Plexus Corp (NASDAQ:PLXS) reported its Q4 2024 earnings, surpassing its own guidance with a non-GAAP EPS of $1.85 and revenue of $1.050 billion. Despite these strong results, the stock fell 3.81% in after-hours trading, closing at $164. This decline followed the company's report of a record quarterly free cash flow and significant debt reduction.
Key Takeaways
- Plexus exceeded its Q4 revenue and EPS guidance.
- The stock price dropped 3.81% in after-hours trading.
- The company achieved a record $194 million in free cash flow for the quarter.
- Plexus reduced its total debt by $102 million in Q4.
- The company anticipates mid-single-digit revenue growth in FY2025.
Company Performance
Plexus demonstrated robust performance in Q4 2024, achieving a revenue of $1.050 billion, which exceeded its guidance. The company also reported a non-GAAP operating margin of 6.2%, meeting its long-term goal one year ahead of schedule. The record $568 million in program wins in Healthcare Life Sciences underscores its competitive edge, despite a 17% revenue decline in this sector due to inventory corrections.
Financial Highlights
- Revenue: $1.050 billion (exceeded guidance)
- Non-GAAP EPS: $1.85 (exceeded guidance)
- Free Cash Flow: $194 million (quarterly record)
- Annual Free Cash Flow: $341 million (double the previous record)
- Total (EPA:TTEF) debt reduced by $102 million in Q4
Earnings vs. Forecast
Plexus's Q4 performance exceeded expectations with an EPS of $1.85, surpassing the forecast of $1.54. The revenue of $1.050 billion also exceeded the forecast of $981.99 million. This represents a positive surprise of approximately 20% in EPS and 6.9% in revenue, showcasing the company's strong operational execution.
Market Reaction
Despite the positive earnings report, Plexus's stock fell 3.81% in after-hours trading to $164. This drop might reflect investor caution or profit-taking, as the stock has been performing near its 52-week high of $172.5. The broader market's sentiment and sector-specific factors could also have influenced this reaction.
Outlook & Guidance
For Q1 FY2025, Plexus projects revenue between $960 million and $1 billion, with a non-GAAP EPS ranging from $1.52 to $1.67. The company expects mid-single-digit revenue growth for FY2025, driven by strong performance in the Aerospace & Defense sector and continued operational efficiency improvements.
Executive Commentary
"We exited fiscal 2024 with exceptional performance," stated CEO Todd Kelsey, highlighting the company's achievements in free cash flow and debt reduction. He also emphasized Plexus's commitment to operational efficiency, which has led to healthy margin leverage.
Q&A
During the earnings call, analysts inquired about sector pull-ins totaling approximately $40 million and ongoing inventory corrections in Healthcare. The company addressed concerns about Boeing (NYSE:BA)'s uncertainty with a conservative approach and highlighted the strength in the semi-cap equipment sector.
Risks and Challenges
- Inventory Corrections: Continued adjustments in the Healthcare sector could impact future revenue.
- Aerospace & Defense Uncertainty: Potential challenges related to Boeing could affect growth.
- Market Saturation: Increased competition in key sectors may pressure margins.
- Macroeconomic Pressures: Global economic conditions could influence demand and operational costs.
- Supply Chain Disruptions: Any disruptions could affect production timelines and costs.
Full transcript - Plexus Corp (PLXS) Q4 2024:
Bailey, Conference Operator: Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Plexus Fiscal 4th Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I would now like to turn the call over to Sean Harrison, Vice President of Investor Relations. You may begin.
Sean Harrison, Vice President of Investor Relations, Plexus: 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 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 ks filing for the fiscal year ended September 30, 2023, is supplemented by our Form 10 Q filings from the Safe Harbor Care 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 Mihn, 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.
Oliver Mihn, Executive Vice President and Chief Operating Officer, Plexus: Before I turn the
Sean Harrison, Vice President of Investor Relations, Plexus: call over to Todd, please note that during our fiscal Q1, Plexus will participate in Stifel's Midwest 1 on 1 Conference in Chicago on November 7 and Raymond (NSE:RYMD) James' 2024 TMT and Consumer Conference in New York City on December 10. With that, let me now turn the call over to Todd Kelski. Todd?
Todd Kelsey, President and Chief Executive Officer, Plexus: Thank you, Sean. Good morning, everyone. Please advance to Slide 3. Plexus exited fiscal 2024 with exceptional performance, a testament to the dedication and focus of our more than 20,000 team members globally. Our team's commitment to delivering customer service excellence resulted in Plexus gaining market share throughout fiscal 2024, positioning us for a solid fiscal 2025 and capturing pull in data late in the fiscal Q4, leading to the exceptional quarterly results.
In addition, our team's ongoing focus on driving efficiency and increasing operating margin resulted in Plexus achieving our 6 plus percent non GAAP operating margin goal 1 year earlier than anticipated, producing robust quarterly EPS. We also generated record free cash flow of $194,000,000 in the quarter. The stellar free cash flow performance pushed our fiscal 2024 free cash flow generation to $341,000,000 representing more than 2 times our previous record annual free cash flow. We continue to anticipate revenue growth for fiscal 2025, while noting trends within our market sectors remain mixed. We anticipate another strong year for our aerospace and defense market sector aided by ongoing share gains and new program ramps.
While we expect modest growth from Healthcare Life Sciences and Industrial market sectors supported by demand recovering in certain subsectors, new program ramps and share gains. We remain focused on maintaining our strong operating margin performance of recent quarters, producing meaningful growth in EPS and generating free cash flow that will continue to be deployed toward creating additional shareholder value. Please advance to slide 4. We delivered tremendous fiscal 4th quarter financial results. Revenue of $1,050,000,000 exceeded our guidance range.
As the quarter progressed, we experienced stronger demand and a pull in of activity with customers across multiple market sectors that more than offset ongoing demand weakness in the industrial market sector and the EMEA region. Non GAAP operating margin of 6.2% met our long term goal, expanding 40 basis points sequentially and exceeding our 5.6 percent to 6.0 percent guidance range. Our focus on driving operational efficiency led to healthy margin leverage on the late quarter demand surge. Non GAAP EPS of $1.85 also exceeded our guidance range, benefiting from revenue upside, robust operating margin performance, further reduction in interest expense and a favorable tax rate. Please advance to Slide 5.
For the fiscal Q4, we won 26 manufacturing programs worth $230,000,000 in annual revenue when fully ramped into production. Included in this result is another strong quarterly contribution from the Healthcare Life Sciences market sector of $148,000,000 For fiscal 2024, our go to market team generated more than $1,000,000,000 of manufacturing program wins, including a record $568,000,000 of program wins in the Healthcare Life Sciences market sector, supporting our anticipation of exceptional revenue growth for this market sector over the long term. Please advance to Slide 6. We continue to create value for our shareholders, our team members, our customers and communities through our sustainable and responsible business practices. The following are highlights from fiscal 2024.
Reduced our waste to landfill by over 10% globally, double our 5% goal through increased recycling and reuse, strategic vendor selection and reduced waste generation. We reduced our Scope 1 and 2 emissions by over 5% across Plexus' global manufacturing sites as we continue to improve operational efficiencies, optimize technology and transition to cleaner sources of energy. In support of our social impact efforts, we donated more than $1,000,000 globally through the Plexus Community Foundation. Our team members contributed over 20,000 paid volunteer hours to their local communities, surpassing our fiscal 2023 engagement. And we continue to drive sustainable and responsible business practices across our value chain.
We assessed over 50% of our global supply chain spend on environmental and social factors as we help our customers deliver more sustainable products to the market. Finally, this past quarter, we were thrilled to be named 1 of the top 100 U. S. Internship programs for 2024 by Yellow (OTC:YELLQ), recognizing the investment in our people who are at the heart of who we are and what we do. We also received the Business Friend of the Environment Award for Sustainability in the Large Company category presented by Wisconsin Manufacturers and Commerce.
This is in recognition of our dedication to environmental stewardship, sustainable business practices and our vision to help create the products that build a better world. Thanks to all of our team members who supported these achievements that we will continue to build upon throughout fiscal 2025. Please advance to Slide 7. We begin fiscal 2025 in a strong position given healthier improved conditions for many of our market sectors and subsectors. Solid fiscal 2024 new program wins performance inclusive of market share gains enabled by our focus on delivering customer service excellence.
The expansion in profitability witnessed throughout fiscal 2024 associated with our focus on driving efficiency and increasing operational performance. And the EPS leverage created from deploying our outstanding free cash flow toward reducing our borrowing and completing our share repurchase program. We are guiding fiscal first quarter revenue in the range of $960,000,000 to $1,000,000,000 non GAAP operating margin of 5.7% to 6.1% and non GAAP EPS of $1.52 to $1.67 After the stronger than anticipated finish to fiscal 2024, along with an ongoing challenged demand environment in EMEA, we expect sequential revenue growth to pause with our fiscal Q1 before resuming as the fiscal year continues. For fiscal 2025, we expect robust revenue growth within Aerospace and Defense, reflecting a continuation of end market strength, new program ramps and market share gains, moderate growth in Healthcare Life Sciences as we navigate through any remaining inventory corrections, while benefiting from new program ramps, share gains and a modest rebound in health care market demand and moderate growth in industrial, reflecting robust growth in semi cap exceeding third party market recovery forecasts, but a broader industrial market that remains challenged by inventory corrections and weak demand. We anticipate our efforts to continue to increase operational efficiency will result in maintaining the strong operating margin performance of recent quarters.
While EPS should witness meaningful expansion leveraging revenue growth, strong profitability and the ongoing benefits from deploying our substantial free cash flow generation toward creating shareholder value. I will now turn the call over to Oliver for additional analysis of the performance of our market sectors. Oliver?
Oliver Mihn, Executive Vice President and Chief Operating Officer, Plexus: Thank you, Todd. Good morning. I will begin with a review of the fiscal Q4 performance of each of our market sectors, our expectations for each sector for the fiscal Q1 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 region and then provide an overview of our funnel of qualified manufacturing opportunities. Starting with our aerospace and defense sector on Slide 8, revenue increased 3% sequentially in the fiscal Q4, above our expectation for flat revenue.
Multiple customers drove the revenue upside reflecting increased demand inside the quarter and stronger than anticipated demand for our engineering solutions, which more than offset cautiousness stemming from uncertainty in the commercial aerospace subsector. Consistent with prior guidance, fiscal 2024 represented a very strong growth year for the aerospace and defense sector, with revenue up 21%, exceeding the robust growth we saw in fiscal 2023 of 17%. We expect revenue for the aerospace and defense sector to decline high single digits in the fiscal Q1 with a pooling of activity into Q4 and customer conservatism in the commercial aerospace subsector more than offsetting strength in our space subsector. Our wins for the fiscal Q4 for the aerospace and defense sector were strong at $45,000,000 and included a complex product assembly for our Boise, Idaho facility. This program win further solidifies our relationship with 1 of the largest defense prime contractors.
We also won our 1st manufacturing award from a defense customer where we have maintained a long standing engineering solutions engagement. This program will be built in our Neenah, Wisconsin facility. Finally, engineering solutions wins for the aerospace and defense sector hit a record high in fiscal 2024, reflecting continued progress and diversifying our opportunities to generate growth. Our fiscal 2025 aerospace and defense market sector outlook continues to be bullish, supported by new program ramp strength in our defense subsector and our expectation that uncertainty in the commercial aerospace subsector will resolve as the year progresses. Please advance to Slide 9.
Revenue in our Healthcare Life Sciences sector was up 9% sequentially for the fiscal Q3 on the strength of inside the quarter demand increases and a pool of demand for a new product launch. This beat our expectations of a mid single digit increase. Fiscal 2024 for our healthcare life sciences sector saw a 17% revenue decline as a result of inventory corrections and demand softness, as well as a discussed headwind from the normalization of previously procuring components at above market prices. For the fiscal Q1, we expect the healthcare life sciences sector to decline high single digits, reflecting some continued inventory corrections and the pooling of activity into the fiscal Q4. This dynamic is more than offsetting continued momentum from our engineering solutions.
Healthcare Life Sciences sector wins for the fiscal 4th quarter marked a 2nd consecutive quarter of strong performance at $148,000,000 Wins included 2 significant awards from an existing customer for our Neenah, Wisconsin manufacturing facility. One of these awards represents new outsourcing work and reflects on the depth of our experience in the subsector, the strength of our historical execution from our ongoing sustaining services engagement and our ability to contribute world class engineering commercialization and development resources in support of customer success. We also won the production of a therapeutic device for an existing customer based on historical execution and support of their new product launches. This product will be produced in our Chicago, Illinois facility. The aggregate wins for the healthcare life sciences sector for fiscal 2024 reflect a record high and a remarkable 69% year over year increase.
As we look to our fiscal 2025, we remain optimistic for a return to growth for the Healthcare Life Sciences sector, benefiting from the ongoing strength in program ramps, modest end market improvements and normalization of inventories. Advancing to the industrial sector on Slide 10, revenue increased 12% sequentially in the fiscal Q4. The result was above our expectation of a high single digit increase and primarily driven by inside the quarter demand increases from customers in our semi cap and energy subsectors. Fiscal 2024 saw a 3% revenue decline for the industrial sector as strength in new program ramps and the beginnings of the semi cap subsector recovery were more than offset by generally soft demand in various subsectors working through an inventory correction. Looking ahead to the fiscal Q1, continued demand improvement in semi cap is being more than offset by some industrial subsectors continuing to work through demand instability, the revenue upside experienced in the fiscal Q4 and near term program volatility with 2 customers.
As a result, we expect revenue to decline mid single digits in the industrial sector for the fiscal Q1. The industrial market sector wins for the fiscal Q4 of $37,000,000 included a next generation product win with an existing test and measurement customer. Our wins also included share gains on 2 platforms for an existing semi cap customer. These products will be built in our Penang, Malaysia campus. We are also pleased to note that an existing customer with a leadership position in the energy subsector has audited our Boise, Idaho facility and confirmed the Plexus quality system as compliant to NQA-one.
This is ASME's nuclear quality assurance standard for firms providing services in support of nuclear energy. Compliance to this standard expands our differentiation, enabling continued revenue growth. Our expectation for the industrial sector of a return to growth in fiscal 2025 remains unchanged. Our view is that general subsector instability will resolve as the year progresses with market outgrowth and semi cap offsetting industrial subsector market weakness. Advancing to Slide 11, we can review the regional highlights of the manufacturing wins for the fiscal Q4.
The Americas wins were exceptionally strong at $195,000,000 This marks the 2nd consecutive quarter of strong regional wins performance. Wins included a share gain award for our Neenah, Wisconsin facility from an existing customer in our space subsector that is seeing increasing product market acceptance. This win reflects the strength of our collaborative relationship and support of helping launch their product into the market. APAC region's fiscal 4th quarter wins of $30,000,000 included new programs with 2 of our existing semi cap customers. These assemblies will be built in our Penang, Malaysia campus.
The awards are a result of our continued strong execution. The aggregate fiscal 2024 wins for the APAC region increased 46% over the prior fiscal year. EMEA region's fiscal 4th quarter wins of $5,000,000 included a new program award from an existing semi cap customer. This award for our team in Scotland reflects continued share gain for Plexus as our customer executes to the strategic supplier roadmap. Please advance to Slide 12 for a review of our funnel of qualified manufacturing opportunities.
The funnel of qualified manufacturing opportunities remains robust at $3,500,000,000 with a sequential decline reflective of the robust harvesting activity by our team and typical funnel management. In summary, the strength of wins in fiscal 2024, the continued progress of new program ramps and the normalization of subsectors currently experiencing either uncertainty or inventory corrections gives us optimism for growth in fiscal 2025. I will now turn the call over to Pat for an in-depth review of our financial performance. Pat?
Pat Germain, Executive Vice President and Chief Financial Officer, Plexus: Thank you, Oliver, and good morning, everyone. Our fiscal Q4 results are summarized on Slide 13. Gross margin at 10.3% exceeded our guidance and was sequentially higher by 50 basis points. We recognized significant fixed cost leverage as revenue sequentially increased 9%, while fixed manufacturing expenses decreased slightly from last quarter. Efficiency gains and productivity improvements across all three of our manufacturing regions led to the better than anticipated results.
Selling and administrative expense of $54,000,000 was above our guidance, primarily due to additional incentive compensation expense linked to improved operating and cash flow performance. Non GAAP operating margin of 6.2 percent exceeded our guidance due to the strong gross margin performance and delivered on our target margin 1 year earlier than expected. Non operating expense of $8,400,000 met expectations. While we experienced a substantial reduction in interest expense due to our robust cash flow performance, we did see higher levels of foreign exchange losses this quarter. Non GAAP diluted EPS of $1.85 exceeded the top end of our guidance due to the factors mentioned along with a benefit from a favorable tax rate.
Turning to our cash flow and balance sheet on Slide 14. We were extremely pleased with our free cash flow performance as we wrapped up the fiscal year. We delivered $220,000,000 in cash from operations and spent $26,000,000 on capital expenditures, resulting in free cash flow of $194,000,000 This result was well above our expectations. As Todd mentioned, this was the highest performance in company history. For fiscal 2024, we generated record free cash flow of $341,000,000 an outcome representing more than double our previous record and 3 times our fiscal 2024 net income.
With the strong performance, we reduced our total debt during the quarter by $102,000,000 while continuing to support our share repurchase program. For fiscal 2024, we reduced our total debt by $184,000,000 During the quarter, we purchased approximately 166,000 shares of our stock for $19,500,000 which completed the previously authorized $50,000,000 share repurchase program. For fiscal 2024, we purchased $55,700,000 of our stock at an average price of $104 per share. We have now begun purchasing shares under the new $50,000,000 program authorized during the fiscal Q4. We ended the year in a net cash position.
Cash of approximately $347,000,000 was sequentially higher by $78,000,000 At the end of the fiscal year, we had $50,000,000 outstanding under our revolving credit facility with $450,000,000 available to borrow under the facility. Our gross debt to EBITDA ratio was at a conservative level of less than 1. For the fiscal year, we delivered return on invested capital of 11.8%, which was 3 60 basis points above our weighted average cost of capital. Cash cycle at the end of the fiscal year was 64 days, 16 days favorable to expectations and sequentially improved by 19 days. This level of cash cycle was the best result delivered in the past 4 years.
Please turn to Slide 15 for details on this exceptional performance. Our cash cycle improvement primarily came from a combination of lower accounts receivable and inventory days. Sequentially, days and receivables improved by 7 days, led by fiscal year end collection efforts. Increased revenue and continued progress on our working capital initiatives contributed to a sizable inventory reduction of 24 days. Our teams delivered a sequential reduction in gross inventory of $123,000,000 and a reduction of over $250,000,000 when compared to the fiscal 2023 year end balance.
As Todd has already provided the revenue and EPS guidance for the fiscal Q1, I'll review some additional details, which are summarized on Slide 16. Fiscal first quarter gross margin is expected to be in the range of 10.1% to 10.4%. At the midpoint, gross margin would be similar to the fiscal Q4. We expect selling and administrative expense in the range of $46,600,000 to $47,600,000 which is inclusive of approximately $4,600,000 of stock based compensation expense. Fiscal 1st quarter non GAAP operating margin is expected to be in the range of 5.7% to 6.1% exclusive to stock based compensation expense and any restructuring activity.
Non operating expense is anticipated to be approximately $6,000,000 This would represent a sequential improvement as we continue to deploy excess cash to reduce our borrowing and related interest expense. For the fiscal Q1, we are estimating an effective tax rate between 14% 16% and diluted shares outstanding of approximately 27,700,000. Dollars Our expectation for the balance sheet is that working capital investments will increase compared to the fiscal Q4. Based on our revenue forecast, we expect this level of working capital will result in cash cycle days in the range of 71 to 75 days. This would be sequentially higher by 9 days, primarily due to the return of advanced payments linked to our continuing inventory reduction efforts.
With higher investments to support anticipated revenue growth for fiscal 2025, we expect the usage of cash for the fiscal Q1, a trend we have experienced the last several quarters. Despite this usage, we expect to follow-up the fiscal 2024 result with robust free cash flow in the range of $50,000,000 to $100,000,000 for fiscal 2025. We plan to continue to deploy any excess cash to create additional shareholder value. One additional comment on the full year, we expect capital spending in the range of $120,000,000 to $150,000,000 which is inclusive of approximately $60,000,000 related to footprint expansion on the mainland of Penang, Malaysia. We continue to see significant growth opportunities in this region and are investing to ensure we support broad based customer interest in our services within the region.
With that, Billy, let's now open the call for questions.
Bailey, Conference Operator: Your first question comes from the line of David Williams with The Benchmark Company. Your line is open.
David Williams, Analyst, The Benchmark Company: Hey, good morning, everyone, and congrats on the really solid results here.
Todd Kelsey, President and Chief Executive Officer, Plexus: Thanks, David. Good morning.
David Williams, Analyst, The Benchmark Company: Yes. So I guess the first question for me is really around the aerospace and defense and you talked a bit about this in your script. But just kind of curious how you're thinking about that for the year. Obviously, Boeing without the contract being renewed or resolved as we had hoped. And maybe some of the conversation yesterday from their print just about the timing of that production coming back.
How are you thinking about that? And maybe how do you avoid the risk that could be associated with that as we think about the full year in Aerospace and Defense?
Todd Kelsey, President and Chief Executive Officer, Plexus: Yes. I'll start and maybe Oliver will want to add as we go through the discussion here. But certainly disappointing that the Boeing strike wasn't resolved yesterday as I think a lot of people were anticipating. But one of the things in our projections or as we went through our preparation for the call, we have been conservative in the way we've looked at Boeing. So when we talk about strong growth anticipated in aerospace and defense, that takes a relatively conservative look at how the Boeing situation plays out.
So I think if we get some resolution in that, that could provide some potential upside opportunity for us. We think at this point, we're reasonably derisked for what the situation is today. So with that said, when we think about the aerospace and defense sector for fiscal 'twenty five, looks like another strong growth year, not at the 21% level of 'twenty four, but certainly has the potential to be into the double digits. And a lot of that is driven through strength in new program ramps within our defense subsector.
Matt Sheerin, Analyst, Stifel: Okay.
David Williams, Analyst, The Benchmark Company: Very good. Great color there. I certainly appreciate it. And then maybe secondly here is just on the semi cap equipment space. There's been a lot of, I think, variable discussion around the demand trends there, some up, some down.
It sounds like you've got several new program wins this quarter and it's been an area of opportunity for you. So maybe just as you think about the semi cap equipment space, is there anything that you're concerned with? And how do you view that generally? Have you derisked that do you think for the trends? And just I guess maybe anything that goes into that estimation of demand for the year on semi cap?
Thank you.
Todd Kelsey, President and Chief Executive Officer, Plexus: Yes. I think in general, we're at a relatively conservative look at semi cap as well too. Now we would expect to and as I mentioned in the prepared remarks, we'd expect to outgrow the market and outgrow market forecast because of share gains. So I think you can take any projections that you see out there for WFE or semi cap in general and expect that we're going to outperform that as we have for the past decade or so. So I think that's the way to think about semi cap.
So we would expect it to be well into the double digits from a growth year this year, even taking a conservative view.
David Williams, Analyst, The Benchmark Company: Fantastic. Well, thank you for the time and congrats again.
Todd Kelsey, President and Chief Executive Officer, Plexus: Thanks, David.
Bailey, Conference Operator: Your next question comes from the line of Melissa Fairbanks with Raymond James and Associates. Your line is open.
Melissa Fairbanks, Analyst, Raymond James: Hey, guys. Thanks very much. I'll echo the congrats on the great quarter. I've got one for Oliver. Wondering if we could dig into the non semi cap business in industrial.
On the last call, you had guided to some recovery in the broadband communications sector. It had been pretty weak for quite some time. Just wondering if you could give us an update on that business and what the expectations are going forward?
Oliver Mihn, Executive Vice President and Chief Operating Officer, Plexus: Yes. Thanks Melissa. Sure. Happy to answer that. Yes, our outlook for communications and what we build in here is a much more flat look.
Certainly recognize the macro tailwind that exists and we talked about that in prior quarter. Certainly our growth is tied to certain projects coming to fruition, but we also recognize that those projects in the past to fruition is not always linear.
Melissa Fairbanks, Analyst, Raymond James: No kidding. A lot of experience with that over the years. So for my follow-up, maybe for Pat, on the cash cycle outlook, obviously really great reduction in 4Q. I know it's been a focus of the whole team. You've guided to the bump higher in 1Q.
Can you remind us what the longer term target is? How should we view peak to trough levels of investment? What the cash cycle days look like, especially with that $50,000,000 to $100,000,000 free cash flow target for the year?
Pat Germain, Executive Vice President and Chief Financial Officer, Plexus: Yes, sure can. I mean, going back to the Q1 of fiscal 'twenty four, we were at 95 days. So to have a midpoint now for Q1 to 25 to 73 days, 22 day improvement, really pleased with. And to go to your question of a year ago, what would we have been pleased with? We were kind of signaling mid-70s for cash cycle as a target.
And obviously, hitting 64 at the end of this year kind of resets our expectations. So as I look to 25, Melissa, yes, 73 days in Q1, we'll see an investment of cash in Q1. And just to correct maybe something I said in the script, that's something we have typically seen every Q1 last several years, not several quarters. Last several years, we've seen an investment of cash in the fiscal Q1. I expect us to continue our inventory improvement efforts going through fiscal 'twenty five.
We will see some return of advanced payments along with that inventory reduction. So my expectation is $73,000,000 will be a high point for Q1 for 25% and then we'll start to steadily bring that down. Expectation would be to get back into the 60s. Whether we get back to the 64% level, we'll see. But it has kind of reset my expectations that I'd like to see us more in the high 60s.
Melissa Fairbanks, Analyst, Raymond James: Wow, that's fantastic. That's great. Maybe if I could just squeak in one quick follow-up. You did mention the return of advanced payments. Are your customers now that we're in kind of like a more normalized supply environment, are your customers still eager to give you some of those advanced payments?
So like if we see inventory going up, do you expect that to still be a balance of some customer commitments along with your own working capital investment?
Pat Germain, Executive Vice President and Chief Financial Officer, Plexus: Yes, I think where we see those typically is when inventory starts to age and get to a point of excess and obsolete is where we're pursuing those type of advanced payments. So I think that can still happen. But obviously, with supply chain improving, we're seeing less of that excess inventory.
Melissa Fairbanks, Analyst, Raymond James: Okay, great. Thanks very much. That's all for me.
Bailey, Conference Operator: Your next question comes from the line of Jim Ricchiuti with Needham and Company. Your line is open.
Chris Grange, Analyst, Needham and Company: Hi, good morning. This is Chris Grange on for Jim. Congrats on the results. Thanks, Chris. Is there any one thing that you could point to or that you could describe the pull in during the quarter?
You mentioned there was a broad, I guess, broad pull in and that drove the stronger than expected results. Is there anything in particular that you would call out as a driver of that?
Todd Kelsey, President and Chief Executive Officer, Plexus: Yes. The interesting thing was it impacted every sector. So we saw and there were different reasons for the pull ins that we saw. Some were success of new program ramps, others were demand just demand uptick that people saw with their end customers where they were looking for this. So we saw what we saw was quite broad based to the tune of close to $40,000,000 So one of the things, I mean, we're certainly cognizant that our revenue is sequentially down in Q1, but I think that that $40,000,000 impact or near $40,000,000 impact is really what's causing that fact.
Chris Grange, Analyst, Needham and Company: Got it. And do you have a sense for how much longer the inventory imbalance or correction is expected to persist in healthcare? Do you in conversations with customers or do you have any visibility into how much longer you expect that dynamic to persist?
Oliver Mihn, Executive Vice President and Chief Operating Officer, Plexus: Yes, I'll take that. This is Oliver. Certainly difficult to predict exactly when that's going to come out. I think last quarter, we already talked about the fact that as we look at our portfolio as a whole, we thought that the inventory correction dynamic we had worked through 85% to 90% of that. I'll also note that we talked about engineering solutions revenue momentum here in this last quarter and we view that as generally a good leading indicator of decision making and outlook for that sector.
And so I think that gives us optimism here as we look to fiscal 2025 for continued revenue growth.
Todd Kelsey, President and Chief Executive Officer, Plexus: A little additional color that I'd add here, Chris, is we're seeing the corrections flow through faster in healthcare than in life sciences overall, and there are a couple. But within healthcare, there's a couple of one off situations where the corrections are still fairly significant.
Chris Grange, Analyst, Needham and Company: Got it. Thank you very much.
Bailey, Conference Operator: Your next question comes from the line of Steven Fox with Fox Advisors. Your line is open.
Steven Fox, Analyst, Fox Advisors: Hi, good morning. Just following up on the pull ins that you mentioned. Can you draw any conclusions or I know you said it was broad based, but is there any conclusions to draw from a macro standpoint? Or you just think it was all customers program specific? And along those lines, does it I understand why the pull ins would sort of reduce your growth in FQ1, but what does it preclude you from growing, say, 10% for fiscal 'twenty five?
Todd Kelsey, President and Chief Executive Officer, Plexus: Yes. So maybe, Steve, I'll start
Sean Harrison, Vice President of Investor Relations, Plexus: by answering the 'twenty five question and then I'm going to pass it over to Oliver
Todd Kelsey, President and Chief Executive Officer, Plexus: to provide some the 'twenty five question and then I'm going to pass it over to Oliver to provide some additional detail on the pull ins. When we look at fiscal 'twenty five, I think with the, call it, slower start from a revenue standpoint with the pull ins impacting the comparable of 2024 as well as the revenue in 2025. I think double digits looks difficult, I would say. We're projecting mid singles, maybe a little higher as we look to fiscal 'twenty five. So we think we can make good progress and we expect some pretty strong sequential revenue growth on a quarterly basis once we hit Q2 and move through the balance of the fiscal year.
Oliver Mihn, Executive Vice President and Chief Operating Officer, Plexus: And then adding on to that, I think as we reflect on the pull ins, there were certainly a number of just customer specific situations Todd mentioned earlier, a specific program launch that had pulled in more aggressively from the customer. Taking a step back and looking for some macro themes, we mentioned earlier in our remarks, space subsector showed strength showing strength in Q1. We also talked about the semi cap subsector. So that grew sequentially in Q4 and continues to show underlying demand pickups. That would be, I think, our other macro reflections on the overall trend.
And we look at all of that and we think we're again, I'd say well positioned would be the term that comes to mind as we contemplate the macro F-twenty five outlook.
Steven Fox, Analyst, Fox Advisors: Great. That's helpful.
Todd Kelsey, President and Chief Executive Officer, Plexus: It's Sean. One more thing.
Pat Germain, Executive Vice President and Chief Financial Officer, Plexus: I want to go back to
Steven Fox, Analyst, Fox Advisors: the statement made about aerospace and defense. We added some conservatism in there as well. And so trying to adjust for the unknown related to the Boeing supply chain. Got it. That's helpful.
And then just curious on the program volatility you called out with 2 customers. Can you give us any further details on what that was about and whether that's an ongoing issue beyond the last quarter? Thanks.
Oliver Mihn, Executive Vice President and Chief Operating Officer, Plexus: Yes. I'll just note that for both of those, they're one off situations. We are working with our customer to help them resolve that dynamic. And I'll also note that from my perspective, the demand for both of those programs is not perishable.
Steven Fox, Analyst, Fox Advisors: Understood. Thank you.
Bailey, Conference Operator: Your next question comes from the line of Steve Badger with KeyBanc Capital Markets. Your line is open.
Sean Harrison, Vice President of Investor Relations, Plexus0: Hi, good morning. This is Jacob Moore on for Steve Barger. Thanks for taking the questions. Absolutely. My first question here is on operating margin, really accelerating achievement of that 6% target by a full year.
I'm sure that there was some benefit from the pull forward in the quarter, but my question here is what are the structural actions do you think that margin performance reflects the most? And really how much more work is there to be done on those or other actions?
Oliver Mihn, Executive Vice President and Chief Operating Officer, Plexus: Yes, I'll start and open up to my colleagues if they have any additional comments they want to add. This is Oliver. Certainly, we have a continued focus on manufacturing efficiency. I'll note that we hit that from 2 different angles, both in terms of profitability and capital equipment intensity. I'll also note that generally focusing on continued investments in automation would continue to help us there.
By way of example, we deployed a significant warehouse automation project in our Penang campus in fiscal 'twenty four and expect that to propagate more broadly through the organization. And we see both pick rate efficiency improvements as well as space utilization improvements as a result of that. And then last, I would say organizationally, we've aligned around a technology and innovation organization as well as driving both pieces of the innovation and the optimization and continuous improvement. And we think all of those things will continue to bear fruit as we drive margin enhancement, our margin performance through the fiscal year.
Pat Germain, Executive Vice President and Chief Financial Officer, Plexus: Yes. And Jacob, as I look at kind of the quarterly performance we expect in fiscal 2025, you're right. For Q1, I'm guiding a midpoint of 5.9. So we are losing some fixed cost leverage on the lower revenue. The March quarter is burdened by merit increases.
So we will see margins coming down at that point before we start improving margins on the back half of this year with productivity improvements Oliver pointed to. But I think what this tells us is we can achieve the target of 5.2 I'm sorry, 6.2 just may not be hitting that every quarter.
Sean Harrison, Vice President of Investor Relations, Plexus0: Thanks. That's helpful. So maybe just a follow on to clarify there. Do you think you can hit 6% non GAAP for the full year? Is there a threshold level of sales growth you need to get there?
Pat Germain, Executive Vice President and Chief Financial Officer, Plexus: I think the sequential revenue growth that we're going to see starting the Q2 is going to benefit us. Whether we get to 6% for the full year, what we'll see, Could be slightly below that. But exiting the fiscal 'twenty five is what we want to be hitting that 6.2%.
Sean Harrison, Vice President of Investor Relations, Plexus0: Got it. Okay. I got it there. And maybe the last one for me. This is actually my first question was on the sustainability of the past 2 Monster free cash flow quarters, which you mostly addressed.
I think that's going to come down some. But maybe to expand a bit here, could you touch on near term capital allocation priorities? Like what do you see as your highest return opportunities to use that cash going forward?
Pat Germain, Executive Vice President and Chief Financial Officer, Plexus: Yes, I think well, I think we've done a great job bringing down debt. So we've only got $50,000,000 outstanding under the revolving credit facility. So we do have the new share repurchase authorization of $50,000,000 that we're executing upon. And next month, we're going to be visiting with our Board about other opportunities to deploy the significant free cash flow we've generated over the last two quarters. So from a priority standpoint, I'd say share repurchase program, maybe some further debt reduction.
But again, as we get later in the year with growth, we will see some investment in working capital. And as I mentioned, we do have the footprint expansion in Malaysia.
Todd Kelsey, President and Chief Executive Officer, Plexus: Yes. I'd just add to that too. I mean, when we think about capital allocation, obviously, one of the first things that comes to mind is supporting growth. And we're expecting a good growth year this year. So that's going to have an impact certainly on our free cash flow as compared to fiscal 2024.
Sean Harrison, Vice President of Investor Relations, Plexus0: Okay, got it. That's it for me. Helpful answers and thanks for taking the questions.
Todd Kelsey, President and Chief Executive Officer, Plexus: Absolutely. Thank you.
Bailey, Conference Operator: Your next question comes from the line of Matt Sheerin with Stifel. Your line is open.
Matt Sheerin, Analyst, Stifel: Yes, thanks. Good morning, everyone. Just a follow-up on the last question regarding margins and particularly the strength you're seeing in gross margin. I mean, you're guiding gross margin down just a little bit on what a 6% or 7% sequential drop. And I'm just wondering if in addition to the things you talked about factory automation, more efficient processes, are you also benefiting from mix?
You talked about a higher percentage of engineering services. The defense aerospace sector has been a higher percentage of revenue. So could you talk about maybe margin profile within the different segments and what's going to drive that as we go forward?
Pat Germain, Executive Vice President and Chief Financial Officer, Plexus: Yes, I can start, Matt. You're right. I mean, we're probably losing about 50 basis points of fixed cost leverage in the Q1. We're covering that with higher contribution margin. Some of that's coming from mix of services and customer mix, along with, again, as Oliver touched on, further automation and productivity improvements.
From a sector perspective, it's not much of a difference between the sectors. So I wouldn't say any additional weighting to a certain sector is necessarily driving better profitability. It almost comes to within customers.
Oliver Mihn, Executive Vice President and Chief Operating Officer, Plexus: And then on to that, in terms of mix, rather than hitting that from a sector's perspective, we expect our engineering solutions revenue to pick up as the fiscal year progresses, and that certainly hits a higher margin number than the rest of our operations.
Matt Sheerin, Analyst, Stifel: Could you remind us how big that business is?
Todd Kelsey, President and Chief Executive Officer, Plexus: It's greater than $100,000,000 is kind of the way we framed it. We don't give it to a lot of specifics.
Matt Sheerin, Analyst, Stifel: With very high margins relative to your business, right? Yes. Yes. Yes. Okay.
All right. That's it for me. Thanks so much. Sure.
David Williams, Analyst, The Benchmark Company: Thanks, Matt.
Bailey, Conference Operator: Your next question comes from the line of Anja Soderstrom with Sidoti. Your line is open.
Sean Harrison, Vice President of Investor Relations, Plexus: Anya?
Sean Harrison, Vice President of Investor Relations, Plexus1: Yes, can you hear me?
Pat Germain, Executive Vice President and Chief Financial Officer, Plexus: Just you're really faint.
Sean Harrison, Vice President of Investor Relations, Plexus1: Hello? Yes,
Pat Germain, Executive Vice President and Chief Financial Officer, Plexus: much better. You there?
Sean Harrison, Vice President of Investor Relations, Plexus1: Hello. Can you hear me better now?
Pat Germain, Executive Vice President and Chief Financial Officer, Plexus: We can, yes.
Sean Harrison, Vice President of Investor Relations, Plexus1: Okay. I'm sorry. In terms of the Malaysia expansion, to what magnitude you expect to are expanding it and what kind of products do you support there? And when do you expect the expansion to be completed?
Todd Kelsey, President and Chief Executive Officer, Plexus: Yes. So we support all of our market sectors in Malaysia. We have a quite large campus there that currently consists of 5 different facilities. So this would be our 6th in the Malaysia area. When we think about the new facility, some of the growth we're targeting is around semi cap and around healthcare life sciences in particular.
But that's not again, within Malaysia, in our Penang campus, we support all of our sectors. So regarding completion is
Oliver Mihn, Executive Vice President and Chief Operating Officer, Plexus: we expect to be able to hit some first customer shipments late in the fiscal year.
Sean Harrison, Vice President of Investor Relations, Plexus1: Okay. Thank you. And in terms of the nuclear energy compliance, what led you to get there to obtain that? And what's involved in getting that? And what can we expect from you having that?
Oliver Mihn, Executive Vice President and Chief Operating Officer, Plexus: Yes. So that was driven by our customers. So we had an award that involves some products that's part of the nuclear energy supply chain. And so the customer came out and audited us to that standard.
Sean Harrison, Vice President of Investor Relations, Plexus1: Okay. Thank you.
Todd Kelsey, President and Chief Executive Officer, Plexus: It's a fairly rigorous standard that supports the, again, the nuclear energy subsector. And we've already had additional customers that have an interest in the fact that we have this ability.
Bailey, Conference Operator: There are no further questions at this time. I will turn the call back over to Todd Kelsey, Plexus' President and Chief Executive Officer, for closing remarks.
Todd Kelsey, President and Chief Executive Officer, Plexus: Yes. Thank you, Bailey. Just like to summarize a bit of our call and the key themes of our call. So first of all, I want to thank our shareholders, investors, analysts and our Plexus team members who joined the call this morning. We appreciate your support as always.
Reiterating the key themes of today's call, we're positioned for a solid fiscal 2025, creating additional shareholder value through delivering revenue growth, robust operating margin and sustained free cash flow generation. As we look to fiscal 2025, we anticipate strong Aerospace and Defense revenue growth given robust end markets and new program ramps as well as moderate Healthcare Life Sciences and Industrial revenue growth aided by share gains and new programs. We've displayed our ability to leverage our focus on increased operational efficiency by achieving our target non GAAP operating margin goal of greater than 6% 1 year earlier than projected. This positions us to continue the strong operational performance of recent quarters in fiscal 2025. Finally, we delivered record free cash flow in fiscal 2024, allowing us to reduce debt and generate additional shareholder value.
The combination of these factors position Plexus to deliver strong EPS growth in fiscal 2025. Thank you again, and have a nice day.
Bailey, Conference Operator: This concludes today's conference call. You may now disconnect.
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