Susan Hanson - Director, Corporate Communications and Brand Management Todd Kelsey - President and CEO Steve Frisch - Executive Vice President and COO Patrick Jermain - Senior Vice President and CFO.

Shawn Harrison - Longbow Research Matthew Sheerin - Stifel Nicolaus Sherri Scribner - Deutsche Bank Herve Francois - B. Riley Mitch Steves - RBC Capital Markets Jim Suva - Citi Steve Fox - Cross Research Sean Hannan - Needham & Company.

Good morning and welcome to the Plexus Corp. Conference Call Regarding its Fiscal Fourth Quarter 2016 Earnings Announcement. My name is Sylvia and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open the conference call for questions.

The conference call is scheduled to last approximately one hour. I would now turn the call over to Ms. Susan Hanson, Plexus Director of Communications and Brand Management.

Susan?.

Thanks, Sylvia. 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 as they will not be limited to historical facts. The words believe, expect, intend, plan, anticipate and similar terms often identify forward-looking statements.

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 3, 2015, and the Safe Harbor and Fair Disclosure Statement in yesterday's press release.

Plexus provides non-GAAP supplemental information such as ROIC, economic return and free cash flow because those measures are used for internal management goals and decision-making and because they provide additional insight into financial performance.

In addition, management uses these and other non-GAAP measures such as adjusted net income and adjusted operating margin to provide a better understanding of core performance for purposes of period-to-period comparison.

For a full reconciliation of non-GAAP supplemental information, please refer to yesterday's press release and our periodic SEC filings.

We encourage participants on the call this morning to access the live webcast and supporting materials at Plexus website at www.plexus.com by clicking on Investor Relations at the top of that page and then Event Calendar.

Joining me today are Todd Kelsey, President and Chief Executive Officer; Steve Frisch, Executive Vice President and Chief Operating Officer; and Pat Jermain, Senior Vice President and Chief Financial Officer. Consistent with prior earnings call, Todd will provide summary comments before turning the call over to Steve and Pat for further details.

Let me now turn the call over Todd Kelsey.

Todd?.

Thank you, Susan, and good morning, everyone. Beginning with our fiscal year fourth quarter results on slide two. Yesterday, after the close of the market, we reported results for our fiscal fourth quarter of 2016.

Despite late quarter headwind headwinds, we achieved solid operating performance, resulting in GAAP diluted EPS of $0.55 and non-GAAP diluted EPS of $0.82. The latter firmly in position within our guidance range. Our revenue of $653 million was slightly below the guidance range.

Revenue was impacted by late quarter softness within our Networking/Communications sector and the temporary impact to our Xiamen, China operations from Typhoon Meranti that made landfall on September 15, 2016. Beyond these two items, we encountered modest softening of demand in our Defense/Security/Aerospace market sector.

This was offset by strength in our Industrial/Commercial sector as a result of new program ramps and improving demand from several semiconductor capital equipment customers. Please advance to slide four for further clarification of the impact of Typhoon Meranti to our Xiamen, China operations.

On September 15 our Xiamen 1 facility sustained significant damage to the roof of the building resulting in a two-day loss of power and several inches of water in certain areas of the facility. Despite these conditions, the site was largely operational three days after the typhoon as a result of the tremendous efforts of our Xiamen and APAC teams.

Our Xiamen 2 facility was not impacted by the typhoon beyond the initial power outage. After the typhoon subsided, we engaged our crisis management protocol. As a result, we enacted daily customer communications with impacted customers and a listed support from corporate and regional teams to assist with remediation efforts.

The typhoon had an approximately $5 million impact to our fiscal fourth quarter revenue as a result of loss production time and a meaningful inventory loss. Our global supply chain team rapidly engaged and has been clearing associated cut shortages. As a result we don’t expect any impact for fiscal first quarter revenue as a result of the typhoon.

In addition, our customer relationships at the site have strengthened as a result of the proactive communications and aggressive recovery plan. Given the challenges we face this quarter, I am pleased with our operating performance. Our teams displayed great passion in minimizing the impact of Typhoon Meranti.

As a demonstration of the resiliency in our operating model, we exceeded our targeted operating margin range of 4.7% to 5% on an adjusted basis despite revenue challenges. In addition, we improved our return on investment capital to 13.8% or 280 basis points above our weighted average cost of capital. Please advance to slide five.

Despite disappointing top line results in fiscal 2016 with revenue reducing by approximately 4%, we delivered an economic return of 280 basis points, below our goal of 500 basis points, but solidly in value creation territory. Please advance to slide six for a high level review of fiscal 2016.

We entered the year with significant revenue headwinds in Q1 and Q2 of fiscal 2016 as a result of rapidly deteriorating end markets and our decision to proactively disengage with two customer programs that didn’t align with our financial model or market sector synergy. The latter had an impact of $130 million for the fiscal year.

We responded by immediately implementing our cost reduction and productivity improvement initiatives. Our goal was to create a more resilient platform where we can achieve strong margin performance even in a soft revenue environment.

The end result was a 140 basis point improvement to quarterly adjusted operating margin throughout the course of the fiscal year.

We met or exceeded our target operating margin range of 4.7% to 5% in the fiscal third and fourth quarters as we benefited from the full impact of the productivity initiatives and improved revenue resulting from new program ramps.

Please advance to slide seven for results of our market sector performance in fiscal 2016 and insight into our expectations for fiscal 2017. Our three non-traditional sectors of Healthcare/Life Sciences, Industrial/Commercial and Defense/Security/Aerospace all display growth in fiscal 2016.

However, this was overshadowed by the nearly 30% revenue reduction in our Networking/Communication sector. Much of the reduction is reflective of our intentional shift out of the volatile and increasingly more commoditized networking space.

As we look to fiscal 2017, networking represents less than 20% of the sector revenue and less than 4% of Plexus revenue overall. In order to accurately reflect this portfolio change, we are eliminating the networking nomenclature from our sector naming convention.

Going forward, in our fiscal first quarter of 2017, this market sector will be named Communications. It is important to note the significance of our differentiated portfolio and revenue growth moving forward. Factoring out the traditional networking business, which is reflective of our current portfolio, our five-year CAGR is 8%.

The CAGR improves to 10% over a six-year period, which is the longest timeframe which we have the data segregated and coincides with the end of the Great Recession. Our differentiated portfolio positions Plexus for accelerated growth moving forward and gives us confidence that we can grow at a high single or low double-digit percentage point rate.

Please advance to slide eight for a few thoughts regarding fiscal 2017. While we expect continued low growth end markets, we have confidence in our outlook for fiscal 2017 based on our strengthening wins momentum and record $2.8 billion funnel of qualified manufacturing opportunities.

We currently anticipate that we will return to sequential growth after the fiscal first quarter of 2017 and grow revenue within each of our market sectors for the full fiscal year.

Consequently, while the demand environment could certainly change over the course of the next year, we are increasingly optimistic that our goal of a $3 billion annual run rate as we exit the fiscal year is attainable.

Furthermore, with the exception of our seasonally challenged fiscal second quarter, we anticipate delivering operating margins within our target range throughout fiscal 2017. In addition, we're committed to achieving meaningful growth and profitability in Europe and expanding our aftermarket services portfolio in fiscal 2017.

Our teams continue to differentiate Plexus by providing customer service excellence and delivering exceptional quality products on time at a fair price. Further, we're driving efficiency and consistency across the global enterprise by leveraging our One Plexus mindset.

Finally, we've recently become a full member of the Electronic Industry Citizenship Coalition, reflecting our commitment to socially responsible business practices. Advancing to our fiscal first quarter guidance on slide nine.

In the fiscal first quarter of 2017, we anticipate strong operating performance despite near-term revenue softness as a result of a delay in orders with a large industrial commercial customer and further end market weakness within our Communications market sector.

As a result, we're guiding fiscal first quarter 2017 revenue of $620 million to $650 million. With previously disclosed restructuring activities behind us and continued strong operating performance as a result of the resiliency in our model, we are guiding diluted GAAP EPS in the range of $0.74 to $0.82.

This includes $0.11 of stock-based compensation expense. Please advance to slide 10. Before concluding, I want to take a moment to thank the more than 14,000 Plexus team members globally. It is through the dedication the customer service excellence that Plexus is able to deliver strong operating performance and industry-leading net promoter scores.

I will now turn the call over to Steve for additional insight into the performance of our market sectors and operations.

Steve?.

Thank you, Todd. Good morning. Please advance to slide 11 for insight into the performance of our market sectors during Q4 of 2016 as well as our expectations for the sectors in fiscal Q1 of 2017. Our Healthcare/Life Sciences sector was down 7% sequentially in Q4, below our expectations of low single-digit decrease.

Demand was relatively robust within the quarter due to several new programs exceeding expectations; however, delayed shipments due to typhoon in Xiamen and customer delays with two new programs offset the strength.

Looking ahead to fiscal Q1, we currently anticipate in our Healthcare/Life Sciences sector to be up in the high single-digits as we complete our recovery in Xiamen and several new programs continue to ramp. Seven of our top 10 customers increased their Q1 forecasts from the prior period.

Overall, we expect a healthy growth here in fiscal 2017 within our Healthcare/Life Sciences market sector as a result of recent program wins. Our Industrial/Commercial sector was up 14% sequentially in our fiscal Q4, above our expectations of high single-digit growth. 12 of our top 15 customers outperformed their Q4 forecast.

We currently anticipate that Industrial/Commercial sector will be down in the high single-digit percentage range in fiscal Q1 due to a temporary delay in orders from one large customer. On positive note we've seen some forecast improvements in the semiconductor market space.

We are expecting reasonable growth in the Industrial/Commercial sector in fiscal 2017. Our Networking/Communications sector was down 18% sequentially in Q4, which was below our expectations of low double-digit decline. Late quarter shipments to a top customer were below expectations.

Eight of our top10 Communications customers have sought forecast in Q1 mainly due to end market weakness. As a result we expect fiscal Q1 Communications revenue to be down in the high single-digits. However we expect sequential growth beginning in Q2 of fiscal 2017 due to growth of existing program as well as new program ramps.

As a result we expect modest growth for fiscal 2017. Our Defense/Security and Aerospace sector was down 1% sequentially in Q4, a result that was below our expectations of mid-single-digit growth. The soft results were due to a new single systemic issue.

New program ramps delays, end market softness and inventory adjustments all contribute to the weaker result. We currently expect Q1 revenue to be down in the mid-single digits mainly as a result of end market softness.

However expect new program ramps to offset sluggish end markets and enable good year-over-year growth within the sector in fiscal 2017. Next to new business -- to new business wins on slide 12.

During the fiscal fourth quarter we won 37 new programs at our manufacturing solutions group that we anticipate will generate $200 million in annualized revenue when fully ramped in production.

The second consecutive quarter of strong business wins is an indication of our focus on operational and customer service excellence is being recognized by our customers. Wins within our Americas region was exceptionally strong with several key wins from existing customers.

In addition our EMEA region returned to wins level required to support healthy growth going forward. Please advance to slide 13 for further insight into the wins performance of our market sectors. In the fiscal fourth quarter our Manufacturing Solutions wins were balanced across all four sectors.

The wins include significant business expansions with three of our top customers in addition of two new customers. And additionally expanded our relationship with one of our top customers within Q4 and expect additional wins and revenue growth with them in fiscal 2017. Our wins momentum continues to support a diversified portfolio strategy.

Now advancing to Manufacturing wins momentum on slide 14. Our trailing four quarter manufacturing wins as shown by the dark blue bars is at $747 million. This performance results in wins momentum was 29% above our target of25% in the second consecutive quarter strong results.

As expected Engineering Solutions delivered record wins in fiscal Q4 of approximately $30 million. With this win the backlog for Engineering Solutions was robust as we start fiscal 2017. These engineering programs will provide a good pipeline of manufacturing opportunities in fiscal 2018. Please advance to slide 15.

In with the strong wins our manufacturing funnel of qualified opportunities increased to $2.8 billion. A new record for the company. The funnel strength is being fueled by larger opportunities especially from our Healthcare/Life Sciences and Industrial/ Commercial sectors further supporting our differentiated business mix.

Next we like to turn to operational performance on slide 16. Revenue in fiscal Q4 finished slightly below one of our guidance range at $653. As Todd highlighted APAC team did outstanding job mitigating the impacts of the typhoon in Xiamen. They were able to limit the revenue impact to approximately $5 million.

The backwaters expected to be recovered within this fiscal quarter. Further we reported adjusted operating margin of 5.1% in record Non-GAAP operating profit for the quarter.

All this result from enterprise-wide improvement efforts in fiscal 2016 our operations team in APAC delivered improvements throughout the year and our operations teams in Americas drove significant improvements in the back half of fiscal 2016.

We expect these improvements to be the same as represented by operating margin guidance of 4.9% to 5.2% for Q1 fiscal 2017. With the record funnel and strong business development wins our reporting and transition teams are very busy in all three regions. We will be making investments to support the anticipated revenue growth in fiscal 2017.

Our win continues to drive productivity improvements from across the enterprise remain committed to maintaining our target margin -- operating margin range of 4.7% to 5.0%. I'll now turn the call over to Pat for detailed review of fiscal performance.

Pat?.

Thank you, Steve and good morning, everyone. Our fiscal fourth quarter results are summarized on slide 17. As mentioned revenue of $653 million was slightly below guidance due to late quarter softness within our Networking/Communication sector and the impact to our Xiamen facility from the typhoon.

GAAP gross margin of 9.4% reflects the detriment of approximately 50 basis points related to losses incurred from the typhoon. Our Xiamen facility experienced damages to inventory, equipment and the facility itself and as a result, we recorded charges up to our insurance deductible of approximately $2.9 million.

Any additional charges which we don’t expect to be significant would be covered by insurance. Before considering the losses from typhoon, adjusted gross margin was 9.9% which was above our Non-GAAP guidance and 50 basis points above the fiscal third quarter.

By continuing to manage costs and improve productivity, we experienced margin expansion across all three of our manufacturing regions. Selling and administrative expense of approximately $36 million, included $5.2 million of accelerated stock-based compensation expense related to the previously announced retirement agreement with our former CEO.

As most of you are aware, we have historically reported results inclusive of stock-based compensation expense and will continue to do so. However given the amount and infrequent nature of this acceleration, we have excluded the $5.2 million as part of our Non-GAAP results.

So before restructuring and items just mentioned, our adjusted operating margin of 5.1% was at the top-end of our guidance. Our ability to operate within this range at a lower revenue level demonstrates the success we have had in managing our cost structure.

As anticipated and mentioned last quarter, the devaluation of the British pound had a minor impact to the overall fourth quarter results as less than 3% of Plexus revenue is generated in the U.K.

Diluted EPS of $0.56 includes the detriment of $0.26 per share, as a result of the after-tax charges of approximately $9.2 million which included losses incurred from the typhoon, the acceleration of stock-based compensation and restructuring and other charges.

Excluding the special items, Non-GAAP EPS of $0.82 was slightly above the midpoint of our guidance During the quarter, we recorded again below operating profit of $0.02 per share related to foreign exchange activity.

Turning now to the balance sheet on slide 18, return on invested capital was 13.8% for fiscal 2016 reflecting an economic return of 2.8% based on our weighted average cost of capital of 11%. In fiscal 2017, our weighted average cost of capital will reduce slightly 10.5%.

During the quarter, we purchased approximately 155,000 of our shares for $7.1 million at a weighted average price $45.81 per share. For fiscal 2016, we completed the stock repurchase program by purchasing $30 million of our shares at an average price of $39.43 per share.

Starting in fiscal 2017, we have begun purchasing shares under the new $150 million multiyear repurchase program. We expect to execute this program on a consistent basis similar to the fiscal 2016 program dependent on market conditions. Also during the quarter, we repatriated $100 million of cash from our foreign operations.

We are able to offset the resulting tax expense through the utilization of accumulated U.S. net operating loss carryforwards and foreign tax credits. We believe the additional cash will enable us to maximize shareholder value by returning excess cash to shareholders through our previously announced share repurchase program.

During the quarter, we generated approximately $5 million in cash from operations and spent $7 million on capital expenditures, resulting in cash outflows of $2 million.

For the fiscal year, we generated $128 million in cash from operations and spent $31 million on capital expenditures resulting in free cash flows of $97 million more than doubling the free cash flow from the prior year. Cash cycle at the end of the fourth quarter was 71 days a sequential increase of eight days and three days above our guidance.

Please turn to slide 19 for details on our cash cycle. Days in inventory were sequentially flat which demonstrated our ability to effectively manage material purchases despite the revenue shortfall.

Sequentially, days in receivables were up seven days due to the timing of customer shipments and the anticipated mix changed customers with less favorable payment terms. In addition the close alignment for the fiscal and calendar periods result in less quarter-end payments being received prior to the fiscal year-end.

Sequentially payable days were down one day due to reduced purchasing activity. As Todd has already provided the revenue and EPS guidance for fiscal first quarter, I'll now turn to some additional details which are summarized on slide 20.

During the fiscal fourth quarter we completed all restructuring activities related to our cost reduction and productivity improvement initiatives. At this time we do not anticipate any restructuring charges or other special items in fiscal 2017, therefore the guidance provided today's GAAP only.

Fiscal first quarter gross margin is expected to be in the range and 9.6% to 9.8%. The midpoint of this guidance suggests a sequential decrease of 20 basis points, a result of lower fixed costs absorption caused by the anticipated revenue decline.

As we continue to tightly managed our operating expenses, we expect SG&A dollars in the fiscal first quarter to be in the range of $29 million to $30 million. At the midpoint of our revenue guidance anticipated SG&A would be approximately 4.6% of revenue.

Fiscal first quarter operating margin is expected to be in the range of 4.9% to 5.2% which includes approximately 60 basis points stock-based compensation expense. At the midpoint of this guidance suggests a 130 basis point improvement compared to the prior year first quarter. A few other notes.

Depreciation expense for the fiscal first quarter is expected to be approximately $12 million consistent with the fiscal fourth quarter. We estimate an effective tax rate of 9% to 11% for the fiscal first quarter as well as for the full year. Our expectation for the balance sheet is a sequential improvement in working capital dollars.

Cash cycle days are expected to be in the range of 67 to 71 days for the fiscal first quarter, suggesting a sequential improvement two days at the midpoint of this guidance. The decrease in working capital dollars and cash cycle days is primarily related to reduction in accounts receivable to a more normalized level.

We expect free cash flow in the range of $20 million to $40 million for the fiscal first quarter and to be above $100 million for fiscal 2017. Fiscal 2017 capital spending is anticipated to be in the range of $50 million to $60 million to support new program ramps, refresh of equipment and productivity improvement.

With that Sylvia I will now open the call for questions. We ask that you please limit yourself to one question one follow-up.

Sylvia?.

Thank you. We will not begin the question-and-answer session. [Operator Instructions] And our first question comes from Shawn Harrison from Longbow Research. .

Hi. Morning everybody. .

Good morning, Shawn. .

Good morning. .

Wanted to delve into just the weakness I guess now we got to call it comp your largest customer within that segment cited I guess a product transition in terms of technology they are including and I think one of the products you deal with in a ramp.

As the calendar 2017 year progresses maybe you could be just talk about how that affects your view of the comp business throughout 2017? Is that's the biggest factor, or is just the underlying demand a bigger dynamic versus kind of just technology transition in their product?.

Yeah. Okay, Shawn. This is Todd. I’ll take that question. Just give me one moment, please. So, with respect to the Communications market sector as we look into Q1, we are seeing some broad-based softening. One of the things we want to be cautious of is we don't want to talk about specific customers and what we see with specific customers.

But what I would say is as we go forward and we talked a quarter ago that we expected to start to see some sequential growth and expected reasonable growth throughout -- in the rest of fiscal 2017. And that outlook really hasn't changed. I mean, what is done I would say is pushed a quarter or so out from our perspective.

But, in general, what we see is some near-term softening as we talked about across the board.

But as we get into next quarter and beyond we are in the process of ramping several programs with a number of different customers within the sector, including with our largest customer, and I would say that we're very confident in our outlook with our largest customer in the sector.

And I think external research from everything we can say would support that. So, overall, we still have confidence we're going to have growth within the networking -- within the Communications sector. I have to get my own branding right here. Within our communication sector in fiscal 2017 we believe there's sequential growth in each of the quarters.

And one of the things I want to point out before moving on from this question is we still have a headwind from the one program disengagement that we announced last year within fiscal 2017 versus fiscal 2016 and that's the tune of about $58 million.

So as we look at our own internal numbers we view Communications -- the underlying growth in Communications has actually been double-digit in fiscal 2017..

So organic would be double-digit fiscal 2017….

Correct..

Okay. And as a follow-up if I may. Just Pat, I know you're controlling SG&A here in the March quarter.

What is the typical down tick, I guess increase you would see in terms of expense for the -- for the -- I am sorry -- December quarter you are holding it down, March quarter you'll see and I think what's the typical increase and maybe what a normalize dollar figures as we go through the year in terms of SG&A..

Yeah, that -- the merit increases and the payroll reset, we typically see at the first of the calendar years is typically around $1 million to $1.5 million that hits operating expenses. And then what I would say Shawn kind of going through the year in that range of $30 million to probably $32 million is a reasonable.

A lot of our incentive compensation flows through SG&A. And with the improved revenue and return on invested capital, we will see some increase in operating expenses this year compared to last year..

Perfect. And congrats everybody on just solve profitability. .

Thank you, Shawn. .

Our following question comes from Matt Sheerin from Stifel. .

Yes. Thanks. Good morning.

Just following up on Shawn's question regarding that Communications business that networking portion which is down to 20%, are you expecting to grow that part of the business? And in terms of the de-selecting and walking away from programs, is that also behind you at this point?.

Hey, this is Steve. I will answer your second question first. Yeah, the walking away from businesses is behind us. We do have a few customers left in that space that we think that our value proposition. And we do anticipate to grow with them. But in terms of the split of the sector, it will remain a small portion of that -- of the Communications sector.

So from this point forward, I would say relatively stable in terms of the percentage mix that that it is..

Okay. And then -- and just for your guidance for fiscal 2017 and your implication to get to the $3 billion revenue run rate so that implies a very strong second half double-digit growth year-over-year by the next September quarter.

Are you expecting -- and it sounds like communication is -- the underlying growth rate is going to be double-digits, but are you expecting that kind of goes across the sector, or will one be stronger than the other and which one?.

Yeah, I will hit the fiscal 2017 question first, maybe in a little bit more detailed picture. A lot of people have interest in that area. First thing I would say is we are cautious, we're not guiding fiscal 2017 or any specific quarters in fiscal 2017 beyond Q1.

So it is certainly too early to guide the year, to predict what's going to happen to come August or September of next year due to ramp rates of programs, end markets, the macro environment, geopolitical issues what have here.

But what I want to do is take things back to our Investor Day in June and at our Investor Day I spoke about our goal of exiting the fiscal year at a $3 billion run rate. And we talked I believe in Q&A about how realistic that goal was and what needed to occur.

And I said well, right now, it's attainable, there is a path to it as a path of this goal but a number of things we need to accomplish to make that occur as we exit the fiscal year. And what I would say is those things that are within our control that we needed to accomplish are largely accomplished.

So there's still many things that I would say would not be in our control that could impact that number, but we feel really optimistic with what we've been able to accomplish and that we will continue to get those actions done that will put us in position to be able to reach this goal. So we view it as realistic.

We view it as attainable, certainly not in the bag because so many things can happen over the course of the next year. But we also have more opportunities that really even were reflected or weren't even known in that June timeframe that have a potential to move the needle in 2017. So we feel good that if we continue to execute the way we're executing.

The market stay like they are that we can we can do this..

So even in the stable market environment without underlying growth you still think you can get to those numbers based on the program wins and the backlog that you have?.

Well, it can't get any worse than it is now. I mean we could -- certainly couldn't have a recession and believe what we can make it. But we're really looking at today's environment as being the environment. And for the most part of we're seeing stability across our market sectors.

We've had a couple of customer specific or sector specific issues that are impacting us in the near-term that we talked about, but our markets are pretty stable as of right now as a whole..

Fair enough. Okay. Thanks a lot..

And following question comes from Sherri Scribner from Deutsche Bank..

Hi, thanks. I am just having a hard time mathematically getting to, you know, modest growth in the Communications segment in fiscal 2017.

I was just wondering if you could provide some additional detail and how you expect that business to ramp through the year because if you look at the year-over-year -- the guidance for the first quarter it suggests 25% year-over-year decline in revenue roughly and then it seems like it will be hard to get that number -- to offset that number through growth.

And so I am trying to understand when do these new programs kick-in? Is it the second quarter you see a pretty significant ramp, is it the third quarter? Just trying to understand that..

Hey, Sherri. This is Steve. The expectation is that some of the current products that we have that we will start seeing an uptick is early as Q2. I think I put that in my commentary that we expect a rebound with one of our significant programs in Q2. We also expect new program ramps to start occurring in Q2 as well.

So there's a little bit of softness that we saw here in Q1, so it will be interesting to see how that fully plays out, but we do see a pretty significant ramp with some of these programs as we look into the latter half of 2017, and gives us the visibility that modest growth is possible..

Okay. And then you guys have done a great job with the operating margins. You now above your target range.

Should we assume that the margins start to trend down as you ramp some of this new business, you have a little bit of extra cost but still in the high end of the target range for the rest of the quarters of the fiscal 2017?.

Yeah, I think, Sherri, what we want to continue to do is be sure we hit this 4.7% to 5%. Now we know we've got some potential challenges in Q2 from the seasonal issues that Pat talked about that we still need to overcome, but that's still our goal within there.

We would expect though -- I mean, while we bump the head in Q4 and our guidance suggests we could exceed the range in Q1 we wouldn't expect that to be a long-term situation as we believe we need to put in some reasonable investments particularly around transitions for the new business that we're bringing in towards the back half of the year..

Thank you..

You are welcome..

Our next question comes from Herve Francois from B. Riley..

Yeah. Hi. Good morning, guys..

Good morning. .

On your Industrial business I think you mentioned in your opening remarks about 12 out of our top 15 customers outperform their forecasts in the quarter. Can you drill into that little bit kind of what kind of product lines, you know, did you see -- I mean that's certainly impressive.

Was it just get I guess strength across the board within Industrial or is it specific type of product lines that you saw a lot of your customers increasing the forecast with you throughout the quarter?.

Yeah. This is Steve. I will take that one. We definitely saw an uptick in the semiconductor market which is the first time we've seen that in quite some time. And I think what we expect to see that continuing in 2017.

How strong it gets remains to be seen, but we can -- we definitely seen an uptick there which -- we have several customers in that space, so that was a fair amount of it. We do have a few other customers that are associated with that industry that saw an uptick as well.

We have not seen an uptick in oil and gas yet, after market stays flat to down for us. So it's really the semicon space we want to draw the majority of it..

Got it. And then I guess switching over to the Healthcare side. I know it was impacted due to the typhoon as you mentioned in the quarter.

Do you see that coming back over the next several quarters outside of what was impacted due to the typhoon?.

So from -- this is Steve again. From a typhoon standpoint we expect to be fully recovered with everything in this fiscal quarter. So we will be -- the facility itself is back 100% operational.

The only thing we're working through is filling the pipeline of inventory that was damaged, but we expect to get all customer shipments in the quarter and be -- maybe operating as normal here as we exit the fiscal fourth quarter. So should be no further impact for that.

With that said in terms of Healthcare/Life Sciences if you take a look at the wins percentage of that -- some out of Healthcare/Life Sciences we have significant opportunities, are ramping with Healthcare/Life Sciences and that's what's giving us the confidence for the growth in F 2017 with Healthcare/Life Sciences..

Got it. If I could just -- one last question.

When you take a look at your end markets throughout fiscal 2017 I know you're not giving guidance for all the fiscal 2017, what would you say that has the best upside or improving their margins throughout the year versus where it stands today?.

This is Steve. It's difficult to say in terms of improving margins. I think in terms of the optimism for growth -- I think it’s important to know the majority of the stuff that we're doing in terms of F2017 growth is really associated with new program ramps.

And so we kind of switch the mode from depending upon end market growth, really figuring out how we're going to grow the organization with the ramps that we need to do. And so there's a lot of focus on ramping customers. As you can ramp customers, there a little bit more pressure on margins.

And I think Todd talked about the fact that we will need to invest a little bit as we ramp these programs in the back half of 2017. So from that standpoint we remain committed to the 4.7% to 5%, but we do know we will have to invest to support the growth that we expect to see..

And I guess that's included within your $50 million to %60 million CapEx guidance for the year?.

Yeah. .

Got it. All right. Thanks again..

Welcome..

Our next question comes from Mitch Steves from RBC Capital Markets..

Yeah. Thanks for taking my question, guys. So on the Defense/Security/Aerospace segment, I know the five-year CAGR is 15%, which seems like a pretty high number in 2017.

So you guys can help us think through the Q-over-Q there because you'll be starting at $97 million or so roughly, based on the guidance for December and how that ramps over the next three quarters. .

Yeah. This is Steve. I think in terms of this quarter it really was a collection of things that that drove the softness. We did see some softness in the Security markets. We have a couple of products with a different customer that they definitely had softer end market demand.

On the Aerospace side, the commercial remains strong from our perspective, maybe a little bit of hesitation in some of the helicopter market or in the bizjet. But from an overall standpoint it's kind of a collection of things that happened. We do see in the Aerospace market a bit of softness in Q1.

But as we look forward that rebound nicely in the back half of 2017. So we're not expecting any, you know, kind of systemic things going on into future, just seems to be a softness in a one quarter timeframe here..

Got it. And in the Networking Cloud -- sorry -- Networking/Communications transition there, can you help us think about what type of products you guys are walking away from? Because it seems like if the five-year CAGR is down 28% for Networking, you're probably going to be readjusting the portfolio a bit.

I know you guys can't give customer comments, maybe just products would be helpful..

Yeah. This is Steve again. I think it's important to note that we haven't walked away from any product any for probably three quarters or four quarters.

There was -- the business that we did walk away at the beginning of F17, F16, fiscal 2016 was really more associated with mobile infrastructure and some of the things that basically certainly get commoditized, really -- not really the back office stuff.

So from that standpoint it's really -- there really isn't anything more placed in our portfolio that we feel like we need to walk away from..

Yeah, so I maybe just a little bit to that as well. I mean part of what we saw it certainly was a major impact, may be the major impact, the large program that we walked away from. There was also end market softness in that market as well, so that contributed to the 29% down that we were in the Networking/Communications sector last year..

Got it. And I just wanted clarify.

So for the fiscal 2017 for the Communications side, so the numbers should still be down double-digits because of the disengagement you guys had, right? Or do you believe that's really going to flat line?.

No, we believe that it will be modestly up from -- F17 will be modest up F16 even including the $58 million headwind of the program disengagement..

Okay..

So we expect to be double-digits in essence..

Got it..

Our following question comes from Jim Suva from Citi..

Thank you very much. Can you quantify exactly or at least close to what it was, the financial revenue impact from the typhoon for the September quarter? And then it sounds like you said that you're making it all up in December.

And so it seems like that sequentially if that accurate, based upon my memory, then the December quarter should be guided to like above normal. And I was kind of scratching my head about why it's not.

Maybe that because of the Industrial slowdown, or how can we bridge those factors?.

Right. So, Jim, first of all, the typhoon revenue impact was about $5 million. It’s probably important to point out to everybody on the call to that the expectations one that typhoon occurred was on the order of maybe double that amount.

So the team did a great job of getting product out the door within the quarter to the extent possible limited the revenue to $5 million. It is true that this -- that demand does shift into Q1, so there is some pretty significant softening of demand, but it's very limited for us in Q1.

That's really down to two specific areas, one is an order push out from an Industrial/Commercial customer and I would say that is you could call that a heart order, so it basically is a true push out and that will be somewhere between a quarter to two in duration. And then the second is the Communications weakness that we're seeing right now.

So those two areas had a very significant impact to our guide for Q1. .

Okay. Thanks. That makes a lot of sense. And then as a follow-up, you mentioned some softness in Industrial, and you mentioned an order push out. But you also mentioned Industrial actually did quite well across most of your portfolio. So, how does one kind of bridge the gap of strengthened Industrial yet push out.

So, was it like qualification by the customer and not necessarily challenges within Plexus, or is it their current products are doing very well, or maybe what they're coming to market with has just been pushed back? How should we think about again the strength in Industrial yet kind of some push outs?.

That's related to the customer the push outs. It’s not related to any issues within Plexus. So we can certainly fulfill the demand, but there's some situations within there where the orders get pushed out. I don't give any more specific than that. But it is demand that will come back. It's not lost demand by any stretch of the imagination.

And when we look at the rest of the sector, the rest of the sector is pretty reasonable. For the first time in a long time I'd say we're seeing some strengthening in semiconductor capital equipment which is really encouraging..

Okay. Thank you so much for the detailed, much appreciated..

You are welcome. Thanks, Jim. .

And our final question comes from Steve Fox from Cross Research..

Thanks. Good morning. Just getting back to the operating margins, like you pointed out, you could be above the range two quarters in a row despite some revenue headwinds.

So, can you sort of talk about why that is the case a little bit more specifically? Was there -- did the mix turn out to be a lot better than you thought it would be, or do you take some additional actions in order to make sure you're at least in your targeted range this quarter and above the last quarter? And then I have a follow-up..

Sure. It sounds good Steve. So if we look at -- I will compare it really to Q4 and where our results ended up in Q4. And bottom line is what it comes down to is solid cost management and productivity gain. But to give you a little bit more specifics, it really four factors, I would say play into this.

One is the based off of what we came off of this past year the company is pretty conservative in spending. So we manage costs better than we had anticipated coming into the quarter and we see that continuing into Q1.

We also had some really nice labor productivity gains in the Asia-Pacific region, so some areas that they focused on as part of our productivity improvement initiatives yielded better than anticipated results.

The third factor is our supply chain organization had really strong performance on specific customer accounts where we're expecting to provide future cost reductions. So they really drove progress on that ahead of the curve so to speak. And then finally we benefited from the mix in the quarter..

Great. That's helpful. And then as a follow-up, Todd, like you pointed out, your funnel had a sharp increase this quarter, and I guess you were highlighting Healthcare and Industrial. I was wondering how much of that is based on expanded capabilities within Plexus versus seeking out business or types of business within those markets.

And I was wondering if there is anything -- any color you can add around what types of business in those markets is helping your funnel? Thanks very much..

This is Steve. From a strategy standpoint, our strategy hasn't changed. What we are seeing, you know, you're kind of being flat or down for some of our end customers. We see them looking to consolidate business more into the fewer number of suppliers. We've been benefiting from that. So from my perspective we're taking market share from the competition.

And so the opportunities that we're seeing is our customers are basically taking pieces of business and putting them together and making bigger packages out of them and that's what's coming into our funnel for one, specifically in the Healthcare/Life Sciences space that's happening.

And in terms of the Industrial/Commercial, we are benefiting from engagements with customers that have larger spend and larger opportunity. So both teams have been doing a good job at really seeking and finding opportunities that are maybe fit our value stream or value proposition, and they just happen to be a bit larger, so it's good for us..

Just a clarification on that last point.

So when you say larger spend, is that with new customers or existing customers, or both?.

In this quarter our win funnel is about 70% with existing customers and 30% with targets and that's a healthy mix for us. We like that. We like growing with existing customers, it's easier.

But we also want to add new logos and that 70/30 split might have to go back and look at the historical trend, but that's typically where the areas that we're in and we like that that max that ratio. .

Great. Thank you very much..

And we have Sean Hannan from Needham & Company..

Yeah. Good morning. Thanks. Just to follow-up on the question in terms of wins, just trying to get a perspective, and particularly, actually, focused around the funnel. Steve, you had commented that you're very pleased in accomplishing share gains.

Can you broaden your comments a little bit more around that to what degree are we accomplishing share gains, particularly as it relates to either traditional or non-traditional markets versus newly outsourced programs? Obviously, that's not something you'd expect much in the traditional markets, but it would be interesting to hear commentary around the non-traditional in that regard.

Thanks. .

Great. So without getting into specifics with customer -- in by name or anything like that there are a few of our customers that have decided to take their outsourcing spend and consolidate from anywhere from six to seven suppliers down to three.

We have that happened in the last quarter too here with a couple of customers and in all cases, we've come on the victorious side of being one of selected two or three.

So, that is driving some of the funnel and some of the opportunities that are basically important wins as well as the size of the funnel, which also gives us a bit more optimism in terms of our ability to grow in the short-term because these are existing programs and existing opportunities that we just have to work through the transition in the Plexus for..

Okay.

And then can you comment a little bit on nearly outsourced programs coming from industry?.

Yes, similar to the same scenarios that's happening -- challenges that our customers are having with managing their cost. They are looking to basically take internal manufacturing and outsource and consolidated it.

So, they will take a look at three factories, consolidate it into and then look to give us basically a piece of the standard interest we have outsourced and that happened a year ago with the large industrial customers that we've been talking about, that was internal manufacturing in the past.

They decided to down on outsourcing strategy and we benefited significantly from it..

Okay. And then last question here. From a geographic standpoint, you guys obviously accomplish some positive momentum globally.

Can you talk a little bit about expectations from a geographic facility standpoint as you look into fiscal 2017; obviously, there are some that provide little bit more leverage than others based on where their revenue closed in? Thanks..

Yes, so Sean with respect -- first of all, with regards to facilities, I think our footprint we view as stable right now. So, we think we have quite a bit room to able to grow within our footprint -- our existing footprint.

The one potential exception is around Guadalajara where we've had a lot of success in ramping new business in the Guadalajara all continues to remain very strong as those the wins momentum and into the site. So, that would be the one area as we look out over the next couple of years where we could have a facilities expansion.

Now, as we look at how our facilities potentially drive the business, there's certainly a lot of opportunity in our EMEA region or in Europe to be able to drive better leverage, to be able to drive stronger profitability, that something we expect as we're working our ways for fiscal 2017 that we’re going to continue to see strong growth from that region and as a result, we're going to gain leverage and drive stronger margins out of that region as a whole.

But overall, again, I wanted to again highlight that we want to stay focused around this 4.7% to 5% operating margin though and want to use what you could consider that additional margin or dollars to fuel growth. Our key goal is to accelerate growth while driving this target operating margin range..

Sure. Understood. All comments very appreciated. Thanks so much..

Thank you, Sean..

We have no further questions. At this time, I'd like to turn the call back over to your host, Todd Kelsey..

All right. Thank you very much Sylvia. So, what I'd like to leave you with is that we remain optimistic with outlook for 2017. We admittedly have had a near-term revenue setback as we look at into Q1, but we view that very much as a temporary situation. And I think even more importantly, we feel really good about the areas that we control.

First of all, our cost structure is well-aligned right now. We've shown the resiliency in our model that we can execute within a model for revenue amounts. From an execution standpoint, our sites and our regions are performing very well and this is reflected in the customer satisfaction scores that we receive on our net promoter survey scores.

Also we feel really good about our portfolio. I mean we went through the difficult transition of two large programs out of the company last year that's well behind us. We feel really good about our customer base and our portfolio moving forward.

And then finally, the wins in the funnel, we're taking share with customers, where it's showing up in strong wins and our funnel continues to build. So, we feel really good about things that we can control and that we'll do the right things for you in fiscal 2017.

So, in closing, what I like to do is thank the analyst for all your good questions and thank everybody who joined the call today..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..