Plexus Corp (PLXS) 2018 Q4 法說會逐字稿

Good morning, and welcome to the Plexus Corp. conference call regarding its fiscal fourth quarter 2018 earnings announcement. My name is Sylvia, and I will be your operator for today's call. (Operator Instructions) The conference call is scheduled to last approximately 1 hour. Please note that this conference is being recorded. I will now turn the call over to Ms. Heather Beresford, Plexus Senior Director Communications and Investor Relations. Heather?

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 September 30, 2017, 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, adjusted earnings per share and adjusted operating margin, to provide a better understanding of core performance for purposes of period-to-period comparisons. 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's website at www.plexus.com, clicking on Investor Relations at the top of that page.

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 calls, Todd will provide summary comments before turning the call over to Steve and Pat for further details. Let me now turn the call over to Todd Kelsey. Todd?

Thank you, Heather, and good morning, everyone. Please begin with our fiscal fourth quarter results on Slide 3. After the close of the market yesterday, we reported results for our fiscal fourth quarter of 2018. We continue to produce meaningful growth, finishing with record revenue of $771 million near the high end of our guidance range. The result was a 15% increase from the comparable quarter last year and a 6% increase from the third fiscal quarter of 2018.

We achieved strong sequential growth from our Healthcare/Life Sciences, Industrial/Commercial and Aerospace and Defense market sectors with Healthcare/Life Sciences strengthening within the quarter. We realized these results while overcoming the impact of the highly constrained supply chain market and minimizing the impact of global tariffs.

In addition, as a result of strong execution and operating leverage, we delivered fiscal fourth quarter operating margin of 4.8%, comfortably within our target range of 4.7% to 5%. Our solid growth in operating performance led to record non-GAAP diluted EPS of $0.96, a result that was above our guidance range. The EPS result included $0.14 of stock-based compensation expense. From a GAAP perspective, we produced fiscal fourth quarter earnings per share of $2.20. This result included a $1.24 per share benefit due to a nonrecurring tax event.

Please advance to Slide 4. Next I will highlight fiscal 2018 accomplishments, starting with our performance to our enduring financial goals of revenue growth and economic return. As we previously communicated, we have an aggressive revenue growth goal of 12% annually. We delivered fiscal 2018 revenue of $2.9 billion, representing a 14% increase over fiscal 2017, exceeding our revenue growth goal. The following are additional highlights related to our revenue growth. Our Engineering Solutions organization grew over 20% year-over-year. Our customers continue to see the value in this differentiated service offering that generates higher margins for Plexus.

Our Healthcare/Life Sciences sector grew over 20% in fiscal 2018 and exceeded $1 billion in revenue. We continue to have exceptional wins performance in funnel growth within the sector as industry leading OEMs are attracted to our strong brand within this end market. We expect continued robust growth in the sector in fiscal 2019.

During fiscal 2018, we grew in each of our 3 geographic regions, while our EMEA region grew an impressive 46%, providing vital leverage leading to improved operating performance. Our fiscal 2018 growth and forward-looking growth projections led to decisions to add new manufacturing facilities in Penang, Malaysia and Guadalajara, Mexico. In addition, we expanded several of our Engineering Solutions design centers in response to the needs of our customers.

We target an economic return, which represents return on invested capital less weighted average cost of capital of 500 basis points. In fiscal 2018, our weighted average cost of capital was 9.5%. We delivered return on invested capital of 16.1%, resulting in an economic return of 660 basis points, well above our goal. Fiscal 2018 was the second consecutive year of economic return above our 500 basis point goal.

Please advance to Slide 5. Next I will highlight a few additional accomplishments in fiscal 2018, which position Plexus for meaningful growth in fiscal 2019. In the fiscal fourth quarter, our teams delivered quarterly manufacturing wins of $233 million, which represents a historically strong result. In total, our teams delivered $889 million of manufacturing wins within fiscal 2018, exceeding fiscal 2017 by nearly $80 million.

The profile of our manufacturing wins throughout the fiscal year continues to align with our differentiated portfolio. Further, our teams booked a record $132 million of Engineering Solutions wins, exceeding fiscal 2017 results by over 30% and increased the engineering funnel to record levels. Our Engineering Solutions team is currently developing several leading-edge products, which will transition into Plexus manufacturing.

Our global teams continue to stand out in providing superior execution for our customers. We recently completed our semiannual Net Promoter Survey and achieved our all-time best score of 84%. We believe this result is best in class. Our exclusive focus on mid- to low-volume, high-complexity markets and passion for delivering customer service excellence is resonating with current and perspective customers. It is the key to attract, retain and grow our customer base. We announced our revised capital allocation strategy on February 20, 2018. As of the end of the fiscal year, we have repatriated over $430 million from the APAC region. This cash has been used to fund investments in facilities and working capital, pay down debt, fund a onetime nonexecutive employee bonus and repurchase shares. In total, we repurchased approximately $137 million of our stock, representing over 2 million shares. We have nearly $180 million remaining on our 2018 share repurchase authorization, which we anticipate executing in fiscal 2019.

Advancing to our guidance for the fiscal first quarter of 2019 on Slide 6. We are establishing revenue guidance of $750 million to $790 million. The midpoint of our guidance range suggests approximately 14% revenue growth from the fiscal first quarter of 2018. Within the quarter, we anticipate the growth we are projecting as a result of strength in the Healthcare/Life Sciences sector, new program wins and largely stable end markets to be offset by softening in the semiconductor capital equipment space. Overall, we expect to return to solid sequential growth in the fiscal second quarter as we further capitalize from new program launches due to recent wins. We anticipate strong operating performance consistent with the fiscal fourth quarter as we continue to effectively mitigate the impacts of the complaint -- constrained supply chain. Our anticipated operating performance strength alleviates the impact of increased tax expenses, which we're estimating to be approximately $0.05 as compared to the prior quarter. Consistent with these beliefs, we are guiding fiscal first quarter GAAP diluted EPS in the range of $0.85 to $0.95. The EPS guide includes $0.15 of stock-based compensation expense.

Please advance to Slide 7. I will close with a few thoughts regarding fiscal 2019. I'm excited about the traction our new Plexus brand has gained in the past year. Our commitment to help create the products that build a better world is resonating with current and perspective customers. Our expertise in and exclusive focus on mid- to low-volume, high-complexity markets provides advantages in operational efficiency and results in a more consistent platform for our customers.

Please advance to Slide 8. We continue to make progress in building and leveraging our differentiated portfolio, which is unique in the industry. As we exited fiscal 2018, nearly 85% of our revenue was in nontraditional, noncommoditized sectors. These sectors have programs with longer life cycles, in any cases exceeding 10 years. In addition, we have consistently achieved higher growth rates in the nontraditional sectors with our 10-year CAGR, excluding networking at 9%. We anticipate fiscal 2019 to be another strong growth year as we achieve the full production volumes of recently launched programs and expect to capitalize on our robust fiscal 2018 wins performance. The latter is a direct result of our focused, consistent strategy, commitment to customer service excellence and expertise within our customers' end markets. Further, we currently see overall strength in our end markets and believe we can navigate the ongoing supply chain constraints. Operationally, our teams remain focused on providing exceptional service for our customers. In addition, we are confident we have plans that will deliver strong operating results, and we expect our operating performance will be within our target range of 4.7% to 5% for the fiscal year, as we gain operating and fixed cost leverage. We continue to believe the leveraged benefit could approach 30 basis points as compared to fiscal 2018. We anticipate that the robust growth and strong operating performance, in conjunction with our share repurchase program, will result in meaningful EPS leverage in fiscal 2019.

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 9 for review of our market sectors' performance during the fourth quarter of fiscal 2018 as well as our expectations for the sectors in the fiscal first quarter of 2019.

Our Healthcare/Life Sciences sector had a strong finish to fiscal 2018 with revenue growth of 9% in the fiscal fourth quarter. This result exceeded our expectations of a mid-single-digit increase and contributed to the sector's outstanding growth of 21% in fiscal 2018. Expansion with new programs in the fiscal fourth quarter and throughout fiscal 2018 fueled the growth. Continued growth of these programs combined with new wins support the strong start to fiscal 2019. We anticipate a mid-single-digit revenue increase in our Healthcare/Life Sciences sector in the fiscal first quarter.

Our Industrial/Commercial sector was up 8% sequentially in the fiscal fourth quarter, which was in line with our expectations of a high single-digit increase. Broad-based increases from 12 of the top 15 customers grow the strong revenue. For fiscal 2018, the sector had exceptional revenue growth of 16%. As we look towards the fiscal first quarter, we are realizing the anticipated softness with some of the semiconductor capital equipment market customers. As a result, we anticipate a mid-single-digit decrease in our Industrial/Commercial sector in the fiscal first quarter. Our Communications sector revenue was down slightly in the fiscal fourth quarter and for the fiscal 2018. These results were in line with our expectations of relatively flat revenue. This sector was impacted the most in fiscal 2018 by the constrained component market.

Looking ahead to fiscal first quarter of 2019, we see improved component supply and robust demand from 2 Communications infrastructure customers. However, they're being offset by a programmed cancellation by the federal agency that another customer supplies. As a result, we anticipate revenue to be flat in our Communications sector for the fiscal first quarter.

Our Aerospace and Defense sector was up 5% in the fiscal fourth quarter, a result that was in line with our expectations of a mid-single-digit increase. Robust demand from 9 of our top 10 Aerospace and Defense customers contributed to the growth. As expected, the sector finished fiscal 2018 with double-digit growth of 10%. As we look towards the fiscal first quarter, we are experiencing end market softness with our customer [in our] security subsector, and a ramp delay with a complex space program. We expect these impacts will result in a low single-digit decrease for our Aerospace and Defense sector. Please advance to Slide 10 for an overview of the wins performance for the fiscal fourth quarter. We won 44 new manufacturing programs that we expect to generate $233 million in annualized revenue when fully ramped into production. Engagements with new customers accounted for $145 million of the wins. Our trailing fourth quarter manufacturing wins, as shown by red bars, increased to $889 million. The wins momentum of 31% is well above our 25% target. And is an enabler for growth in fiscal 2019 and beyond. Likewise, the positive momentum in our Engineering Solution Group continues. The engineering team converted the strong wins in fiscal 2018 into a record revenue year.

With another strong quarter wins at $34 million in the fiscal fourth quarter, our Engineering Solutions team is starting fiscal 2019 with a solid backlog and an expectation of continued growth.

Please advance to Slide 11 for further insight into wins performance by region. The American region had strong manufacturing wins of $141 million in the fiscal fourth quarter. A significant new mechatronics customer for our Appleton, Wisconsin facility, and a program with microelectronics content for our Boise, Idaho facility are the highlights for the region. The APAC region had solid manufacturing wins of $85 million in the fiscal fourth quarter. Included in the wins are the addition of other customer for our new Healthcare/Life Sciences facility in Penang, Malaysia. The EMEA regions manufacturing wins were light, with revenue growth of 46% in fiscal 2018, the region's priority is execution. The team did add a new customer with growth potential in fiscal -- in the fiscal fourth quarter, but we recognize the need to drive larger wins in order to enable continued strong growth.

Please advance to Slide 12 for further insight into the manufacturing wins performance by market sector. The distribution of wins across the market sectors in fiscal fourth quarter was well balanced. The Communications sector had an exceptionally strong results with wins of $94 million. Two meaningful wireless programs and one Communications infrastructure program were the main contributors to the solid results. The Healthcare/Life Sciences sector produced $53 million in manufacturing wins in the fiscal fourth quarter. In addition to the customer who will ramp in our new Healthcare/Life Sciences facility in Penang, the team expanded the customer base with 2 additional new customers. The Industrial/Commercial sector generated wins of $52 million in the fiscal fourth quarter. The wins include 2 larger programs from new customers that support our approach to a diversified portfolio. One customer is focused on additive manufacturing and another on the heavy transportation industry. The Aerospace and Defense sector wins of $34 million were a result of the addition of a new strategic customer as well expansion with the current customers. We will start to realize revenue in early fiscal 2019 from some of these wins.

Please advance to Slide 13. Despite winning almost $900 million of opportunities in fiscal 2018, we exited the year with a healthy funnel of $2.6 billion of qualified manufacturing opportunities. The Healthcare/Life Sciences team had a great year. They won $288 million of qualified manufacturing opportunities in fiscal 2018 and grew their funnel to a robust $1.5 billion. Industrial/Commercial team had the highest wins in the fiscal 2018 at $331 million, but it has decreased their funnel to $373 million. The team does have a strong pipeline of opportunities in front of the qualified funnel, so we anticipate funnel growth in fiscal 2019. The Communications sector's exceptional wins in the fiscal fourth quarter lowered their funnel to $232 million. However, they also have a good pipeline of activities in front of their qualified funnel as we enter fiscal 2019.

Finally, the Aerospace and Defense sector increased its funnel to $524 million, even with the good wins performance in the fiscal fourth quarter. Opportunities that will increase our market share with current customers are providing a solid foundation to the sector's funnel.

Next I would like to turn to operating performance on Slide 14. With a record revenue of $771 million and operating margin at 4.8% in the fiscal fourth quarter, the team delivered outstanding results. The fact that they did it in a constrained supply chain environment is exceptional. Although the availability of components continues to create elevated inventories and operational inefficiencies, our teams are addressing the challenges it creates. We expect our days of inventory to peak at 106 days in the fiscal first quarter. Our teams are working closely with our customers to reduce inventory overdrive, while maintaining a high service level.

Returning inventory to a traditional level in -- is the focus for the team in fiscal 2019. The team returned operating margin to our targeted range in the fiscal fourth quarter. We expect that strong opening performance to continue in fiscal 2019. As a result, we are getting operating margin in the range of 4.6% to 5% for the fiscal first quarter.

A few final comments. I'm proud of the accomplishments the global team has achieved in fiscal 2018. Achieving revenue growth of 14% in a constrained component market was a team effort. Our global market development teams generated the wins required to grow the business, the supply chain teams have worked tirelessly to ensure continuity of supply. Our operations and engineering teams have worked aggressively to deliver for our customers and the corporate teams are true partners in the business; it was a great team effort. It is this team's demonstrated commitment to operational excellence and customer service excellence that gives me the confidence for a great fiscal 2019. I will now turn the call to Pat for a detailed review of our financial performance. Pat?

Thank you, Steve, and good morning, everyone. Our fiscal fourth quarter results are summarized on Slide 15. Record fourth quarter revenue of $771 million and gross margin of 9.5% were both at the high end of our guidance. Gross margin was approximately 20 basis points above the fiscal third quarter. Our continuing efforts to manage costs and improve productivity while increasing revenue contributed to the margin improvement. Selling and administrative expense of approximately $36.3 million was slightly above our quarterly guidance. As a percentage of revenue, SG&A was 4.7%, an improvement of 20 basis points from the fiscal third quarter. Operating margin of 4.8% improved sequentially by 30 basis points, a combination of improved gross margin and better leverage of operating expenses drove this improvement. Included in this quarter's operating margin is approximately 60 basis points of stock-based compensation expense in line with our quarterly expectations. Other expense for the fiscal fourth quarter was $2.7 million, which was favorable to our guidance, primarily due to lower interest expense and foreign exchange gains recognized during the quarter.

GAAP diluted EPS at $2.20 included a benefit of $1.24 per share related to U.S. Tax Reform.

During the fiscal fourth quarter, the U.S. Department of Treasury released additional guidance regarding the repatriation tax we recorded in the fiscal first quarter. The benefit resulted from adjustments made in applying the additional guidance as well as our utilization of accumulated U.S. net operating loss carry forwards. Both reduced the repatriation tax due in future years. We also recognized the benefit from the reversal of our valuation allowance previously maintained on our U.S. net deferred tax assets. With future projected taxable income in the U.S. primarily as a result of tax reform, the valuation allowance is no longer required. Excluding these tax benefits, we recorded a tax rate for the fiscal fourth quarter of 8%, slightly below our earlier expectation of 10% to 12%. Non-GAAP EPS at $0.96 for the fiscal fourth quarter was above our guidance, primarily due to the improved operating performance and lower tax rate.

Turning now to the balance sheet on Slide 16. Return on invested capital was 16.1% for fiscal 2018, 660 basis points above our weighted average cost of capital of 9.5%. Each year, we recalculate our weighted average cost of capital by using a consistent methodology. With less volatility in our stock price over the past few years, our cost of capital for fiscal 2019 will be reduced from 9.5% to 9%.

During the quarter, we continue to execute on our capital allocation plan outlined earlier this year. In addition to the $380 million of offshore cash brought back earlier in fiscal 2018, we repatriated over $50 million from our APAC region during the fiscal fourth quarter. In total, approximately $430 million was brought back during fiscal 2018.

With a portion of the funds repatriated during the fourth quarter, we purchased approximately 639,000 of our shares for $39.2 million, at an average price of $61.32 per share. During the fiscal fourth quarter, we completed the $150 million program authorized in 2016, and commenced purchasing shares under the $200 million program authorized earlier this year.

Moving into fiscal 2019, we have approximately $180 million available under the program. We expect to execute this program on a consistent basis, however, will take market conditions into consideration. For the fiscal fourth quarter, we generated $25 million in cash from operations and spent $11 million on capital expenditures delivering free cash flow of $14.7 million, slightly better than expected.

For the fiscal year, we generated $67 million in cash from operations and spent $63 million on capital expenditures, resulting in free cash flow of $4 million. We ended the year with a strong balance sheet, cash totaled $298 million with approximately 70% of the balance offshore. Sequentially, our cash balance reduced approximately $36 million, primarily due to share repurchase activity.

Total balance sheet debt was approximately $190 million, and our debt-to-EBITDA ratio was a healthy 1.1x at year-end. Cash cycle at the end of the fourth quarter was 73 days, favorable to our guidance and consistent with fiscal third quarter.

Please turn to Slide 17 for details on our cash cycle. Sequentially, days in inventory improved by 1 day, despite increasing inventory dollars to support the ramp of new customer programs. Inventory days improved due to the strong sequential revenue growth. Days in receivables of 47 days also improved by 1 day.

Payable days were sequentially flat, while customer deposit days reduced 2 days, as we applied a deposit against a customers' accounts receivables balance. As Todd has already provided the revenue and EPS guidance for the fiscal first quarter, I will share some additional details, which are summarized on Slide 18. Fiscal first quarter gross margin is expected to be in the range of 9.3% to 9.6%. At the midpoint of this guidance, gross margin would be consistent with the fiscal fourth quarter. For the fiscal first quarter, we expect SG&A expense in the range of $35 million to $36 million. At the midpoint of our revenue guidance, anticipated SG&A would be 4.6% of revenue, sequentially improved by 10 basis points. Fiscal first quarter operating margin is expected to be in the range of 4.6% to 5%, which includes approximately 60 basis points of stock-based compensation expense.

A few other notes. Depreciation and amortization expense for the fiscal first quarter is expected to be approximately $13.5 million, slightly higher than the fiscal fourth quarter. Other expense for the fiscal first quarter is expected to be in the range of $3 million to $3.5 million. We estimate an effective tax rate of 13% to 15% for both the fiscal first quarter and full year. As I mentioned earlier this year, fiscal 2019 will include a new form of taxable income referred to as global intangible low taxed income. This income and resulting tax will be generated from our earnings in Asia and expected to add 3 to 4 percentage points to our effective tax rate.

Given our recent share repurchases and our anticipated activity during the fiscal first quarter of 2019, we estimate diluted weighted average shares outstanding to be in the range of 32.4 million to 32.6 million shares. Our expectation for the balance sheet is for working capital dollars to increase as we begin procuring inventory later this quarter for the fiscal second quarter. Based on forecasted levels of revenue, we expect the higher working capital will result in cash cycle days of 79 to 83 days for the fiscal first quarter. At the midpoint of this guidance, GAAP cash cycle days would increase by 8 days.

We are currently pursuing customer deposits where appropriate to mitigating a portion of this increase. I'd like to point out that as we adopt the new revenue recognition standard this quarter, we will see a new category added to our cash cycle, referred to as unbilled receivable days. As we reduce inventory days under the new guidance, we'll see an increase to unbilled receivable days. The net impact to our cash cycle will be slightly unfavorable due to the adoption. Capital spending for fiscal 2019 is expected to be in the range of $70 million to $90 million, while the largest portion of capital spending relates to our new facility in Guadalajara. In the fiscal first quarter, we expect free cash flow to be net negative given the elevated working capital investments to support the anticipated revenue growth, along with higher capital spending anticipated earlier in fiscal 2019.

We anticipate generating free cash flow as we move through subsequent quarters and expect to deliver free cash flow in the range of $40 million to $60 million for fiscal 2019.

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

(Operator Instructions) And our first question comes from Shawn Harrison from Longbow Research.

I wanted to delve into 2 different end market topics. First, just on the semi cap weakness. How -- what degree of weakness are you seeing in that market? We all know it's obviously weakened. I guess, maybe how long do you expect the weaker revenue profile to persist in fiscal '19?

Shawn, this is Steve. In semi cap, we -- 2 things happen to us through fiscal '18. One is the growth of the market itself, but we're also gaining market share with customers as we move through the year. What we see now is some of the end markets as we talked about from a software standpoint, we do it -- see it coming down a bit, but it's kind of being made up by the ramp of new programs. And so our expectation right now, for fiscal '19, is like in the flat range. Obviously, I'll have to see how it pans out throughout the year, but semi cap for us is looking about flat.

Okay, and then there's a follow-up, just the big win number in the Communications sector. I had to go back a couple of years to find a similar level of wins and, particularly, wireless I don't think has been highlighted in a while. So hoping you elaborate just on -- is there a bigger total available market that you're now going after in Communications? Is wireless now becoming a growth area that it hasn't really been in a number of quarters? And is there potential for larger wins throughout fiscal '19 as well?

Yes, this is Steve again. As -- if you recall, you go back to the end of fiscal '17 and into early '18, we talked about realigning, kind of, our teams in terms of making sure that we're going after markets and subsectors that align with our strategy, and the teams have done that. And so the wins that you see are a result of that. Subsector wireless is one of the areas that team has been focusing. These wins, I think are a result of what's happened over the hard work by the teams through fiscal '18. I do expect to continue to see decent wins from this team as we move forward. So it's really a realignment of our strategy and a focus on the subsectors and the team's doing a good job. So I expect it to continue through '19 and beyond.

One of the things I'd add on that Shawn, too, is that if we were going to see growth within the Communications sector, we needed to add new logos. And that's where the team was really successful this year, I'd call it 3 new logos. One we've been doing business for a while but it's more of an NPI type customer and then 2 are brand-new logos that have some people with histories with Plexus in the past. So it's good to see them come back to Plexus.

And if you think about, I guess, fiscal '19 in that business considering the new wins versus the legacy historical business, do you expect Communications now to be able to grow for fiscal '19?

Right now, we're showing it is basically flat. And we were seeing nice growth from the new wins, but we're seeing a few legacy programs trail off and Steve had mentioned, too, we had a cancellation of a fairly significant program that our customers' end customer, who was a federal government agency, decided not to order the product. So that's having a negative impact for us and is offsetting some of the projected growth from the new wins right now. But there's certainly more potential now that we're adding some new logos there.

Our next question comes from Matthew Sheerin from Stifel.

Just a question regarding the supply constraints that you and other folks have been seeing for a while. It looks like in some areas lead times are beginning to come in but there's, obviously, still shortages of things like MLCC. So in that environment, are you seeing sort of an imbalance of inventory, if you will, so that you can actually start working on bringing down some working capital as you balance that? Or do you just expect that to be tighter? Or would you -- your customers rather you carry some buffer stock here given the environment?

So what we're seeing in general in the supply chain right now is, I'd call it stable to maybe modestly improved from what it was a quarter ago. So if we look at Q4 for instance, fiscal Q4, we were able to pull in and service a little bit of upside that we saw in there, and that's where we generated the nice revenue within the quarter. We're also seeing, I would say, less programs in Q1 that have supply chain constraints, but they're still there. And I would say that when we look at it from a customer standpoint, that's one of the reasons our inventory's a little bit higher as we continue to function in this call it load and chase mode, where we're bringing in inventory knowing a few components are at risk, but we'd expect that to start to clear out as we work our way through fiscal '19 and plus as we drive some processes that are focused on improving inventory with our customers. But in general our customers -- if I looked at them on aggregate, they're feeling bullish so they want to see us try to have the parts. So we're working with them on solutions to be able to do that.

Okay, that's helpful. And you haven't -- I don't think you really talked about tariffs and impact there. And I know you have some customers in the Communications sector that are susceptible to some of the tariffs and you have manufacturing obviously in China. So are there any discussions with customers about actually moving capacity and, obviously, you've been adding Malaysia and places like that, so what's happening there?

Yes, I'll just give you an overall view of how the tariffs are impacting us, and overall, I would say that net impact is a positive for us as we're seeing it right now. If you look at it from a product standpoint, I mean, our customers tend to be the importer of record so they would pay the tariffs on the products that are imported. From a component standpoint, because of the way our business is structured that's passed along to customers, any component tariffs. Now if we look at what's happening on a customer basis, I mean, first of all, I'd say, we're not seeing anything that's really noticeable on a demand front right now of reductions in demand yet as a result of tariffs. We're starting to have some discussions with certain customers that ship out of China, which, again remember, that's maybe only about half or a little above half of our business in China. But we're starting to have some discussions with them about alternate facilities for their business. And I would say that those are active dialogues, there's not active transitions going on at this point. But if the situation persists, I could see that occurring at some point in fiscal 2019.

Now in the positive front, we're seeing new opportunities as a result of the tariffs. And some of it's from customer facilities, some of it's at competitors. We've already transitioned or won a small amount of business that is impacted by the tariffs and have opportunities on the order of about $100 million already, that we don't believe would be there if it wasn't for the tariff situation. So we're well positioned with our global footprint just adding with the capacity we're bringing up in Malaysia and China as well as our U.S. capacity. So we feel good that we are able to maneuver the tariffs situation. And we'd rather have it go away, but we feel good that we can maneuver it if it continues to persist.

Our next question comes from Sean Hannan from Needham.

If I could actually just follow up on that topic. Todd, I think everything you just explained is pretty consistent with what I think a number of us are hearing in these early stages as a result of the tariffs. OEMs are investigating, don't know exactly what's going to happen. But conceptually, if we move a few steps down the road and we do see a lot of these OEMs, ultimately, in the medium -- near to medium term, looking to move this business out of China to, whether it be Guad or whatever else. How do we think about the industry's ability, or you guys specifically, to manage that? I mean, is this -- you're going to have cost inefficiencies that you'll have to digest. I mean, is this something that ultimately the OEMs are going to have to bear in kind of a unique circumstance for transition costs? What you do with under absorption? Conceptually, just wanted to see if we can get some thoughts around how do we work with some of those risks that could potentially materialize? Even though we, of course, acknowledge we've got some opportunities as well, but there are some things that are going to have to be managed here. So just wanted to see if we can get some early views around that?

Yes, so first of all from a transition or a transition cost standpoint, our approach was that with -- is that, that would be cost neutral to us. So -- and if -- or if anything be a benefit to us to move the business, so we think there's an opportunity to do that. From a pure move standpoint and the amount of business to move, I think we're in a -- if this occurs and we start to ship business and the industry starts to ship business that exits China or that is imported out of China -- or exported out of China, excuse me, I think we're in a better sport than most, given our small amount of revenue that's in China and the small amount that's exported out or the small amount of revenue as a percentage. So I think we're well positioned to be able to move whatever business our customers feel that they need to, to be competitive in their market as well as potentially take some share from our competitors, who perhaps have a much greater absolute and relative portion of their business that's in China. From a footprint standpoint, I mean, I guess that just remains to be seen as to how much business has moved out. Right now nothing's -- we feel pretty good about our footprint right now, but we'll just continue to play it out as this whole situation plays out. But as of now, there's no evidence that would suggest we're going to be in an overcapacity situation.

That's helpful, and I don't mean to communicate and ask the question with a negative spin, it's more of, this is obviously a point of ambiguity right now, and I think that those comments are very helpful. So next question here. So the wins, the growth for you folks, I mean, it's just continues to be really remarkable. You're offsetting the semi cap weakness. Seems like you're even more comfortable with the double-digit top line growth here in '19. So everything really looks to be lining up great. Just wanted to see if I could pick on a -- what might be a perceivable spot here that could use a little bit more, I suppose, comfort. So when I look at the funnel, and I realize reading the funnel is not as valuable as wins themselves, but you've been harvesting a good bit now. And that total has been a little bit suppressed the last few quarters versus '17. So can we get a perspective, how do we rebuild that? Or are we even over interpreting the comparison to where it's historically been and maybe we shouldn't be drawing conclusions like that? Can you help us think about building the funnel? Views on where it stands? And where you'd like it to be?

Yes, so this is Steve, I'll try to attempt that to start here. If you look at the funnel in the historical numbers, the wins and the harvesting is up. It's been a good year. The funnel -- the fluctuation in the funnel a bit as we've gone through fiscal '18, is not a concern to us, we don't really necessarily target anything from a quarter-to-quarter basis. That's why we just try to stay focused on what, kind of, the trailing 4 quarters looks like. And so the fact that the funnel comes up and then down by $100 million or $200 million a quarter is fundamentally not a concern to us. There is other data that we watch, which is the -- kind of the leads that are coming into the funnel. That number stays robust. And so if we saw the funnel come down and that number come down, we'd get more concerned, but we haven't seen that, and we don't anticipate to see that. We have the teams focused on doing the right things to win the business. I think the indications of what happened in com is a good thing in terms of what the teams can deliver. Obviously, the Healthcare/Life Sciences team is doing a phenomenal job. So in the Aerospace and Defense, we see no ends in terms of what's happening there with the funnel. So from our perspective, we don't really get too concerned in terms of where it's going up and down because it's, from our perspective, it's heading in the right direction.

The other thing I'd add on to that, Sean. One of the things we're seeing is a little bit faster velocity through the funnel from our teams. So I think that would imply they're either driving more aggressively to close business or putting higher-quality opportunities into the funnel itself. So as long as we can continue to keep producing the wins we're producing, we feel pretty comparable with the funnel, but we continue to monitor the whole package.

That velocity piece of feedback is actually pretty interesting and very helpful. And Steve, your comments are very helpful as well. Thanks so much folks, nice job.

Thank you.

Our following question comes from Jim Suva from Citi.

This is Tim Young, calling on behalf of Jim Suva. Your Capex for fiscal year 2019 is higher than '18. Are you seeing the need of CapEx increase for the next few years given the tariffs and customers might move the outsourcing outside of China? And then on component shortage, can you quantify the revenue and the margin impact from the shortage?

Yes, Tim, this is Pat. I'll start with the CapEx and then maybe hand it off to Steve for the component piece. We're not increasing CapEx necessarily related to any tariff concerns. We had planned over a year ago to add the capacity in Penang, Malaysia and then make the decision to add the second facility in Guadalajara. So that was in place a year ago, and that's really what's impacting the fiscal '19 CapEx, why that's up as much as it is. The new facility in Guadalajara is going to be about $20 million to $25 million of CapEx in fiscal '19, and the existing facility, as we continue to grow in that existing facility in Guadalajara, we'll need about another $5 million to $10 million. So those are the largest components of our fiscal '19 CapEx spending.

Yes, this is Steve. I'll take the component question. We talked about in the Q3 call, a bit about a $10 million opportunity for us that we could've shipped if we would've had the components. That number grew for us a bit in Q4. As Todd highlighted, we were able to pull some of it in, but there's probably about $20 million more that we could've shipped, if we would've had components. We see that number coming down in Q1 here, as we've been able to basically resolve a fair amount of issues. And so my expectation is, there's a bit of upside for us if we can clear components. But we're starting to run into the inefficiencies in the factory of when we get them, even if we get the components if it's at the tail end of the quarter, it's really hard to push them through the factory to get the revenue out. So I would expect, over the next few quarters, the things that bounce around in that area in terms of what potential and opportunity is for us. With the strong expectation now as we get through the first of '19 here, that we can work with our customers to basically get that aligned and get the supply chain straight.

Got you, this is super helpful. Just to clarify, Pat, so there's no need for more CapEx to capture the that ramping upside from the tariffs that you mentioned this year are gaining from the tariffs? Is that right?

That's correct.

Our following question comes from Mitch Steves from RBC.

But I just wanted to clarify one point, just maybe help us out a bit on the end market dynamic you guys expect for FY '19. So if I assume you guys grow double digits, how would I think about the 4 end markets? What do you guys think would be the faster growing and the slower growing of the 4 groups?

Yes, we're expecting strong growth from 3 of our 4 end markets. Those would be Healthcare/Life Sciences, Industrial/Commercial and Aerospace and Defense. And we're thinking of coms as relatively low growth to relatively flat based off of the dynamics that I had mentioned earlier to Shawn Harrison.

Okay, Yes. So I just want to clarify 2 items there. So then the first one is on the industrial side. So given that semi cap probably can be a little bit weaker given the checks we've seen. What is offsetting that weakness within industrial? And then secondly, on the Healthcare said, you guys are growing at 20% plus, so I'm just curious is there ever going to be an issue of kind of a law of large numbers there as we go forward to the back half of '19?

Yes, this is Steve. I'll hit this one. As we've talked a little bit on my portion. The Industrial/Commercial wins were $330 million in fiscal '18, the strongest sector for wins. And they were pretty diversified. And so we see oil and gas is coming back with some customers. We're winning new work in the automated retail space as well as heavy transportation and things. And so for us, it's pretty broad-based new wins and growth that's basically offsetting some of the semi cap and overcoming the semi cap market. And so that for us is what's giving us optimism in Industrial/Commercial.

Yes, in the Healthcare front, we haven't seen the law of large numbers come into play yet. I mean, right now, with the wins in the funnel strength that they're -- we're showing in that sector, we think we have a lot of runaway for growth within Healthcare/Life Sciences yet. But our brand's really strong in the marketplace and the team there's just doing a excellent job.

Our following question comes from Paul Coster from JP Morgan.

This is Paul Chung on for Coster. So just on free cash flow, it looks like guidance has lowered a bit. Your CapEx level's expected to increase, inventory level's probably elevated maybe in the first half, I assume your accounts payable might come down from elevated levels, but what could go right for you in the cash cycle days to come down in the second half? Is there a possible upside to your guidance there?

Yes, I think there could be upside. We'll see about the CapEx spending, if we're going to need to all of that. Sometimes we see some of that shift into the following years. So some of that could push out. But then touching on, I believe what Todd had talked about around inventory, I think putting in new processes, working with our customers on managing the inventory coming in to support them. I think that's an opportunity for us too. So inventory days would be an area that I think we could improve upon compared to where the forecast is currently.

Okay, and then looking further out, how should we think about CapEx levels beyond this year? I know it's too early to tell on your cash cycle days further out. But I'm just trying to get a sense from when we can hit kind of normalized levels for free cash flow?

Yes, so we are having elevated capital spending in fiscal '19. But that's because of, again, our second facility in Guadalajara. Once we get past that year, I think we'll come back down to a lower CapEx that we've historically seen, maybe around $40 million to $60 million, which includes maintenance capital and any capital to support the new revenue growth that we're expecting. And that would probably carry us through probably a 2- to 3-year period before we start looking at an additional footprint somewhere.

Okay, and my last question. So on the win side, can you just talk about the competitive environment? Doesn't look like you're sacrificing much on margins to win these new deals. So if you could just talk about how you are winning these deals would be helpful.

Yes, this will Steve, I'll hit that one. I don't think the overall macro environment in terms of competitiveness has really changed. It's always been a competitive industry. I think the difference for us and I think the Healthcare/Life Sciences team is benefiting from this is really our ability to differentiate ourselves in the market with that focus on low- to mid-volume products. People are starting to realize the value of that. I also think our supply chain team has done a phenomenal job this year in terms of being able to deliver for our customers, and I think we're taking market share because of that. So it's still a competitive market but I think we've done a really nice job of differentiating ourselves and been able to basically not focus at all on price and focus a little bit more on value. I think our value proposition is resounding with customers.

Our next question comes from Sean Hannan from Needham.

Just wanted to dig back into wireless as you guys are ramping some activity -- or winning some activity. Wanted to get an understanding, what's the nature of the work that we're looking to be involved with here? As we're specifically adding these new logos, I'm assuming that there's probably more of a domestic focus, a higher-end type of quality point product and just trying to understand how much this plays into 5G as part of the thrust there?

Sure, this is Steve. I'll hit that one. The 2 that I mentioned in terms of wireless, one is focused on more of the business in the large campus environment. So they do more point-to-point communications as well as large, complex infrastructure deployments. So it's really more to your point more of the back office in higher-value stuff. That's one of them. The other one is more focused on delivering triple play to more remote areas, but again, it's more of the back office stuff. So it's the higher value equipment, those are the 2 areas. And in terms of 5G, both of these customers have a view on how they're going to address that market, but these products specifically aren't addressing that yet.

Okay, that's helpful. And then for Pat, just some accounting questions here. Where do -- or where can we think about taxes going beyond fiscal '19 conceptually as your mixed geographic production continues to morph here. Any thoughts around that? And also can we get any color around accounts receivables factoring in the quarter?

Sure. So on the tax rate, I think we're -- in this range of 13% to 15% for probably the next several years. We do have a tax holiday that comes due in 2024 in Malaysia that we're working through an extension on that. So that's something we're just going to have to work through and see if there's any impact to our tax rate when that comes due. But apart from that, I think being in this kind of low- to mid-double-digit range is reasonable for us. On the accounts receivable factoring, we continue that program in the fiscal fourth quarter, slightly higher than the fiscal third quarter, still at a discount rate that's actually lower than our borrowing rate on our line of credit. So still positive to be factoring. And again, similar level, and I think going into fiscal '19, we'll see continuing at that similar level that we've been at.

Our following question is from Matthew Sheerin from Stifel.

Yes. My questions were just answered.

We have no further questions at this time. I'd like to turn the call over to CEO, Todd Kelsey for final remarks.

All right, thank you, Sylvia. In closing, given it's the end of the fiscal year, I want to take a moment to acknowledge and thank the more than 18,000 Plexus' team members globally. You delivered just an outstanding fiscal 2018. You continue to provide exceptional customer service, achieved outstanding revenue growth, produced strong profitability and positioned Plexus for future success. I'm really proud of your accomplishments. The results of fiscal 2018 make me optimistic that Plexus will have an outstanding fiscal 2019. Keep up the tremendous work.

And then finally, thank you to everyone who joined us on our call today. We appreciate your support and interest in Plexus.

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