here, certainly, stems from coming off a really strong '26 to 19%, well ahead of market, which we think is mid-single digits. As you noted, the strength in therapeutics and monitoring underscores that, right? And so that's kind of maybe your point about what we've historically seen, certainly seeing new -- our engagement with secular growth technology. So like robotic surgical like pulse field ablation I think those things give us further optimism here as we look forward into the coming year. Yes. And 1 other comment I'll make, which isn't directly related to your question, but I think provides us some optimism on future tailwinds, as historically, our engineering development work has been a bit of a leading indicator for us. and our funnel inside engineering for Healthcare/Life Sciences took a marked uptick in Q4. So that gives us also some optimism here in terms of future outlook.

Your next question comes from the line of Anja Soderstrom with Sidoti.

Congratulations on the great quarter here and here. Just curious in the aerospace and defense. First of all, the commercial area. What are you seeing there?

Yes, we're seeing slightly incremental demand improvements in commercial aerospace. I think it still has hit the levels that we think it's capable of once we see the Boeing demand flow all the way through to us.

And is that included in your guidance now, the more meaningful comeback there or?

No. No, it's not. We're still taking a conservative approach on when that happens and to what level it happens. .

Okay. And then within space, are you -- do you have an exposure to the deals at all or?