Plexus Corp

NASDAQ:PLXS

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, and welcome to the Plexus Corp. Conference Call regarding its Fiscal First Quarter 2019 Earnings announcement. My name is Sylvia and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open the conference call for questions. The conference call is scheduled to last approximately one hour. Please note that this conference is being recorded.

I would now like to turn the call over to Ms. Heather Beresford, Plexus Senior Director Communications and Investor Relations. Ms. Heather Beresford, you may begin.

[Heather Beresford, Senior Director of Communications & IR]

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 are not limited to historical facts. The words believe, expect, intend, plan, anticipate and similar terms are often identified 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 from the fiscal year ended September 29, 2018, and the safe harbor and fair disclosure statement in yesterday's press release.

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

In addition, management uses these and other non-GAAP measures, such as adjusted net income and adjusted earnings per share, 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' 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?

[Todd Kelsey, President, CEO]

Thank you, Heather, and good morning, everyone. Please begin with our fiscal first quarter results on Slide 3.

After the close of the market yesterday, we reported results for our fiscal fourth quarter - first quarter of 2019. Our results were aligned with our expectations entering the quarter.

We delivered revenue of $766 million and non-GAAP EPS of $0.91, both near the midpoint of our guidance range. The revenue result represented a 13% increase from the first quarter of fiscal 2018.

We achieved solid sequential growth in our Healthcare, Life Sciences, Aerospace and Defense and Communications market sectors, which offset weakness in the semiconductor capital equipment space. Both Aerospace and Defense as well as Communications strengthened in the quarter.

In addition, we delivered strong operating performance with operating margin of 4.8%, firmly within our enduring target range of 4.7% to 5%. Our EPS result increased 21% from the comparable quarter last year, an outcome that supports our expectation for solid EPS leverage in fiscal 2019. The result included $0.15 of stock-based compensation expense.

From a GAAP perspective, we produced fiscal first quarter earnings per share of $0.69. This result included $0.22 per share of non-recurring tax expense as a result of further guidance related to U.S. Tax Reform.

Please advance to Slide 4. Next, I will highlight additional accomplishments within the fiscal first quarter. We delivered return on invested capital of 14.6%, well above our weighted average cost of capital of 9%. This resulted in economic return of 560 basis points exceeding our 500 basis point enduring goal.

Our teams achieved manufacturing wins of $230 million annualized when fully ramped into production. The win consisted of a healthy mix of programs with new and existing customers and brought our trailing four quarter wins to $920 million, representing the highest level since fiscal 2013.

Our wins were nicely balanced across our sectors and regions and were representative of our differentiated portfolio focused on mid to low volume, higher complexity markets.

Our teams maintained a funnel of qualified manufacturing opportunities of $2.6 billion. This magnitude has proven sufficient to fuel our growth. In addition, their early-stage funnel continues to expand. The quality of our early stage and qualified funnels gives us confidence that we will sustain strong wins momentum into the future.

Our Engineering Solutions team delivered another record revenue quarter and is on pace to continue its recent history of annual double-digit percentage growth. Our Engineering Solutions wins finished near a quarterly record at $35 million as we expanded relationships with several new and existing customers. Many of these programs have the potential for meaningful future manufacturing revenue.

In addition, our funnel of qualified engineering opportunities continues to increase. Current and potential customers are attracted to the breadth and depth of our engineering competencies.

Finally, I would like to highlight our recent success in expanding our excellence and differentiation in the Healthcare, Life Sciences market sector, particularly as it relates to complex finished devices.

First of all, our Healthcare, Life Sciences revenue exceeded $300 million for the fiscal first quarter. This represents 27% growth over the same period last year. In the fiscal first quarter, Healthcare, Life Sciences increased to 39% of our portfolio, further positioning our leadership in non-traditional, non-commoditized markets.

Nearly 85% of our portfolio consists of revenue in these non-traditional markets of Healthcare/Life Sciences, Industrial/Commercial and Aerospace and Defense. These are sectors where we differentiate due to the demand for technical expertise beyond what is required for traditional EMS.

Our trailing four quarter wins in the sector is at a healthy $249 million and the sector maintains a funnel of nearly $1.5 billion. The combination of these two factors positions us well for sustained growth.

Our Guadalajara manufacturing facility successfully completed its first FDA Class III audit. This brings the total number of Plexus facilities manufacturing FDA Class III products to four globally. Our customers increasingly view us as an expert and trusted partner in the development and manufacture of life sustaining products.

Finally, we shipped the first products built in our new Healthcare, Life Sciences Center of Excellence in Penang, Malaysia. We are prepared to increase customer deliveries in the fiscal second quarter and expect a rapid ramp of this facility.

The facility contains a Class 10,000 clean room and will be producing single-use devices for health care customers in addition to finished medical capital equipment.

Advancing to our guidance for the fiscal second quarter of 2019 on Slide 5. We are establishing revenue guidance of $760 million to $800 million. The midpoint of our guidance range suggests approximately 12% revenue growth from the fiscal second quarter of 2018.

Within the quarter, we anticipate revenue due to the abundance of new program ramps, coupled with largely stable end markets to offset weakness in the semiconductor capital equipment space.

We are guiding fiscal second quarter GAAP diluted EPS in the range of $0.80 to $0.90. The EPS guide includes $0.16 of stock-based compensation expense. Our EPS guide includes a $0.05 per share increase in non-operating expenses as compared to the fiscal first quarter.

In addition, we are experiencing modest short term pressure on our operating margin as we absorb the seasonal impacts of the U.S. payroll tax reset and annual salary adjustments.

We expect to mitigate these expenses through productivity improvements beginning in the third fiscal quarter, enabling operating margin within our 4.7% to 5% target range for the fiscal year.

Please advance to Slide 6. As we look ahead to the balance of fiscal 2019, we remain optimistic regarding our outlook. With the exception of the semiconductor capital equipment space, demand in our differentiated end markets remains stable.

In fact, we are seeing modestly increasing demand in Healthcare, Life Sciences and Aerospace and Defense. These sectors represent 55% of the revenue in our portfolio. In addition, as a result of our robust wins performance we are ramping a significant number of new programs, many of which are sizable.

Finally, our strong commitment to customer service excellence is resulting in increased customer loyalty and expanding relationships with several of our existing customers. These factors continue to leave us optimistic that we will achieve solid growth in fiscal 2019.

Furthermore, we anticipate operating margin within our 4.7% to 5% target range for the fiscal year as we mitigate the second quarter seasonal cost pressures through improved productivity. We have additional margin expansion opportunity through operating and fixed cost leverage. The growth in margin expansion, combined with our share repurchase program should result in meaningful EPS leverage in fiscal 2019.

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

[Steven Frisch, Executive VP & COO]

Thank you, Todd. Good morning.

Please advance to Slide 7 for a review of our market sector performance during the first quarter of fiscal 2019, as well as our expectations for the sectors in the fiscal second quarter of 2019.

Our Healthcare, Life Sciences sector grew 4% in the fiscal first quarter, which was in line with our expectations of a mid single digit increase. This result represents a 27% increase from the fiscal first quarter of 2018.

As we look forward, we expect a robust demand from new program ramps to continue. However, they will be offset by seasonal softness with a large customer this quarter. As a result, we anticipate a low single digit decline in our Healthcare, Life Sciences sector in the fiscal second quarter.

Our Industrial, Commercial sector was down 10% in the fiscal first quarter, which was below our expectations of a mid single digit decrease. Softer than anticipated demand from semiconductor capital equipment customers was the main reason for the lower result. For the second fiscal quarter, we expect semiconductor capital equipment revenue to decline to less than 10% of Plexus' total revenue.

However, growth of new program ramps from other customers within the Industrial, Commercial sector is strong. As a result, we anticipate the Industrial, Commercial sector will grow at a mid-single-digit rate in the fiscal second quarter.

Our Communications sector had a stronger fiscal first quarter than anticipated, with revenue climbing 4%. Robust calendar year end shipments drove results above our expectations of flat revenue.

Looking ahead to the fiscal second quarter, we do not expect the demand to be as strong. As a result, we anticipate a high single digit revenue decline in our Communications sector for the second fiscal quarter.

Our Aerospace and Defense sector grew 2% in the fiscal first quarter. This result exceeded our expectations of a low single digit decrease. Stronger demand from 11 of our top 12 Aerospace and Defense customers surpassed quarterly projections and enabled the growth.

As we look towards the fiscal second quarter, several new programs are in the late stages of ramping. As a result, we are expecting a low double-digit increase for our Aerospace and Defense sector in the fiscal second quarter.

Please advance to Slide 8 for an overview of the wins performance for the fiscal first quarter. We won 33 new manufacturing programs that we expect to generate $230 million in annualized revenue when fully ramped in production.

With 26 of the wins coming from existing customers and 7 from new customers, the teams delivered on our strategy of growing existing customers, while adding select new customers in our differentiated markets.

With the strong wins, our trailing four quarter manufacturing wins, as shown by the red bars, increased to a very healthy $920 million. A key indicator for future growth potential is our wins momentum. At 31% in the fiscal first quarter it provides optimism for continued growth in 2019.

An additional indicator for future growth is our Engineering Solutions wins. With another quarter of strong wins of $35 million, the engineering backlog is exceptionally strong for fiscal 2019. In addition to the accretive margin that this team generates, they are designing products that provide a pipeline of manufacturing opportunities for 2019 and beyond.

Please advance to Slide 9 for further insight into the wins performance by region. $230 million of manufacturing wins were balanced across all three regions. Within the Americas region, each of our five manufacturing facilities benefited from the robust manufacturing wins of $94 million in the fiscal first quarter.

The APAC region had very strong manufacturing wins of $114 million in the fiscal first quarter. Each of the four market sectors contributed to the strong results by winning meaningful programs for our facilities in Penang, Malaysia.

The EMEA region's renewed focus on increasing manufacturing wins yielded positive results in the fiscal first quarter. With $22 million in the manufacturing wins, the EMEA region had a good start to fiscal 2019.

Please advance to Slide 10 for further insight into the manufacturing wins performance by market sector. Similar to the regions, the $230 million of manufacturing wins were well distributed across the market sectors in the fiscal first quarter. The Healthcare, Life Sciences sector produced $67 million in manufacturing wins in the fiscal first quarter.

Included in the wins is a significant program that improves point-of-care diagnostic capabilities for developing countries. We will produce this product in a new Healthcare/Life Sciences Center of Excellence facility in Penang, Malaysia. The team also added a new customer that is focused on robotic-assisted medical procedures. This product will be produced in the Americas region.

The Industrial, Commercial sector generated robust wins of $76 million in the fiscal first quarter. Included in the wins is the expansion of our relationship with a recently added customer who is focused on additive manufacturing equipment.

Despite the softness in the semiconductor capital equipment market, the diversity of the recent wins are expected to enable meaningful growth for the Industrial, Commercial sector in fiscal 2019.

The Communications sector had strong wins of $45 million. A next-generation product from an existing customer and a new customer focused on providing IoT connectivity were the main contributors to the sector's solid wins performance.

The Aerospace and Defense sector's healthy wins of $42 million were mainly a result of growth with 2 customers within our Security subsector. Similar to last quarter, we expect these recent wins to contribute to our revenue growth within fiscal 2019.

Please advance to Slide 11. Our go-to-market teams continued to deliver strong results. Even with the robust wins performance of $230 million, three of the four sector teams increased their manufacturing funnels. At a combined $2.6 billion of qualified manufacturing opportunities, we have a funnel to support continued growth wins performance through 2019.

Our Healthcare, Life Sciences Vice President, Michael Tendick, and his team are doing an outstanding job. They are leveraging the strong execution of our global operations team to rapidly expand the business.

With the recent FDA Class III certification in Guadalajara and the opening of our new Healthcare, Life Sciences Center of Excellence facility in Penang, the team has leveraged our unique global value proposition to maintain a strong $1.5 billion funnel, while delivering sustained wins performance and revenue growth.

The Industrial, Commercial team has done an exceptional job managing their portfolio. Their diversification of the wins comes from an active management of their funnel. With an increase in our funnel of 17% to $436 million in the fiscal first quarter, they are enabling continued success.

The Communications sector's past two quarters of strong wins with new customers has impacted their funnel. They are aggressively managing the pipeline of opportunities to increase to a $167 million funnel.

Finally, the Aerospace and Defense sector is steadily building momentum. At $526 million in the fiscal first quarter they are maintaining a healthy funnel, while simultaneously increasing their wins performance over the past three quarters.

Next, I would like to turn to operating performance on Slide 12. With revenue of $766 million and operating margins at 4.8% in the fiscal first quarter, the team once again delivered outstanding results. As we look to the fiscal second quarter, the main priority is to realize the revenue growth opportunities.

However, we have two areas that we are focused upon as we achieve the growth. The first focus is inventory. As expected, our days of inventory rose to 105 days in the fiscal first quarter. With some improvements in component availability and an initiative to improve planning with our customers, we are committed to reducing inventory throughout fiscal 2019.

The second focus is on operating margin. Our operational improvements will not overcome the headwinds associated with the U.S. payroll reset and annual salary adjustments that occur in the fiscal second quarter. Although we expect to return to our target operating margin range in the fiscal third quarter, we are guiding operating margin in the range of 4.3% to 4.7% for the fiscal second quarter.

A few final comments. During the first fiscal quarter each year, Todd and I visit all of Plexus' facilities across the globe. It is easy to talk about customer service excellence and operational excellence, but it is not until you see them being delivered by the 19,000 Plexus people in 23 facilities that you really understand the differentiation they create.

Our global alignment to helping our customers create the products that build a better world has become more than just a statement. I'd like to thank our employees for making it a commitment to our customers, each of you are making a difference.

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

[Patrick Jermain, Senior VP & CFO]

Thank you, Steve, and good morning, everyone. Our fiscal first quarter results are summarized on Slide 13. At the beginning of the quarter, we adopted the new revenue recognition standard ASC 606, which requires revenue to be recognized over time for certain contracts. We implemented the standard using the modified retrospective approach, therefore, prior periods have not been restated. The impact from adoption was minimal.

First quarter revenue of $766 million was near the mid-point of our guidance, while gross margin of 9.5% was at the higher end of guidance and consistent with the fiscal fourth quarter of 2018. Product mix contributed to the improvement in gross margin.

Selling and administrative expense of approximately $35.4 million was in line with our quarterly guidance. As a percentage of revenue, SG&A was 4.6%, a sequential improvement of 10 basis points.

Operating margin of 4.8% was also in line with our quarterly guidance and consistent with the prior quarter. Included in this quarter's operating margin is approximately 60 basis points of stock-based compensation expense.

Non-operating expenses for the fiscal first quarter were $2.8 million, which was favorable to our guidance, primarily due to lower interest expense and foreign exchange gains recognized during the quarter. GAAP diluted EPS of $0.69 included a detriment of $0.22 per share related to further refinement of U.S. Tax Reform.

In late November, the U.S. Department of Treasury proposed new regulations clarifying the treatment of foreign taxes paid in relation to the repatriation tax. In accordance with U.S. Tax Reform enacted December 2017, we were able to deduct these payments. However, the recently issued regulations now prohibit this deduction. The additional tax expense will be paid over an 8-year period, consistent with the overall repatriation tax.

Excluding this tax expense, we recorded a tax rate of 14.2% for the fiscal first quarter, in line with our guidance of 13% to 15%. Non-GAAP EPS of $0.91 for the fiscal first quarter was slightly above the mid-point of our guidance.

Turning now to the balance sheet and cash flow on Slide 14. During the quarter, we continued our cash repatriation strategy by repatriating approximately $20 million of offshore cash. Since the enactment of U.S. Tax Reform last year, we have brought back over $450 million.

During the quarter, we purchased approximately 870,000 of our shares for $50 million at an average price of $57.53 per share. At the end of the fiscal first quarter, we had approximately $129 million remaining under the authorization.

For the fiscal first quarter, we used $33 million in cash from operations and spent $25 million on capital expenditures resulting in cash outflows of $58 million, slightly better than our forecast.

At the end of the fiscal first quarter, our cash balance was $193 million. Sequentially, our cash balance reduced approximately $105 million with additional working capital investments, capital expenditures and share repurchases. Cash cycle at the end of the first quarter was 83 days, within guidance and 10 days higher than our results in the fiscal fourth quarter.

Please turn to Slide 15 for details on our cash cycle. As I mentioned last quarter, we now have a new category in cash cycle, due to the adoption of the new revenue recognition standard. This category, referred to as contract assets, represents certain work in process and finished goods inventory recognized as revenue, however, yet to be billed to our customers.

Since this was previously part of our inventory days, I'll discuss the combination of this category with inventory days when comparing to the prior quarter. With that said, combined days in inventory and contract assets sequentially increased by 11 days, while the combined dollar value increased by $87 million.

With the significant wins recognized over the past few quarters, we have experienced increased inventory to support the program ramps. In addition, continued long lead times led us to build inventory for anticipated demand. When actual demand came in lower for certain customers, we experienced increased inventory levels.

We have worked with several customers to secure deposits in order to mitigate a portion of the elevated inventory. You can see that with the three day sequential improvement in customer deposits.

Sequentially, days in receivables increased by 4 to 51 days primarily due to the timing of shipments. First quarter shipments were weighted more toward the last month of the quarter in contrast to last quarter. This created a higher receivable balance at the December quarter-end. With the elevated purchasing activity, payable days sequentially increased by 2 days.

As Todd has already provided the revenue and EPS guidance for the fiscal second quarter, I will share some additional details, which are summarized on Slide 16. Fiscal second quarter gross margin is expected to be in the range of 9% to 9.3%. At the midpoint of this guidance, gross margin would be 30 basis points lower than the fiscal first quarter.

Seasonal compensation cost increases as well as the reset of payroll taxes for U.S. employees will sequentially impact gross margin by approximately 50 basis points. We expect to offset a portion of this impact through continued operational productivity and better leverage of fixed expenses with the anticipated higher revenue.

For the fiscal second quarter, we expect SG&A expense in the range of $36 million to $37 million, up sequentially due to the seasonal compensation headwinds, which are about $1 million. At the mid-point of our revenue guidance, anticipated SG&A would be 4.7% of revenue, sequentially up 10 basis points.

Fiscal second quarter operating margin is expected to be in the range of 4.3% to 4.7%, which includes approximately 65 basis points of stock-based compensation expense.

A few other notes. Depreciation and amortization expense for the fiscal second quarter is expected to be approximately $13 million, slightly higher than the fiscal first quarter.

Non-operating expenses for the fiscal second quarter are expected to be in the range of $4.2 million to $4.6 million. At the midpoint of this guidance, these expenses would be sequentially higher by $1.6 million or $0.05 per share.

The increase is primarily related to additional interest expense from increased borrowing under our revolving credit facility and the commencement of a capital lease for our new facility in Guadalajara, Mexico.

We estimate an effective tax rate of 13% to 15% for both the fiscal second quarter and full year. Given our recent share repurchases and our anticipated activity during the fiscal second quarter of 2019, we estimate diluted weighted average shares outstanding to be in the range of 31.5 million to 31.8 million shares.

Our expectation for the balance sheet is for working capital dollars to increase slightly. Based on forecasted levels of revenue, we expect higher working capital will result in cash cycle days of 81 to 85 days for the fiscal second quarter. At the mid-point of this guidance, cash cycle days would be consistent with the fiscal first quarter.

There have been no changes in our capital spending estimate for fiscal 2019. We still expect spending in the range of $70 million to $90 million. In the fiscal second quarter, we expect free cash flow to be around breakeven and we reconfirm fiscal 2019 free cash flow in the range of $40 million to $60 million.

With that, Sylvia, I will now open the call for questions. [Operator Instructions] Sylvia?

[Operator]

Thank you. [Operator Instructions] And our first question comes from Matt Sheerin from Stifel.

[Matt Sheerin, Stifel]

Yes. Thanks. And good morning, everyone. First, a question just regarding the weakness you are seeing in semi cap. You've talked about that for a couple of quarters. And I think you said it was just less than 10% of total revenue. Could you give us an idea of what it was a year ago or sort of the year-over-year declines?

And talking to your customers, are you expecting to hit the bottom any time soon, where you see forecast that might indicate a bounce back in the second half as we've heard from some other companies?

[Todd Kelsey, President, CEO]

Good morning, Matt. This is Todd. So I'll just start and I'm going to pass it to Steve for color. But if we look back a year ago, semi cap was on the order of 15% of our revenue. So it's dropped to less than 10%.

And one of the things that I really think significant that everybody take note of is we're expecting some reasonable growth yet in our Industrial, Commercial sector over the course of the year, despite the semiconductor capital equipment drop.

So we're making that up through a lot of good, hard work on diversifying the portfolio and new program wins. I'll pass it to Steve to run a little bit more color around semi cap.

[Steven Frisch, Executive VP & COO]

Yeah, just a little bit of what happened in the quarter and what we see going forward for '19. So within the first fiscal quarter, three of our large semi cap customers brought down the forecast in aggregate of about $7 million. That was in the November time frame. So that impacted Q1 a bit. We could have been a little bit stronger if that would've obviously materialized.

In the December time frame, they brought it down by about an additional $20 million for Q2. So that's what's really kind of driving some of the challenges for us in Q2 with inventory and a little bit of headwind in margins as well because we were planning an additional $20 million of revenue for them in the fiscal Q2 time frame.

One of the challenges that we have with this - these customers is that a lot of the components are customer engineered components. So from an inventory standpoint, it's difficult to push them back into the pipeline. And so it's going to take us a little bit of time through '19 to burn through those. We expect that that's about a three day impact in Q2 in terms of days of inventory associated with what's happening there.

In terms of your question about where do we think we're at, we do believe we're at the bottom talking to our customers. The way that it's been described is that we're in maybe a U-shaped as opposed to a V-shaped. As we come down to the bottom, we're not necessarily going to see a rapid climb back up, but maybe hover at the bottom here a little bit before we turn back up. And depending upon which customer you talk to, some say late '19, maybe at the beginning of '20, but for the most part, they believe we're at the bottom.

[Matt Sheerin, Stifel]

Okay. That was very helpful, Steve, and your commentary on inventory, it's actually part of my follow-up question. And you answered some of that in terms of the headwinds you see in terms of the cash cycle and inventory you explained on the semi cap and the custom parts.

But if you look at the rest of your inventory picture, because I imagine that there is some commodity parts associated with some of that bill of material where you may have a mismatch and you did talk about bringing inventory down this year.

Are you able to get parts pretty much in areas that we've seen shortages or are there still some spot shortages that you - we might still have a mismatch of parts?

[Todd Kelsey, President, CEO]

Yeah. So in general, the supply chain environment is improving, Matt. And particularly, memory is good right now. We're still seeing some challenges around MLCC's industry semiconductors, but it's not as bad as it's been.

So when you start to look at the ability to upside, and this is also, really feeds right into the ability to drive inventory down, that environment is getting better. So we're starting to see an ability to be able to do that.

And one of the things though, that we're still continuing to do is really keep up the interactions with our primary suppliers and supply chain people. So we have a number of meetings going on with executives ensuring we're getting supply and also ensuring we're getting favorable pricing. So they are liking our strategy and our growth and our engineering content. So that's really playing into our favor.

[Matt Sheerin, Stifel]

Okay. Thanks a lot.

[Operator]

Our following question comes from Shawn Harrison from Longbow Research.

[Shawn Harrison, Longbow Research]

Hi. Morning, everybody.

[Todd Kelsey, President, CEO]

Morning, Shawn.

[Shawn Harrison, Longbow Research]

Pat, just focused maybe for you on the cash cycle days. Is there a target you're looking to get at for the end of the year to be able to hit the free cash flow forecast that you left unchanged?

[Patrick Jermain, Senior VP & CFO]

Yes. I'd want to see us in the low 70s, kind of that 71 to 74 range, and then going into fiscal '20, I'd like to get that sub-70. So that will take a little more effort.

[Shawn Harrison, Longbow Research]

And then it's safe to assume the majority of this is going to come from inventory being pulled out of a system versus shifts in AP or AR?

[Patrick Jermain, Senior VP & CFO]

It is, yeah. And maybe some additional customer deposits where it's more a request of the customer to have that inventory on hand, and we'll support it with the deposit. So I think a combination of those two is where you'll see that improvement.

[Shawn Harrison, Longbow Research]

Okay. And then as a follow-up. Todd, last quarter, you talked about potential incremental outsourcing opportunities with the tariffs and the trade war. Are you seeing those opportunities come to fruition? Maybe, are they're growing, are you seeing customers begin to consider, I guess, more acutely, moving production outside of China?

[Todd Kelsey, President, CEO]

Yeah. So what I'd say, Shawn, is in the - the situation today looks a lot like it did a quarter ago. So everything's pretty much taken a quarter pause while we have the trade negotiations that are ongoing. So the funnel of new opportunities is still there and the potential to move certain chunks of work is still there, but nothing's active at this point. So we'll see how this all progresses and whether it really turns out to be anything additional or not at this point.

[Shawn Harrison, Longbow Research]

Okay. Thank you.

[Todd Kelsey, President, CEO]

But I have to say, either one is a positive because it's good to get the additional revenue, but it's also good to be focusing our efforts around bringing in new business as opposed to moving other stuff around. So either is a positive.

[Shawn Harrison, Longbow Research]

Got you. Thanks.

[Operator]

Our following question comes from Paul Coster from JPMorgan.

[Paul Coster, JPMorgan]

Thank you for taking my questions. A couple on comms. So it looks like you had a strong fiscal fourth quarter, of course. Is that - or fiscal first quarter, is that the reason why the second quarter is going to be down, was it just a pull forward?

And the second question is, the pipeline looks a bit thin and what's - the most exciting thing in comms at the moment is 5G. Are you sort of under indexed to 5G?

[Todd Kelsey, President, CEO]

Yeah. So I'll start, and then - with the first part, and then Steve will take the question around 5G and the comms funnel. But if we look at first quarter and the impact it had on the second quarter, it didn't have a big impact. We had a little bit of a comms, I would call it, pull forward just from a improved throughput that we had in certain programs that allowed additional shipments to go out the door.

But if you look at Q2, and I wouldn't say Q2's - I mean, it's - we're still projecting at the midpoint sequential growth, so it's not down. But the reason that's a little bit below what we thought it might be, coming into this call, is semiconductor capital equipment. So that went down pretty substantially.

[Steven Frisch, Executive VP & COO]

And your question related to 5G, from sectors that we focus on and where we differentiate, as you look at the - more of the infrastructure of the cellular arena, that's not an area that Plexus has traditionally kind of played in. Now with 5G, it opens up the door for us a bit more in terms of the IoT and the connectivity things. And one of the wins that we announced this quarter, it is a customer that deals with IoT and more on the industrial side of how we're connecting more factory automation and other things to the network. So we do see ourselves a player in it, but we're selectively focusing on where we can differentiate ourselves.

[Paul Coster, JPMorgan]

Got it. My follow-up question really has to do with the new wins. Given that you're currently wrestling with cash flow and improving your cycle there. And we've seen across the EMS space and a lot of investment to bring on new customers, are you in any way, kind of, sort of screening the new business to make sure that it's not capital intensive or inventory intensive or is there no change to your methodology?

[Steven Frisch, Executive VP & COO]

Not from a cash standpoint. I mean, we always do a pretty thorough screening to make sure that the business fits our strategy, and we believe we clearly differentiate that it fits this mid to low volume, higher complexity, the non-commoditized markets. But from a standpoint of ability to bring on business, we're in great shape. We have access to plenty of cash.

[Patrick Jermain, Senior VP & CFO]

And Paul, one thing we do too is we measure every customer by a return on capital employed. So we're looking at working capital needs compared to margin and making sure that makes sense and that has not changed.

[Paul Coster, JPMorgan]

Right. Is there any difference in the lead time between bringing on the customer and them sort of achieving the optimal margin structure?

[Todd Kelsey, President, CEO]

I don't think there's a fundamental change in the recent past here. A lot of the non-traditional markets that we deal with take a bit longer. As you have a highly regulated products, either in Healthcare, Life Sciences or in aerospace, the amount of time it takes to bring them up to full production takes longer. But that hasn't changed than what it has been over the last several years.

[Paul Coster, JPMorgan]

Okay. Got it. Thank you very much.

[Todd Kelsey, President, CEO]

You’re welcome.

[Operator]

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

[Mitch Steves, RBC Capital Markets]

Hi, guys. Thanks for taking my question. Wanted to circle back a little bit on the semi cap commentary there. So does that include, when you guys talk about that, probably Micron or is that not part of kind of the customer count as it's just related to Lam, AMAT and KYC?

[Todd Kelsey, President, CEO]

Yeah, we don't include Micron in the semi cap numbers because we do a - kind of a broader portfolio and it really started in different areas of their business. So we don't include that in our semi cap. It's just part of the broader...

[Mitch Steves, RBC Capital Markets]

Okay. And then just overall for semi cap, is there any specific exposure within those three that is heavier or is it just pretty equal across three?

[Todd Kelsey, President, CEO]

Yeah, we deal with customers that are servicing the whole value stream of the semi cap over from the front end to the back end processes. And so it's pretty diversified across the entire spectrum.

[Mitch Steves, RBC Capital Markets]

Okay. Got it. And then secondly, just switching to the medical side. This is like one of the first things you're seeing a sequential decline there. So is there anything to look into there or is it just more of the timing of deals in terms of what you're going negative for the sequential and Healthcare going forward?

[Todd Kelsey, President, CEO]

It is more - definitely more of a seasonal thing. We have one customer that's just down for the quarter. And that's the typical - it's typical for them to see this every year. So we expect that to return to growth as we go through '19.

[Steven Frisch, Executive VP & COO]

Yes. So the one thing, you will see sequential growth in Healthcare, Life Sciences as we go through the rest of fiscal '19. And we're expecting an exceptionally strong growth year within that sector. So things are very encouraging.

[Mitch Steves, RBC Capital Markets]

Okay. Thank you.

[Operator]

At this time, we have no further questions. I'd like to turn the call over to Todd for closing remarks.

[Todd Kelsey, President, CEO]

Okay. Thank you, Sylvia. So I have an announcement for the analysts who joined us today. We'll be hosting an Analyst Day at our headquarters in Wisconsin on June 5th, 2019. So during that event, we'll be highlighting our differentiated strategies and our capabilities. And you can expect to see some further communications from us regarding Analyst Day later this quarter with invitations to follow. And then finally, in closing, I want to thank everybody again for joining us on the call today. We certainly appreciate your support and your interest in Plexus.

[Operator]

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