Good morning, and welcome to the Plexus Corp Conference Call regarding its fiscal second quarter 2024 earnings announcement. My name is Brett Morgan, and I will 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 1 hour. Please note that this conference call is being recorded. .

I would now like to turn the call over to Mr. Shawn Harrison Plexus's Vice President of Investor Relations.

Shawn?.

Thank you, Britney. Good morning, everyone, 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 inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in the forward-looking statements.

For a list of factors that could cause actual results to differ materially from those discussed, please refer to the company's periodic SEC filings, particularly the risk factors in our Form 10-K filing for the fiscal year ended September 30, 2023, as supplemented by our Form 10-Q filings and the safe harbor and fair disclosure statement in our press release.

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We encourage participants on the call this morning to access the live webcast and supporting materials at Plexus' website at www.plexus.com, clicking on Investors at the top of that page.

Joining me today are Todd Kelsey, Chief Executive Officer; Pat Jermain, Executive Vice President and Chief Financial Officer; and Oliver Mihn, Executive Vice President, Chief Operating Officer; Steven Frisch, our President and Chief Strategy Officer, will unfortunately not be participating in today's call due to a death in the family.

Our thoughts are with Steve and his family. With today's earnings call, Todd will provide summary comments referring before turning the call over to Oliver and Pat for further details. .

Let me now turn the call over to Todd Kelsey.

Todd?.

Thank you, Shawn. Good morning, everyone. Please advance to Slide 3. I was pleased with the performance of our team during our fiscal second quarter, positioning Plexus to deliver ongoing industry-leading revenue growth along with sustained higher levels of profitability and increased free cash flow generation.

Our go-to-market team delivered $255 million in new program wins consistent with our fiscal first quarter, reflecting both market share gains and new outsourcing opportunities.

Our ongoing wins momentum, when combined with a $240 billion available market that is directly aligned to our strategy, supports our expectations of delivering our 9% to 12% revenue CAGR goal. .

Our target remains a 5.5% GAAP operating margin exiting fiscal 2025, which equates to a greater than 6% non-GAAP operating margin, excluding stock-based compensation expense. We continue to align our operations to achieve this return and expect sequential operating margin expansion in both our fiscal third and fourth quarters.

We generated $65 million of free cash flow for the fiscal second quarter, a particularly strong result, aided by continued progress on our working capital initiatives. I anticipate we will sustain our free cash flow momentum during our fiscal second half.

Later in our prepared remarks, Pat will provide more details regarding our increased fiscal 2024 free cash flow forecast of approximately $100 million as well as our plans for deploying excess cash to create additional shareholder value. .

Please advance to Slide 4 for a review of our fiscal second quarter results. We delivered fiscal second quarter results at the top end of our guidance with revenue of $967 million and non-GAAP EPS of $0.94, including $0.25 of stock-based compensation expense.

Our non-GAAP operating margin of 4.2%, including approximately 70 basis points of stock-based compensation expense, met our expectation entering the quarter. .

Please advance to Slide 5. For the fiscal second quarter, we won 32 new manufacturing programs worth $255 million annually when fully ramped into production, supported by solid contributions from each of our market sectors, including our semi cap subsector.

In capitalizing upon the value created by our differentiated service offering and superior execution as well as our focus on being the leader in highly complex products and demanding regulatory environments, our go-to-market organization is winning significant new outsourcing opportunities and gaining market share in support of sustaining Plexus' industry-leading revenue growth..

we expanded our engagement with the UN Global Compact by joining the Climate Ambition Accelerator, a program that will help Plexus advance our energy transition strategy and accelerate progress towards setting science-based emissions reduction targets.

We delivered on our fiscal 2024 initiative to assess our top 100 suppliers based on environmental and social impact criteria. These efforts build the foundation for a more transparent supply chain, aiding our goal to deliver a more sustainable, responsible and resilient sourcing strategy.

We strengthened the value-added capabilities we offer our customers to design, manufacture and service products while reducing their environmental impact. .

We were recognized by Glasgow, Scotland Center for engineering, education and development as a finalist for their Net Zero Hero award based on the capabilities we developed to assess the global warming potential of the products we help create. Pictures on the slide are members of our team in Scotland who delivered this work.

We also partnered with Purdue University on a custom curriculum to deepen our mutual understanding of eco-design principles in order to strengthen our sustainable product development solutions. .

Finally, we are excited that later in the fiscal third quarter, we will release our annual sustainability report, which captures the demonstrated progress made in fiscal 2023 to advance our sustainable and responsible business practices as we realize our vision to help create the products that build a better world. .

Please advance to Slide 7. We believe our revenue growth is in the early stages of inflecting higher. And for the fiscal third quarter, we are guiding revenue of $960 million to $1 billion.

Robust demand from our aerospace and defense market sector and ongoing gradual recovery in demand for semiconductor capital equipment that is aided by our market share gains over the past 2 years and continued new program ramps are more than mitigating the inventory correction headwinds from our Healthcare/Life Sciences and industrial market sectors.

We are also forecasting non-GAAP operating margin of 5.2% to 5.6%, which excludes approximately 70 basis points of restructuring charges associated with realigning our manufacturing capabilities to best support long-term customer needs and approximately 60 basis points of stock-based compensation expense. .

Following these actions, we do not expect any further restructuring activity this fiscal year.

As mentioned with our fiscal first quarter update, while we continue to measure our performance against GAAP metrics, beginning with this fiscal third quarter, we are excluding stock-based compensation expense from our operating margin and EPS guidance for easier comparability to peers.

Therefore, on a directly comparable basis, the midpoint of our fiscal third quarter non-GAAP operating margin guidance is 50 basis points higher than our fiscal second quarter results or at the high end of our previously provided outlook of 30 to 50 basis points of sequential operating margin expansion. .

Finally, we are guiding fiscal third quarter non-GAAP EPS of $1.22 to $1.37, which excludes $0.21 of stock-based compensation expense and $0.21 of restructuring charges. We continue to anticipate a strong finish fiscal 2024, positioning Plexus for further momentum into fiscal 2025.

For the fiscal fourth quarter, we anticipate modest sequential revenue expansion, reflecting a continuation of the trends we expect for the fiscal third quarter. .

We are also anticipating an additional 30 to 50 basis point expansion in non-GAAP operating margin for the fiscal fourth quarter, benefiting from volume leverage and operating improvements from our restructuring actions.

At the midpoint, our non-GAAP operating margin exiting fiscal 2024 would be improved by 90 basis points when compared to our fiscal second quarter trough. In summary, I'm pleased with how our team continues to execute for our shareholders despite a challenging macro environment.

We remain focused on delivering our 9% to 12% organic revenue CAGR goal over the long term, generating at least 5.5% GAAP operating margin in excess of 6% non-GAAP operating margin exiting fiscal 2025 and producing more consistent and greater free cash flow. .

I will now turn the call over to Oliver for additional analysis of the performance of our market sectors, Oliver. .

Thank you, Todd. Good morning. I will begin with a review of the fiscal second quarter performance of each of our market sectors. Our expectations for each sector for the fiscal third quarter and some directional sector commentary for fiscal 2024.

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 the industrial sector on Slide 8. Revenue decreased 4% sequentially in the fiscal second quarter. This result met our expectation of a low single-digit decrease. Incremental revenue gains resulting from resolve supply chain constraints helped to compensate for softer end market demand across certain market subsectors.

As we start the fiscal third quarter, inventory corrections are creating muted demand in multiple subsectors, offset in part by incremental increases in semi cap and the early stages of recovery and broadband communications. .

This will result in flat revenue for the industrial sector for the fiscal third quarter. The industrial market sector had strong wins in the fiscal second quarter of $104 million. Wins were balanced across our subsectors and included 3 substantial program wins from existing customers in semi cap.

Additional new program wins for the fiscal second quarter included a win with a new customer that leverages AI-enabled technology to support more sustainable mining operations.

Plexus was selected in part due to our capabilities across all of our services, including our ability to commercialize their design, assemble their product and provide sustaining services. This program will be built and serviced in our Boise, Idaho facility..

We also expanded our portfolio with a leading energy infrastructure customer to include engagement from a new division with a complex mechanical assembly that will be produced in our Xiamen, China campus.

Looking ahead, we now anticipate a low single-digit decline in revenue for our industrial market sector for our fiscal 2024 as a gradual strengthening in semi cap and the early stages of an anticipated communications uplift is more than offset by some delays in new program ramp timing and generally muted demand associated with customers working through inventory.

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Please advance to Slide 9. Revenue in our Healthcare/Life Sciences sector was down 1% sequentially for the fiscal second quarter, which modestly exceeded our expectation of a low single-digit decrease. Demand increases inside the quarter from both existing programs and new product launches drove the improvement.

In the near term, we believe inventory corrections have largely subsided as revenue has stabilized. We expect our Healthcare/Life Sciences sector to be flat for the fiscal third quarter. .

Healthcare/Life Sciences sector wins for the fiscal second quarter were strong and totaled $109 million. Our wins included programs with 2 new customers. We have been awarded the production of a point-of-care diagnostic device for our Chicago, Illinois facility and an in vitro fertilization device for our Bangkok, Thailand facility.

This marks our first healthcare life sciences win for our facility in Bangkok. Our fiscal second quarter wins also included a competitive market share gain with a long-standing customer awarding Plexus the production of a patient monitoring device due to our consistent exceptional operational performance and executive engagement and relationships. .

The award is for our Guadalajara campus and marks the expansion of services for this customer to all 3 of our operating regions.

Looking at the Healthcare/Life Sciences market sector for fiscal 2024 as a result of inventory corrections and the approximately 5 percentage point growth headwind from the year-over-year reduction of components procured at above historical market prices, we continue to anticipate year-over-year revenue decline in the teens.

The strength of new program wins gives us optimism for F 25 as they ramp to volume. .

Advancing to Slide 10. Our Aerospace and Defense sector increased 2% sequentially in the fiscal second quarter, meeting our expectation of a low single-digit decrease, improved supply chain performance and new program ramps proceeding ahead of schedule, contributed to the better-than-expected performance.

As we look to the fiscal third quarter, continued robust commercial aerospace demand and new program strength in the defense, security and space subsectors contribute to our expectation of a high single-digit increase for the aerospace and defense sector. .

Our fiscal second quarter wins for the aerospace and defense sector was strong at $42 million. We won 2 new programs with a recently acquired space subsector customers supporting both military and commercial applications. These assemblies will be produced in our Kelso, Scotland facility.

We also won the next-generation product from an existing customer in our security subsector that will be built in our Penang, Malaysia campus. For fiscal 2024, aerospace and defense demand continues to be robust across all of our subsectors.

As a result, we continue to expect revenue growth for fiscal 2024 to exceed the high teens growth witnessed in fiscal 2023. .

Advancing to Slide 11, we can review the regional highlights of the manufacturing wins for the fiscal second quarter. The Americas wins were robust at $120 million and included a substantial win from an existing communications subsector customer for the production of its next-generation device in our Guadalajara, Mexico campus.

The APAC region's fiscal second quarter wins of $94 million included a significant program expansion with an existing health care life sciences sector customer for a monitoring device. That device is built in our Penang, Malaysia campus. .

The EMEA region's second quarter wins of $41 million continues its recent strong wins performance and includes a substantial award from an existing semi cap customer for our facility in Livingston, Scotland. Please advance to Slide 12 for a review of our funnel of qualified manufacturing opportunities.

Given the solid wins harvesting the past few quarters as well as the typical ebb and flow of programs in and out of the funnel, the total funnel decreased to $3.5 billion. While sequentially lower, recall that our qualified funnel of manufacturing opportunities only breached the $3.5 billion threshold in fiscal 2023..

Further, multiple market sectors noted the strength of their unqualified early-stage opportunities as we continue to pursue programs in our large addressable market for outsourcing. The industrial sector funnel dipped slightly to $893 million. The funnel demonstrated resilience as we backfilled almost all of the wins.

The semi cap subsector had both strong wins and a substantial increase in the funnel size. Aligned with our sector strategy, the opportunities reflected in our funnel are balanced across a variety of markets and across both existing customers, new divisions of existing customers and new customers. .

The Healthcare/Life Sciences sector wins performance contributed to the reduction in the funnel, declining to $1.8 billion. Strength in early-stage opportunities provides optimism for future wins growth for the Healthcare/Life Sciences sector.

The funnel for the aerospace and defense sector remains strong at $822 million with a great breadth and opportunities across the commercial aerospace, defense, security and space subsectors. .

Lastly, the funnel of opportunities for our engineering solutions remains robust. Customer decision-making saw incremental improvement during the fiscal second quarter, and our wins rebounded slightly as a result.

In addition, the market sector diversity within the funnel has improved, positioning Plexus to benefit from the future growth and significantly improved utilization of our engineering team..

I will now turn the call over to Pat for an in-depth review of our financial performance.

Pat?.

Thank you, Oliver, and good morning, everyone. Our fiscal second quarter results are summarized on Slide 13. With revenue at the top end of our guidance, gross margin of 9.1% came in above our midpoint due to slightly better fixed cost leverage.

Productivity improvements and the start of savings from our restructuring efforts led to a sequential gross margin improvement despite the impact from seasonal compensation cost increases. Selling and administrative expense of $47.6 million was slightly above our guidance.

However, as a percentage of revenue, SG&A of 4.9% was consistent with expectations. Non-GAAP operating margin of 4.2%, which excludes 120 basis points of restructuring charges, met the midpoint of our guidance. This result included over 70 basis points of static-based compensation expense. .

Recall last quarter that I mentioned we would begin sharing non-GAAP operating margin and EPS, exclusive of stock-based compensation expense for easier comparability to peers. This exclusion is reflected in our fiscal third quarter guidance.

We have also included a table in our press release presenting operating margin and EPS, excluding restructuring charges and stock-based compensation expense for the last 6 quarters. Nonoperating expenses of $10.5 million were favorable to expectations due to lower-than-anticipated net interest expense.

Non-GAAP diluted EPS of $0.94, which excludes $0.36 of restructuring charges, was at the top end of our guidance due to the factors previously mentioned, along with favorable tax rate. .

Turning to our cash flow and balance sheet on Slide 14. We were pleased with our free cash flow performance this quarter. We delivered $88 million in cash from operations and spent $23 million on capital expenditures, resulting in free cash flow of $65 million. This result significantly exceeded our net income and expectations.

With the usage of cash in the fiscal first quarter, we have now generated free cash flow of $33 million through the first 6 months of fiscal 2024. During the quarter, we purchased approximately 186,000 shares of our stock for $17.6 million.

We have approximately $38 million available under our current $50 million authorization and expect to consistently exercise the remaining amount during the second half of fiscal 2024, creating additional shareholder value. .

We ended the fiscal second quarter with a cash balance of $265 million and total debt of $438 million. We had $261 million available to borrow under our credit facility and a conservative gross debt-to-EBITDA ratio of less than 1.8x.

In addition to funding our share repurchase authorization, we will use any excess cash to reduce borrowings under our credit facility. For the fiscal second quarter, we delivered return on invested capital of 9.9%, which was 170 basis points above our weighted average cost of capital.

Cash cycle at the end of the fiscal second quarter was 91 days, 10 days favorable to expectations and sequentially improved by 4 days. .

Please turn to Slide 15 for details on our cash cycle. Our cash cycle improvement came from a combination of lower inventory days and higher days in advanced payments. We were encouraged to see our supply chain and regional teams drive sequential improvement in both areas.

They delivered a $56 million sequential reduction in gross inventory, which now sits at the lowest quarter in balance in 2 years. .

As Todd has already provided the revenue and EPS guidance for the fiscal third quarter, I'll review some additional details, which are summarized on Slide 16. Fiscal third quarter gross margin is expected to be in the range of 9.3% to 9.7%. At the midpoint, gross margin would be 40 basis points higher than the fiscal second quarter.

Improved productivity across all of our regions, better fixed cost leverage and savings recognized from our restructuring efforts are contributing to the anticipated improvement. We expect selling and administrative expenses in the range of $45.5 million to $46.5 million, which is fairly consistent with the fiscal second quarter. .

Note that our SG&A guidance is inclusive of approximately $5.5 million of stock-based compensation expense. Non-operating expenses are anticipated to be in the range of $10.5 million to $11 million, which is also fairly consistent with the fiscal second quarter.

Our non-GAAP effective tax rate for both the fiscal third quarter and fiscal year is expected to be in the range of 15% to 17%. With continued attention and focus on working capital efficiency, our expectation for the balance sheet is that we will recognize further reductions in working capital investments compared to the fiscal second quarter.

Based on our revenue forecast, we expect this level of working capital will result in cash cycle days in the range of 84 to 88 days. .

At the midpoint, this would be a sequential improvement of 5 days, which is mainly related to reductions in gross inventory. This improvement should lead to another quarter of positive free cash flow. A couple of comments on the full year.

We continue to expect capital spending in the range of $100 million to $120 million, which will equate to less than 3% of revenue.

Last quarter, I mentioned that we could generate up to $50 million in free cash flow for the fiscal year, with further progress on working capital initiatives, we are now projecting approximately $100 million of free cash flow for fiscal 2024. .

With that, Britney, let's now open the call for questions. .

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

If you think about the industrial segment, and you mentioned some of that weakening there. That seems -- we've been hearing maybe a little bit better commentary out of some of the semi suppliers in terms of some improvement there, even on the communications side.

So just wondering if you could maybe parse through where you're seeing some weakening and whether you think that's inventory related or more demand related? Or if it's just specific maybe to where you're -- where you have greater exposure. .

So David, I'll start with some of the good things that are happening in the Industrial segment, then I'll pass it over to Oliver and talk about maybe where some of the challenges are.

If we take a look at semi cap, first of all, we -- as we've talked about the last few quarters, we believe we're through the bottom and are seeing incremental improvement within semi CAP demand. Now the bulk of what we're seeing in revenue gains is from market share and market share gains that we've had recently.

But we are seeing some modest market improvement as well, too, which we anticipate will accelerate likely into '25, but it will -- we expect it to accelerate at some point. We're also seeing some signs of improvement within communications as well to you.

So again, early signs, not ready to declare a great recovery at this point, but we are seeing some positive momentum there. .

I'll pass it over to Oliver now. .

Yes. So to add on to that, if I consider other subsectors inside industrial [indiscernible], we are seeing a little bit more of a muted outlook in either say, electrification or automation and industrial equipment. I would attribute that to inventory corrections as we've seen rippling through other subsectors in prior quarters.

And then specific -- just to reiterate what Todd said, it's no a positive note, even if we see some incremental pushouts and say semi cap due to a fab delay or something like that, on the whole, both for semi cap and broadband communications we're sealing those early indications of modest market improvement. .

And you had mentioned some delays in that industrial on the programs.

Is that related to maybe some of the fabless you talked about just now?.

Sorry, the second half of your sentence, I didn't catch it. .

You had mentioned earlier that there were some program delays within the Industrial segment.

Is that related to maybe some of the pushouts or on the fab delays that you just spoke of?.

Yes. Exactly, right. Same correlating those 2 points would be correct. .

And then maybe, Todd, can you talk a little bit about the improvements that you're seeing in the engineering services side? And has that really improved outside of the restructuring actions that you've taken last quarter? And is that, I guess, from a -- in terms of the operating margin boost this quarter, is there a way to think about that contribution?.

Yes. Well, certainly, the restructuring activities helped, but we are seeing a demand improvement in engineering as well, too. As Oliver mentioned, wins ticked up. And the encouraging thing, a number of the new program wins are, I would call them brand-new programs that have the potential for many follow-on phases.

So we're getting a lot more confident around our demand within Engineering Solutions. The other thing I'd add is we're seeing good diversification within our funnel and within our wins within engineering. And I view that as a real positive as we continue to penetrate the other sectors beyond health care life sciences. .

David, I was just going to say from a margin standpoint, some of our actions we've taken will benefit Q3, and that's reflected in our guidance, but probably more so fully in Q4 and going forward after that. .

And Pat, maybe just one more for you on the free cash flow. That's certainly been an area of focus for you all and you've done a fantastic job at paying off.

Can you just talk about maybe what the puts and takes are there and how we should think about maybe the free cash flow as we get beyond this year, maybe in the next year, just kind of given the progress that you made thus far?.

And maybe I'll start with this quarter and where we saw improvement because I think that's going to lead into future quarters as well. I mean we had anticipated, forecasted actually an investment in working capital in Q2, and the reverse happened. We generated $65 million of positive free cash flow.

And there's probably 3 main areas that came from, obviously, gross inventory, a lot of effort around getting after aged inventory, a big effort to moderate what's actually coming into our facilities. Adjusting minimum order quantities, bringing down lead times, all of those benefited gross inventory, but then also higher advanced payments. .

Some of that's linked to excess and obsolete inventory, so getting customer commitments to that excess and absolute inventory benefited us. And then some capital spending pulled back that some of that's just deferral that we'll see in Q3, but some of that is just based on our revenue growth and pulling back on some of that spending. .

So going forward, David, we do see a path to continuing to bring gross inventory down, so generating similar amounts of free cash flow in Q3 and Q4 would be our expectation. And then as we get into '25, I think getting back to a more normalized free cash flow that we've seen kind of pre pandemic is our expectation.

So just a reminder, from a cash cycle day perspective, each day we pull out is $10 million of free cash flow we're freeing up. So really nice improvement in Q2 and expectation for Q3 and beyond. .

Our next question comes from the line of Jim Ricchiuti with Needham & Company. .

You may have addressed this and I may have just missed it. I was on another call. But I was hoping -- I heard some reference to the inventory correction in industrial and some of the subsectors spreading. And I was wondering, it sounds like you're on the margin a little bit more positive about what you're seeing in semi cap.

So where are you seeing some signs of potentially some softening in industrial?.

I'll jump in there, Jim, and provide how we'll provide some oversight overview as to how we're looking at industrial. Yes, you're correct. Our commentary here in our script prepared remarks was pointing out some inventory reductions, creating some muted demand, specifically in industrial equipment, automation and electrification.

We do see still incremental pushouts, say, inside semi cap as we hear about fab delays, fab deployment delays. But on the whole, both within semi cap and comms, we're seeing early incremental modest market improvement. .

And this may be a tougher one to answer, but just the broader correction that you're seeing in health care and even in some of the industrial markets where you've maybe seen the inventory challenges a little early on.

Any sense as to when that correction those headwinds may begin to abate?.

You maybe I'll take guide through each of our markets here, Jim, and talk about where I think we're at, at the moment.

If we look at E&D, continued strong really across all subsectors within aerospace and defense, so I would include security and commercial space, strong growth in each of those subsectors in fiscal '24, and the outlook for 25 looks encouraging as well to -- if we go over to health care, that's where we've seen the most severe inventory corrections.

Now we believe we've hit the bottom there. So there's been stability in our forecast over the course of the past quarter, where previously we had been seeing degradation on a quarter-over-quarter basis. So there's signs we've hit the bottom there. And then the question just becomes when do markets recover. .

So as we look to '25, right now, we're projecting some strong growth within health care, but that's a result of program ramps, not market recovery at this point. So as markets recover, I think we could have a really strong growth projection at that time or growth outlook. And then looking at industrial, that's been the latest one to soften a bit.

So over half the sector, I would say, is on an upward trend right now, that being semi-cap and our communications business. And the balance is seeing a bit of an inventory correction at this point that's really kind of taking away from the growth that we're seeing in the other 2 subsectors. .

Our next question comes from the line of Melissa Fairbanks with Raymond James & Associates. .

Maybe just a follow-up, Todd, on your comments on the health care business. We know you face some headwinds there for quite some time, first, from supply constraints now maybe an overcorrection in terms of the buying patterns. But you actually slightly outperformed your expectations in March.

Can you maybe give us an update on what you're seeing in each product category there or any greater level of detail in terms of where the inventory corrections are coming? Or maybe what's getting a little bit better?.

Yes. I think I'll pass it over to Oliver to give you a little color on that, Melissa. .

As we consider our Q2 performance, I would say that's less subsector based and more customer specific. So we had a few customers that specifically increased their demand through the quarter.

And then we had a couple of program ramps, both with new customers and existing customers that were essentially ahead, so moved a little bit faster than expected, and those are the things that all contributed to the beat. The better for [indiscernible]. .

So for my follow-up, and this might not be fair, but it seems like we have to talk about AI on every call. So in the past, you've talked about deploying AI and machine learning in your own manufacturing processes.

Some of your peers recently have been pretty outspoken about their own exposure to AI, either in the data center, some of the more industrial applications like power management, can you remind us if you've got any direct exposure to this market outside of your own internal processes?.

I think that the most direct line that I can paint for you is if you contemplate AI and then build out associated with that and how that's going to ripple through to semi cap equipment, so that's going to be something that we're going to participate heavily in. We also expect AI to drive continued innovation.

So for instance, within health care, you could expect that to drive faster product innovation as they've developed, for instance, on kind of making things up at algorithms to enable them to come up with patient outcomes more quickly and the innovation and device launching associated with that.

We think that's something we would directly stand to gain from. .

Our next question comes from the line of Steven Fox with Fox Advisors LLC. .

I had 2 questions. First off, you mentioned on the semi cap side that you're not only winning new programs, but you're seeing your funnel expand at the same time. I think that was the only area where you said that this quarter. You called out some growth that's benefiting from new programs, et cetera. It seems like you have a lot of momentum there.

But my question is, I was wondering if you could sort of right size us on where you're seeing the most success on semi cap, why you're taking share? Is anything changing in the supply chain? Because I know at times, you compete with EMS companies, but there's also sort of Tier 1, Tier 2 players to semi cap guys that do some of the stuff you do.

So sort of what's changed maybe over the last couple of years as the industry has gone through this downturn for you guys? And then I had a follow-up. .

So from a semi cap standpoint, and this goes with the new wins as well, too. We basically play across the entire spectrum within semi cap, or semi manufacturing in the process as well as test and back end. So that's a significant piece of business for us as well. The reason we're taking share is execution.

I mean, our team performs incredibly well from a standpoint of quality and delivery within that market space. We ship finished systems. So I think our capabilities are outstanding within the space, and that's recognized by our customers. And I would say we're kind of playing across the technology spectrum as well as memory and logic.

Another big play for us within semi cap is our engineering capabilities. So we're able to bring a lot of technology into our offering for our customers. .

And then just secondly, Pat, you mentioned improved productivity.

Can you just put a little color around that? Where are you seeing the benefits right now? And what kind of initiatives are helping productivity maybe in the future?.

Maybe I'll start, and then Oliver could jump in. It's really across all of our regions. We've seen productivity improvements. In Europe, we've secured some new wins. So leveraging our capacity better is benefiting our gross margin within Europe.

Same can be said for AMER where we're increasing capacity and utilization with some of the new program ramps that are going in. So Oliver let you add anything else from a productivity standpoint that you're seeing. .

I'll add 2 things, Pat. Thanks. First, just in terms of utilization, I'll note that our Bangkok site broke even in fiscal second quarter. So that's good news. And as those program ramps continue to approach full volume production, that profitability will obviously improve -- continue to improve.

And then specifically, internally, we have something that we measure called transformation costs, essentially the cost required to transform raw materials to finished product. And we've got laser focus on improvement goals, by site.

It's something that we think is really important for us as a business, and so that will continue to drive additional benefit as well. .

And one of those areas would be around quality and scrap and seeing scrap expense coming down with improved quality that we're having. And that's just one example of the focus on transformation costs that Oliver mentioned. .

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

I also have 2 questions here. Is there [indiscernible] contraction for the quarter.

How should we think about that? Is there a lumpiness there? Or how should we think about that going forward?.

Yes. I'll answer that, Anja. This is Oliver. As I consider the fund on the whole, the first thing I'll point out is we do not manage that the quarterly boundaries. So there's typical ebb and flow, and that's just a natural part of the process.

I'll also reflect on the fact that we've had a number of quarters of really strong wins recently that contributed to that funnel pulling back. And then the other thing I'll point out is we continue to still have a larger number than typical of large opportunities in our funnel.

And then as during our prepared comments, we also track internally and something we don't publish what we would call our unqualified early-stage funnel and multiple of our sectors have specifically pointed out that they see a lot of strength there. And so that then gives us optimism that the funnel is going to backfill nicely. .

And then I just want some clarification on past comments around the free cash flow and the CapEx spend being pushed out and you're pulling back on that.

Is that just a matter of that being pushed out into later this year? Or are you getting softer on your CapEx spend upon you see softer growth ahead?.

No. I think some of it, Anja, is just timing between quarters and when some of it hits. And I'd say we typically come into a quarter thinking we're going to spend a lot more than we typically do, and that's a quarterly trend we have seen for several quarters. I'm keeping the CapEx spending at $100 million to $120 million this year.

So that's consistent with last quarter. I started the year, I think, at $110 million to $130 million. So it's come down a little bit just based on our needs this year, but still pretty consistent with what we expected a quarter ago. .

What I'd add too, on is we're very optimistic in our growth potential for fiscal '25. So we're not backing off from an investment standpoint at all. .

Actually, I have one follow-up, too. Just in general, with your customer sentiment, given the economic uncertainties. However, you are in the outsourcing industry.

So how do you see them? Are they more cautious? Or are they more turning to outsourcing? Or just in general, what are you seeing among the customers when you speak to them?.

Yes. I think in general, there's a continued movement towards more and more outsourcing. And I think as the economy ebbs and flows as the -- when the economy is worse, you generally see an increase in outsourcing. So it's a bit inversely proportional. Right now, we're seeing good interest in outsourcing as the way I put it and it continues to improve. .

Thank you so much for that. I'm showing no further questions. I would now like to turn the call back over to Todd Kelsey for closing remarks. .

Thank you, Britney. I'd like to thank everybody for joining us, our shareholders, investors, analysts, Plexus team members. In concluding, I would like to state again how pleased I am with our team continues to execute.

We remain focused on activities to create shareholder value, and these include delivering our 9% to 12% revenue growth goal over the long term, generating at least 5.5% GAAP operating margin exiting fiscal 2025 and producing more consistent and greater free cash flow. Thank you all, and have a wonderful day. .

Okay. Thank you for participating in today's conference. This does conclude the program. You may now disconnect..