Plexus Corp. Price & Performance (PLXS)

Good morning, and thank you for joining us today. Some of the statements made and information provided during our call today will be forward looking statements including without limitation those regarding revenue, gross margin, selling and administrative expense, operating margin, other income and expense, taxes, cash cycle capital allocation and future business outlook. Forward looking statements are not guarantees since their inherent difficulties predicting future results and actual results could differ materially from those expressed or implied in the forward looking statements. For a list of factors that could cause actual results to differ materially from those discussed, please refer to the company's periodic SEC filings. Particularly the risk factors in our Form 10 ks filing, the fiscal year ended September 28, 2024, supplemented by our Form 10 Q filings and the Safe Harbor and fair disclosure statement in our press release. We encourage participants on the call this morning to access the live webcast and supporting materials at Plexus' website at www.plexus.com clicking on Investors at the top of that page. Joining me today are Todd Kelsey, President and Chief Executive Officer Oliver Min, Executive Vice President and Chief Operating Officer and Pat Germain, Executive Vice President and Chief Financial Officer.

With today's earnings call, I will provide summary comments turning the call over to Oliver and Pat for further details. With that, let me now turn the call over to Todd Kelsey. Todd? Thank you, Sean. Good morning, everyone. Please advance to slide three. Our commitment to our customer success during dynamic market environments is enabling a growing breadth of new program wins across Plexus' solutions. During our fiscal second quarter, we achieved our largest ever win for our sustaining services, our best quarterly engineering solutions wins performance in more than five years. In addition, our continued progress with initiatives to increase our operational and working capital efficiency resulted in robust fiscal second quarter financial performance. We see this momentum sustaining we drive actions to navigate the current environment. In order to proactively help customers navigate current market complexities, we are strategically investing in talent such as our trade compliance and logistics organization. We also continue to invest in technology, including our growing internal use of AI, [indiscernible] including our new site in Malaysia that will open this summer and advanced capabilities, including numerous tools focused on process automation, efficiency and achieving zero defects. As we look ahead, we continue to anticipate up to $100,000,000 of free cash flow for fiscal twenty twenty five.

Our substantial liquidity and robust free cash flow generation provides the opportunity to create additional shareholder value. Finally, while conservatively assessing assessing the remainder of the fiscal year, and acknowledging the uncertainty associated with tariffs, we continue to anticipate achieving meaningful EPS growth in fiscal twenty twenty five. Capitalizing upon revenue growth in each of our market sectors, sequential revenue growth for the remainder of the fiscal year robust operating margin performance, and ongoing free cash flow deployment. Please advance to slide four. Revenue of $980,000,000 met our guidance. As the fiscal second quarter progressed, we saw signs of incremental strengthening in outlooks from healthcare customers, which offset modest reductions in other markets. Non GAAP operating margin of 5.7% met the high end of our guidance range. Our operational efficiency efforts and stronger performance from our Engineering Solutions and Sustaining Services helped to offset a portion of the typical seasonal cost headwinds. Non GAAP EPS of $1.66 exceeded our guidance benefiting from strong operating margin performance as well as slightly favorable tax rate and lower than anticipated non operating expenses. Finally, we delivered $16,500,000 of free cash flow significantly better than our expectations. Please advance to slide five. For the fiscal second quarter, we won 42 programs worth $2.00 $5,000,000 in revenue annually when fully ramped into production.

During the quarter, we closed our largest ever sustaining services win in support of creating success for an industry leading healthcare customer. Also included in the quarterly wins are exciting manufacturing share gains and opportunities to support growth technologies in all of our market sectors. Furthermore, we generated the highest quarterly wins performance for our Engineering Solutions since the fiscal fourth quarter of twenty nineteen. The engineering wins performance reflected strong engagement across all of our market sectors, highlighting the extensiveness of our capabilities and effectiveness of the team's diversification efforts. The breadth of this quarter's wins performance across our solutions, market sectors and technologies is a strong leading indicator of Future Plexus revenue growth. Please advance to slide six. Our commitment to sustainability is integrated with core value of innovating responsibly. As we boldly drive positive change, and promote a sustainable future. Our people are the heart of who we are and what we do. I'm therefore incredibly proud to share that Wisconsin Manufacturers and Commerce selected Plexus as Manufacturer of the Year mega category. In recognition of our innovation, philanthropy, technological advancements, commitment to customer satisfaction, financial performance, and creation of quality jobs. Thank you to our incredible team members, partners and local communities whose contributions support fulfilling our vision of helping to create the products that build a better world.

We also continue to deliver solutions to create customer success. During our fiscal second quarter, our Plexus Xiamen team celebrated a new partnership with GE Healthcare China to advance the green supply chain ecosphere initiative by focusing on maximizing the recycling and reuse of valuable medical equipment promoting sustainability. We also recently partnered with our customer Bevy to celebrate Earth Day. Bevy's mission is to unbottle the future through their smart, bottleless water dispensers. Throughout our partnership, Bevy's smart water dispenser, is manufactured at our Appleton, Wisconsin facility, has saved the equivalent of over two eighteen million plastic water bottles from landfills. Our commitment to delivering excellence includes reducing our environmental impact. Our team members in Oradio, Romania joined the Planning Hope initiative working with over 100 volunteers to plant 1,000 trees. And finally, we are excited to announce the release of our annual sustainability report later in the fiscal third quarter. The 2024 report highlights our continued commitment to innovating response as we've always been driven to do more for our customers, our team members and the world. Please advance to slide seven. We are guiding fiscal third quarter revenue of 1 to $1,040,000,000 non GAAP operating margin of 5.7% to 6.1% and non GAAP EPS of $1.65 to $1.8 While conservatively assessing the remainder of the fiscal year, and acknowledging the uncertainty associated with tariffs, we continue to anticipate sequential revenue growth for our fiscal fourth quarter combined with another quarter of strong operating margin performance.

This outlook supports a continued view that Plexus will achieve meaningful EPS growth in fiscal twenty twenty five with revenue growth in each of our market sectors, robust operating margin performance, and ongoing free cash flow deployment. We continue to expect year over year growth for our aerospace and defense market sector supported by robust demand for our solutions supporting defense, and commercial space products. Growth forecast improved slightly in our HealthcareLife Sciences sector. We continue to benefit from new program ramps and share gains, while healthcare customer demand is improving after a prolonged period of inventory We continue to expect growth in our industrial market sector. This expectation reflects robust growth in semi cap associated with contributions from new program wins and share gains, amidst an outlook of modest semi cap market growth. In addition, we see some early signs that inventory corrections may have peaked in the broader industrial market. Finally, Plexus uniquely supports customer success leveraging our comprehensive product lifecycle solutions and passion for operational excellence delivered through our globally united team. Our ongoing strategic investments in talent, technology, facilities and advanced capabilities position Plexus to proactively navigate evolving landscapes and dynamic market environments to enable our customers' success.

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 twenty twenty five. I will also review the annualized revenue contribution of our wins performance for each market sector. And then provide an overview of our funnel of qualified manufacturing opportunities. Starting with our aerospace and defense sector on slide eight, Revenue increased 8% sequentially in the fiscal second quarter. Meeting our expectation of a high single digit increase. Continued softness in the commercial aerospace sub sector was offset by demand increases in both the defense and space subsectors. We expect revenue for the aerospace and defense to be up mid single digits in the fiscal third quarter. Reflective of broad based increases in customer demand and an increase in volume for a new product ramp. Our wins for the fiscal second quarter for the Aerospace and Defense sector were healthy at $27,000,000 Reflective of our continued strength of execution, we received awards for products currently manufactured in house at two of our customers in the defense sub sector. We also received an award for further new product launch builds for a customer that continues to invest in their space product portfolio.

Plexus is the sole provider for these new product launch builds. And our focus to expand our engineering design services with aerospace and defense customers continues to build momentum with the award of our largest ever aerospace and defense sector design project. Consistent with our outlook last quarter, we expect continued sequential growth as we finish the fiscal year. Resulting in modest growth for our aerospace and defense market sector in fiscal twenty twenty five. Strength in the defense and space subsectors is being substantially offset by reduced near term demand in the aerospace subsector. Muting the impact of robust underlying long term commercial aerospace market [indiscernible] and the anticipated growth contribution from our ongoing wins, and share gains. Please advance to slide nine. Revenue in our Healthcare Sciences market sector was up 10% sequentially for the fiscal second quarter. Beating our expectation of a high single digit increase. Inside the quarter demand increases across a number customers contributed to the strong result. For the fiscal third quarter, we expect the HealthcareLife Sciences sector to grow revenue mid single digits. Driven primarily by increased end market demand, and supported by strength from new program ramps. Fiscal second quarter HealthcareLife Sciences sector wins of $118,000,000 included our largest ever award for sustaining services.

This substantial award from an existing customer marks a shift in the strategy from in house to outsourced services. Our strong history of execution with this customer and the strength of our executive relationships contributed to the award. This product will be serviced in our Guadalajara, Mexico campus. Our wins also included subassemblies for a customer's next generation MRI support equipment. Again, our historical strength of execution, and executive partnerships contributed to the award. In this instance, our customer engaged exclusively with Plexus on this opportunity. These assemblies will be built in our Penang, Malaysia campus. Penang, Malaysia campus also received an award to build subassemblies in support of an orthopedic robotic assisted surgical system. As we look to the full year, outlook for fiscal twenty twenty twenty five for the HealthcareLife Sciences sector has slightly improved the strength of new programs, and multiple customers increasing demand. Advancing to the industrial sector on slide 10.

Revenue decreased 10% sequentially in the fiscal second quarter The result was in line with our expectation of a high single digit to low double digit revenue decline. Near term demand increases across a number of customers for both existing and new product production offset other forecast changes in the portfolio. Our first school third quarter outlook for the industrial sector of a low single digit increase reflects demand strength in our semi cap sub sector. New program ramp strength in our energy management sub sector. The industrial market sector wins for the second quarter were 60,000,000 As a result of the continued nonlinearity of the new technology transition within the broadband communication sub sector, our customer has awarded us further production of legacy products, as some end customers invest to optimize their installed infrastructure. We also expanded our engagement with a leading construction and mining equipment [indiscernible] as they awarded us production for a safety system that was part of a recent acquisition. Plexus' ability to support the resulting transition reflects a high value add offering and the strength of our partnership. Finally, our wins performance continued to show strength across the portfolio of our semi cap customers with both new program wins and share gains.

Our expectation of growth for the sector in fiscal twenty twenty five remains unchanged. Share gains and new program ramps are driving robust growth for our semi cap sub sector, while despite some early green shoots, trends remain generally uneven across the majority of our industrial submarkets. Please advance to slide 11 for a review of our funnel of qualified manufacturing opportunities. The funnel of qualified manufacturing opportunities remains robust at $3,500,000,000 Our positive outlook for Funnel Health is in part supported by strength of early stage opportunities in our industrial and aerospace and defense sectors. In summary, after considering current dynamic market conditions, our share gains program ramps continued strength in certain subsectors and increased demand in recently challenged subsectors we continue to forecast sequential revenue growth during the second half of fiscal twenty twenty five. Before turning the call over to Pat, reflecting on the recent tariff volatility, I'd like to take a moment to recognize and appreciate the efforts of our trade compliance team, and our global Plexus team. As we continue to provide agile, proactive complicated analysis and responses support of our customer success. Our customers have noted their appreciation we'd like to add our appreciation to theirs.

Thank you.

I will now turn the call over to Pat. Pat? Thank you, Oliver, and good morning, everyone. Our fiscal second quarter results are summarized on slide 12. Gross margin of 10% was at the top end of our guidance due to a favorable mix of service offerings and better fixed cost leverage. Productivity improvements associated with operational efficiency initiatives helped to reduce the impact from our typical seasonal compensation cost increases. Selling and administrative expense of $49,000,000 was at the midpoint of our guidance non GAAP operating margin of 5.7% was at the top end of our guidance due to the strength in gross margin. Non operating expense of $3,800,000 is favorable to expectations due to improved foreign exchange performance and lower than anticipated interest expense. Non GAAP diluted EPS of $1.66 exceeded our guidance due to the items mentioned and a slightly favorable tax rate. Turning to our cash flow and balance sheet on slide 13. As shown across these financial metrics, our performance was strong and consistent consistent with the fiscal first quarter. As a result, we delivered $36,700,000 in cash from operations spent $20,200,000 on capital expenditures generating free cash flow of $16,500,000 This performance exceeded expectations and positions us well to meet our fiscal twenty twenty five free cash flow projection of up to $100,000,000 During the quarter, we continued to return cash to shareholders through our share repurchase program by acquiring approximately 86,000 shares of our stock for $12,200,000 We have approximately $25,000,000 available under the current $50,000,000 authorization.

We are taking advantage of our strong financial performance and robust balance sheet to hold an earlier review with our Board of Directors to discuss an additional buyback authorization once the current program is completed. This review is planned for next month. Similar to the prior quarter, we ended the fiscal second quarter in a net cash position, We had $15,000,000 outstanding under our revolving credit facility with $485,000,000 available to borrow. Given our available capacity we anticipate borrowing under this facility when our $100,000,000 private placement notes mature this June. We will take market conditions into consideration if and when we would refinance any amount longer term. For the fiscal second quarter, we delivered return on invested capital of 13.7%, which was four eighty basis points above our weighted average cost of capital. Our invested capital base is significantly lower than the prior year due to our efforts to drive sustained improvement in working capital. This combined with improved operating performance drove the expansion in ROIC over the prior year. Cash cycle at the end of the fiscal second quarter was sixty eight days, three days favorable to expectations and consistent with the fiscal first quarter. This result represents a 25% improvement in our cash cycle days from one year ago.

Please turn to Slide 14 for details on our cash cycle. With a continued sequential reduction in gross inventory dollars, this quarter by $10,000,000 we experienced a two day improvement in inventory days. We have now reduced the dollar value of inventory for five consecutive quarters with gross inventory $370,000,000 lower than the fiscal twenty twenty three high point. For days in advance payments, we experienced a two day reduction with $14,000,000 being returned to customers during the quarter. 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 15.

Fiscal third quarter gross margin is expected to be in the range of 9.9% to 10.2% At the midpoint, gross margin would be slightly improved from last quarter. We expect selling and administrative expense in the range of 50,000,000 to $51,000,000 which is fairly consistent with the prior quarter. Note that this estimate is inclusive of approximately $6,400,000 of stock based compensation expense. Fiscal third quarter non GAAP operating margin is expected to be in the range of 5.7% to 6.1% exclusive of stock based compensation expense. Non operating expense is anticipated to be approximately $4,500,000 We continue to anticipate lower interest expense consistent with our reduced borrowing. For the fiscal third quarter, we are estimating an effective tax rate between 1416% and diluted shares outstanding of approximately 27,600,000.0. Dollars In support of anticipated program ramps, our expectation for the balance sheet is that working capital investments will increase compared to the fiscal second quarter. However, based on our anticipated sequential revenue growth, we expect our cash cycle days to remain consistent with the fiscal second quarter. Hence, we are guiding a cash cycle range of sixty six to seventy days. With investments to support anticipated program ramps, and a higher level and higher levels of capital spending associated with completing the build out of our new facility in Penang, Malaysia.

We expect breakeven to a slight generation of free cash flow for the fiscal third quarter. Fiscal twenty twenty five capital spending is expected to be in the range of 110,000,000 to $130,000,000 slightly lower than our previous guidance Once again, given our improved performance through the first half of the fiscal year, we anticipate generating up to $100,000,000 of free cash flow for fiscal twenty twenty five. With that, Angela, let's now open the call for questions.

Thank you. We will now begin the question and answer session. If you are called upon to ask your question and are listening via loudspeaker on your device, Please pick up your handset and ensure that your phone is not on mute when asking your Also, for this meeting, we request everyone to please limit your question to one question and one follow-up only. Thank you. Your first question comes from the line of David Williams from The Benchmark Company. Your line is now open.

Hey, morning, everyone. Thanks for, I think, question, and congratulations on on just navigating this environment as well as you are here.

Thank you, David.

Yeah. So lots of think there's lots of things that we could talk about here. But I guess first, it's really around the tariffs and this has been obviously a big topic of discussion. But in the past, you've talked about your in country, for country kind strategy that has helped there, and you talked about hiring some logistics and some support staff.

But just can you talk maybe a little more about how the tariffs are impacting you and are you hearing anything from your customers you seeing their forecast shift? And maybe what are those discussions that you're having today with them?

Sure. So I mean, first of all, what I would say is we would all like to get to a steady state. Because I think that will help us plan for the future, and move forward with our customers. Because right now our customers are largely taking a wait and see type approach, We're doing a bit of modeling for some customers on potentially moving regions, although those aren't necessarily to The U. S. They could just be to lower tariff jurisdictions or things such as that. But in general, we believe we're positioned really well as we move forward through this. One is the investments in trade compliance from a standpoint of people, tools and process. Again, to remind everybody on the call, we pass our tariffs on to our customers, so we don't absorb those costs ourselves. And that's moving forward fine as we would anticipate it to right now. And we think we're positioned well from a footprint standpoint and a services and tools standpoint. Standpoint that we'll be able to adjust and help our customers achieve a successful solution regardless of what that final state is. We have available capacity in each of our regions, including within The U. S. So we're well positioned to be able to do that We still think an in region, for region is the likely end state as this continues to migrate.

We think that's the the typical solution that we'd get towards. But we again believe we're well positioned to continue to adjust as our customers see the final end state. One of the things from a standpoint of demand too, David, at this point we're seeing no impact to demand and that includes no demand degradation or no pull forward into the current and into earlier time periods right now. Okay.

Very good. Certainly appreciate the color there. And then maybe you talked a little bit about having excess capacity, but if you think about new facilities, if you were to build that, can you talk a little bit about that CapEx investment and then the timing in order to bring up a new facility? How quickly can that happen if customer came to you and said, hey, want to move to The US, but you didn't have capacity?

Yes. Well, the good news, David, this is Pat. We've got really good capacity in all three of our regions. As we mentioned, we've got the Penang, Malaysia, site coming onboard this summer. We've got available capacity in Europe and then in Mexico and The U. S. So all three of those regions can handle any additional volume that's put into it. How quickly if the need would arise in the future it's probably a four to six quarter period to do that build. But with some of the improvements we're making within our facilities and Oliver could talk more about this, but trying to expand capacity within our existing facilities through automation efforts and a number of other initiatives, that can delay the need for a new site after we put the one in, in Malaysia.

Yeah, can just expanding on that.

As we drive operational improvements into our manufacturing facilities not only are we working on improvements that would reduce our cost basis, but also on our asset utilization. And so Pat mentioned automation, that could be process automation, material handling automation. As a specific example there. We've automated our warehouse in Penang last fiscal year. And through doing that, we saw a 60% reduction in space utilization as we automated that warehouse. 300% increase in pick rate, and also better labor efficiency. So we're now rippling that through another three facilities this fiscal year and that's a way that we can continue to make and create additional capacity with the existing bricks and mortar that we have.

Your next cluster comes from the line of Melissa Fairbanks with Raymond James. Your line is now open. Hey, guys. Thanks so much. Pat, I just wanted to touch on the cash cycle days.

Since this is the last topic that you spoke about before we went into Q and A. We have seen it leveling out around sixty eight days. Obviously, a significant improvement from where we were a year ago. Just wondering, understanding that there is going to be some on a quarterly basis, but wondering what your longer term target is for those cash cycle days?

Yes. Thanks, Melissa. I mean, it's changed a bit because as you recall last year I was probably in kind of low 70s to mid-70s. And then we frankly were a bit surprised ending the fiscal year in 'twenty four at four days. And we've kind of continued in the 60s and that's where I'm guiding fiscal third quarter. I think we have opportunity though to get back into [indiscernible] Think that's a good target for us. I think there is opportunity around gross inventory to bring that down, but we do have to recognize we have sizable customer deposits Also offsetting that gross inventory that some of that's going to be returned to customers in 2025 and 2026. But keep in mind that every one of those days that we're able to reduce frees up $10,000,000 of cash flow for us. And it's been a huge improvement to our balance sheet from a borrowing standpoint and ability to support our buyback and other growth initiatives.

Yes, absolutely. Absolutely. Oliver, I had a follow-up for you. One of thing that you said was kind of interesting in the aerospace and defense segment, you noted that you won some new product launches. Two of which had previously been done in house by the customer. Correct me if I'm misunderstanding what you said. But I'm curious what some of the dynamics are This is kind of something that we've talked about a lot of outsourcing of manufacturing.

If it's aerospace and defense, that's always an area that tends to move very, very slowly. And so I'm curious what some of the dynamics behind two of those wins or some of your newer product launch wins was?

Yeah. I think just Melissa, in general so you did hear correctly. And just in general, I think as customers are experiencing different external market conditions, as well as if they have significant changes in capacity. So or relative to demand, sorry, I should say, significant changes in demand relative to their capacity, Those are the types of instances that we've historically seen them cause a question, hey, should we take this outside? Of doing this inside? I think the other piece here that we also talked about with the aerospace and defense sector, largest ever engineering design win as we've talked about historically, as we do that engineering product development, we're often then doing well, basically, all the time, doing the production on the tail end of that. And so that would be another circumstance would cause that production to come to Plexus.

I think one of the things from a broader trend standpoint that we're seeing is more of an openness to outsource. Mean, these are long term historical industrial companies that are becoming that have manufacturing assets that are becoming much more open to outsourcing and see the benefits. Of it. So think it's a good long term trend for us.

Your next question comes from the line of Steven Fox with Fox Advisors LLC. Your line is now open.

Hi. Good morning, guys. I had two questions also. First of all, was wondering if you could provide a little bit more color on the healthcare sustainable services program that you highlighted.

Think you said you're doing in Guadalajara, but can you give us a sense for just sort of what exactly you're doing, how it ramps, and what it could mean for other wins in the future? Then I have a follow-up.

Yeah. So we get into a lot of details around the the product itself, Steve. I mean, other than to say it involves a single use aspect of a a piece of capital equipment is what I would say. The potential the program has potential to to ramp though over two to three quarter time period and the volumes could be fairly large.

And does it open up for any other opportunities if you prove yourself capable of of ramping it? Well, it's definitely follow on with the similar program. So the volumes that we're considering right now could go up from there. And could result in future wins. And the the relationship with the customer itself is a a very strong and very long term partnership with one of our top healthcare customers. Understood. Thank you. And then just as a follow-up, I couldn't help but notice that like your June guidance for operating margins at the high end has a six handle and I thought after the September, we were sort of assuming you wouldn't get back to like 6% margins to the fourth quarter of this fiscal year. Is there any reason for thinking that can happen sooner than previously assumed or anything we should think about with the high end of the guidance? Thanks.

Yes. I think it's on two fronts, Stephen. It has to do a lot with what we saw in the results for Q2. But I think we're seeing the benefits of our efficiencies flow through quicker than we had anticipated. We're also seeing a nice mix of services with engineering and sustaining services being quite strong. So I think the two of those are leading to us accelerating margin growth a little bit faster than we had anticipated. So we think Q3 is certainly a potential that it could start with a six as is Q4.

Your next question comes from the line of Ruben Roy with Stifel. Your line is now open.

Thank you.

Hi, guys. Todd, I wanted to have a quick follow-up on your tariff answers to David's questions. And you know, obviously, lot of uncertainty out there at this point, a lot of moving pieces. But in terms of it sounds like you've had some discussions with how the how the cost would look like in pass throughs, etcetera. Have you gotten any feedback on [indiscernible] Of products, you know, based on tariffs at this point? Or is that still on the come? Yes. It's still pretty early, Ruben. What we're seeing is there's a handful of customers that I would say we're doing some modeling on about potential movement of product. There's a small amount of product that we're we're locating. We're moving out of China into different geographies right now.

But it's relatively limited, I would say, at this point. And I think in general, our customers are waiting to see what the end state looks like before they they make any decisions or really push too far in that area.

Got it. Thank you, Todd.

Then a quick follow-up as well for Oliver. On the industrial commentary, Oliver, in the green shoots, it sounded to me like, you know, that was sort of a statement, that that it had to do more with inventory than than demand.

Or sort of new programs, etcetera. Is that the way to think about it? Or you actually starting to see some movement in terms of demand on some of your industrial customers? Yeah. I guess I can slate those two, right? And so I think what we had been seeing over prior quarters was customers had a lot of extra inventory in the channel. That was muting their demand to us.

And so now that that inventory it seems like we've maybe bottomed out in aspects of our broader industrial portfolio. And then that manifests to us as a stronger demand signal. So does that answer the question?

Ruben. It's Sean. I would say there are some pockets where we believe the end demand is strengthening above some of the moderation in inventory headwinds. But it's small pockets right now You know, it's spring in the Midwest, so green shoots is an appropriate term.

Question comes from the line of Chris Granga with Needham. Your line is now open.

Hi, good morning. This is Chris.

On for Jim. Thank you for taking the questions. As you are approaching the opening of of the new Penang site this summer, it sounds like the capacity is filling up and particularly with the the MRI assembly win and and others. Do you see any gross margin headwind as that facility ramps over the course of the next few quarters?

Yeah. Chris, this is Pat. We'll see a little, but it's going to be very minimal. And Asia, especially Malaysia has a great track record of getting up to profitability within a three to four quarter period. And then getting to corporate averages soon after that. So I'm pretty confident in that. And I mean occasionally we have this. We had that with Thailand. So it's something we factor into our margin targets that we will be expanding. Periodically. But I think in this case it will come pretty quick.

Got it. Thank you. And just just looking at the the funnel chart, know, health health care it it bumps around, but it looks like it ticked down a bit sequentially in Q2. And just wondering how I should think about that relative to the improvements that you're seeing in underlying demand? And and and new program ramps.

Yeah. So I think just talking about the funnel couple of things, We've mentioned this in prior calls, haven't maybe talked about it in a while. We don't manage funnel and wins to quarterly boundaries like we would say operational results. And so you'll see some ebb and flow from one quarter to the next. I'd also highlight for healthcare, versus prior year, the funnel is up Sorry. Our wins are up 8% versus prior year. And so just generally, I think we continue to be optimistic about our ability to grow there. We've also mentioned with the extra demand increases we're seeing from customers, we expect that to flow through to additional decision making, which would then flow through to additional wins.

Great. Thank you very much.

Your next question comes from the line of P. Barger with KeyBanc Capital Markets. Your line is now open.

Good morning.

I wanted to go back to industrial.

If you exclude semi cap equipment, is the net effect of the other industrial submarkets showing growth? Or is that still flat or down? And any specifics you can give around heavy equipment, power management, automation, be great.

Yes, Steve. Good morning. This is Todd. So just to give you a little bit of insight, balance of industrial except excluding semi cap is down. And it's down fairly reasonably because our our semi cap business is up would call it in the high teens for the fiscal year. The sectors that are seeing some pressure are test and measurement, heavy equipment, energy, electrification. So it's pretty broad based. Of seeing headwinds right now, excluding semi cap with maybe the exception being communications, which is a bit volatile though as well.

Yeah. That that's great. I appreciate it. And and I understand the comments about maybe seeing inventory stabilization. You said there hasn't been demand degradation or pull forward. I guess to the extent that you know, are you seeing any uptick in aftermarket service business for industrial products? Meaning, end users may be slowing CapEx decisions and that's driving an uptick in MRO? And that did happen, what's the margin benefit for you? Or the margin impact?

Yes. Steve, it's Sean. So just to put a fine point on Todd's comments. That was on a year over year basis, quarter over quarter The non semi cap industrial is looking up. We aren't seeing any kind of sustaining services uptick for that market sector. Or incremental demand of someone trying to sweat the assets in the time of uncertainty. This is either less inventory headwinds or better pure demand.

Your next question comes from the line of Anja Sothersdorf with Sidoti. Your line is now open. Hi, and thank you for taking my I'm curious within the engineering wins, you mentioned that was very strong, helped by diversification efforts. Can you elaborate on what those are?

Yeah. So historically, our engineering wins were dominated by the health care market sector. And we saw [indiscernible] substantial diversification within those markets where it's really hitting all of our sectors. Oliver had mentioned the very large aerospace and defense that we had, which was our largest ever. We had a large life sciences win this quarter and we performed very well. In both industrial and semi cap as well. So it's been pretty broad based and it's like I say, it's a good sign for the future in that we see that diversification because engineering wins lead to manufacturing wins as Thank you. And, also, you mentioned, share gains. Who are you taking shares from?

It's broad based. And so based upon end market, based upon submarket, we are seeing share gains based upon as Oliver highlighted, the strength of our executive relationships, the strength of our execution, our focus on our customers' success In some cases, with the one example Oliver highlighted, we were the the sole EMS company our customer engaged with just because of the strength of the relationship.

So not going to put a fine point in and make it that easy for you on where we're winning share gains, but I would say it's broad based across our market sectors and sub sectors.

Okay. Thank you. And I'm also curious in terms of the weakening dollar. Are you hedging for that? Or how are you thinking about the the the current volatility there?

Yes. Are hedging. We do a portion of our non U. S. Currencies hedging. So we do have some exposure. And with the volatility especially that we saw in the last month we could see some impact on our P and L. But we are hedging for it and we'll watch for it.

Okay. Thank you. That was all for me.

Thanks.

Your next question comes from the line of Tee Barger with KeyBanc Capital Markets. Your line is now open.

Thanks for taking the follow-up.

Really good to hear semi cap is running at mid teens. Can you talk through what you're seeing for leading edge metrology versus memory versus trailing edge?

Yes. It's better than mid teens, Steve. So not to dilute the strength we're seeing. But where we're seeing is as Oliver highlighted, growth across semi cap in terms of wins with customers. We play front end to back end. We're seeing growth across the customers in all areas and some customers maybe they were a little over inventory the past two years and so demand is coming back there as well. But I wouldn't put it into a single bucket of technology or front end or back end where we're seeing strength. It's pretty broad based and I would just go back to the fact that we've won a lot of market share over the past couple of years. From competitors as well as new programs coming to market. We had an effort as highlighted in engineering, but also in manufacturing to diversify. And that's bearing fruit as well. And so it's really broad based strength for us. I wouldn't I hesitate to characterize it was one area of semi cap versus another because it's broad based.

Got it. Okay. And then one last one.

Some of the semi cap names have been talking about a memory tool upgrade cycle rather than new tool built. If that happens, do you get that business if if it was your original build?

Yes. Perfect.

Thanks.

That concludes our question and answer session. I will now turn the conference back over to Mr. Todd Kelsey, President and CEO for closing remarks.

All right. Thank you, Angela. I'd like to thank shareholders, investors, analysts and our Plexus team members who joined the call this morning. Concluding with a few summary comments, With our investment in talent, technology, facilities and tools, we believe Plexus is well positioned to enable our customers' success this dynamic environment in support of our vision to help create the products that build a better world. Evidence of this view is the breadth of our new program wins across our solutions, markets and technologies. Further, while we're acknowledging the Mac macroeconomic uncertainty, we continue to anticipate meaningful EPS growth in fiscal twenty twenty five driven by revenue growth in each of our market sectors, strong operating margin performance and continued free cash flow generation used to create additional shareholder value. Thank you again, and have a nice day.

Ladies and gentlemen, that concludes today's conference. Thank you all for joining. You may now disconnect.