Plexus Corp

NASDAQ:PLXS

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, and welcome to the Plexus Corp. Conference Call regarding its Fiscal Second 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 turn the call over to Ms. Heather Beresford, Plexus Senior Director Communications and Investor Relations. Heather?

[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, Executive 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 second quarter results on Slide 3.

Yesterday evening after the close of market, we reported results for our second quarter of 2019. We delivered record quarterly revenue of $789 million. This result represented a 13% increase from the fiscal second quarter of 2018 and 3% growth from the previous quarter.

Our Industrial, Commercial and Aerospace and Defense sectors were exceptionally strong in the quarter both achieving double-digit percentage growth from the previous quarter.

Industrial Commercial revenue was considerably above our expectations entering the quarter. Conversely our Communications sector substantially underperformed in the fiscal second quarter. The end result was an unusually large mix shift within the quarter that created cost inefficiencies stressing our operating performance.

As a consequence, we delivered GAAP earnings per share of $0.79 an outcome that was slightly below our guidance range. The result included $0.16 of stock based compensation expense.

Please advance a slide four. Next I will highlight additional accomplishments within the fiscal second quarter. Our teams maintain their strong wind performance achieving manufacturing wind of $247 million annualized when fully ramped into production, resulting in trailing fourth quarter wind of $912 million.

The wins consisted of a healthy mix of programs with new and existing customers and were representative of our differentiated portfolio focused on mid to low volume higher complexity markets. The sustained wins performance enhances our confidence of future growth.

We continue to ramp production within our new Healthcare Life Sciences Center of Excellence in Penang, Malaysia. The facility contains a Class 10,000 clean room and we'll be producing single use medical devices in addition to finished healthcare capital equipment.

Our teams are driving an aggressive ramp of the facility. We expect to have over a half a dozen customers launched in the site by the end of the fiscal third quarter and to achieve corporate profitability targets in the fiscal fourth quarter.

Our Aerospace and Defense sector continued its recent trend of exceptional performance posting revenue of $140 million in the fiscal second quarter of 2019. This result represents 28% growth from the fiscal second quarter of 2018 and 15% sequential growth. In addition the team expects another strong result in the fiscal third quarter.

We are being recognized by our customers as a premiums supplier in a highly complex Aerospace and Defense markets, as a result of our focus on zero defects, a utilization of leading edge technology in our advanced service offering.

We announced the expansion of our long-standing partnership with The Coca-Cola Company. We will be manufacturing and servicing the next generation of the Coca-Cola Freestyle with 9100 fountain dispenser. In addition, we will be engaged in engineering test and reliability solutions in support of Coca Cola's sustainability priorities.

We continue to generate meaningful shareholder value and delivered return on invested capital of 13.3%. This result represents an economic return of 430 basis points above our weighted average cost of capital of 9%.

Our efforts to reduce inventory are beginning to produce results. We reduced inventory by three days within the fiscal second quarter. In addition, we assigned a corporate executive, along with a dedicated team to our inventory reduction efforts. We expect sustained improvement as we've progressed through fiscal 2019 and into fiscal 2020.

Finally, our engineering solutions team continued their exceptional performance with record revenue and wins within the quarter. As a result, we are positioned for over 20% growth in the service offering in the fiscal year, a truly remarkable result for a large professional services company.

Given the strong alignment with manufacturing these wins have the added benefit of driving future manufacturing growth.

Our depth of expertise within engineering solutions continues to differentiate Plexus in industries with highly complex products and demanding regulatory environments.

Advancing to our guidance for the fiscal third quarter of 2019 on Slide 5. As we look to the fiscal third quarter, our revenue outlook is mixed. Demand in our Aerospace and Defense and Healthcare Life Sciences sectors continues to be robust. However, we have experienced a broad based softening of communications sector demand which we expect to offset the gains in these other two sectors.

While most of the Industrial Commercial sector is healthy, semiconductor capital equipment demand continues to be weak. As a result of all of these factors, we are guiding relatively flat revenue in the range of $760 million to $800 million. The midpoint of this guidance range suggests 7% growth from the fiscal third quarter of 2018.

At this revenue level, we anticipate GAAP EPS in the range of $0.76 to $0.86 including $0.17 of stock based compensation expense. This result would imply improved operating margins modestly below our target range of 4.7% to 5%.

Please advance to Slide 6. We remain confident in our fiscal 2019 revenue outlook and maintain our expectations of solid growth. Demand remains robust in many of our end markets and in particular our Healthcare Life Sciences and Aerospace and Defense sectors.

These sectors where we have a highly differentiated service offering represented 56% of our revenue in the fiscal second quarter. Interestingly, we expect our growth exclusive of communications and semiconductor capital equipment to approach 20% in fiscal 2019, highlighting the strength of our underlying business, as well as the opportunity for significant growth tailwinds should these markets recover. In addition, our teams continue to achieve strong wins performance throughout our differentiated portfolio providing the catalyst for further growth.

Despite delivering industry leading operating margin, we are not satisfied in our near-term performance. In response, we are implementing productivity and cost containment actions that in conjunction with our current revenue expectations are designed to support a return to our target operating margin range in the fiscal fourth quarter of 2019. We are committed to taking the necessary actions to consistently deliver within our target range of 4.7% to 5%.

In summary, we remain optimistic in our ability to deliver strong results and create shareholder value in fiscal 2019 and beyond.

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 the Slide 7 for review of our market sector performance during the second quarter of fiscal 2019, as well as our expectations for the sectors in the fiscal third quarter of 2019.

Our Healthcare Life Sciences sector revenue exceeded our expectations in the fiscal second quarter. The flat revenue result was above our expectations of a low single digit decline. Strengthened new program ramps within the quarter offset seasonal softness with a large customer.

As we look at the fiscal third quarter, we expect demand from existing programs and a new program ramp to provide growth. As a result, we anticipate a low single digit increase in our Healthcare Life Sciences sector in the fiscal third quarter.

Our Industrial Commercial sector was up 14% in the fiscal second quarter which was significantly above our expectations of a mid single digit increase. Significant upside from a customer and the connectivity subsector, combined with growth associate with new program ramps enabled the strong result.

Although the secretary expects quarter over quarter growth in the base business, part of the fiscal second quarter upside was a spike in demand on a single program that was fulfilled within the quarter. As a result, we anticipate a mid single digit decline in the fiscal third quarter as demand with that program returns to more typical level.

Our Aerospace and Defense sector grew 15% in the fiscal second quarter. The result exceeded our expectations of a low double digit increase. Robust demand from existing programs and new program ramps with several customers fueled by strong growth.

As we look towards the fiscal third quarter, the broad based demand continues to be robust. As a result, we're expecting a high single digit increase for our Aerospace and Defense sector in the fiscal third quarter.

Our Communication sector declined 20% in the fiscal second quarter, a result that was meaningfully below our high single digit decline expectations. During the quarter we experienced broad based forecast declines that are customers mainly attribute to significant softening in their end market demand. We have aggressively worked with our customers to align our supply plan to their new forecast. The result is that we expect the low teens decline in our Communications sector for the fiscal third quarter.

Please advance to Slide 8 for an overview of the strong wins performance of the second fiscal quarter. We won 36 new manufacturing programs that we expect to generate $247 million in annualized revenue when fully ramped into production.

In addition to the magnitude of the wins the balance was also very healthy with 22 of the wins coming from existing customers and 14 of the wins coming from new engagements.

The red bars represent our truly forward [ph] quarter manufacturing wins. We finished the fiscal second quarter at a robust $912 million. The gray line represents the ratio of the trailing four quarters manufacturing wins to the trailing fourth quarter of sales. This ratio is our win momentum and is a key indicator of future growth potential. At 30 % in the fiscal second quarter, our wins performance continues to support future growth.

In addition to the strong manufacturing wins performance, the teams generated record engineering wins in excess of $40 million in the fiscal second quarter. With these wins our enduring [ph] solutions backlog is exceptionally strong for the remainder of fiscal 2019.

Please advance the slide 9 for further insight into the wins results by region. The Americas region benefited the most from the strong wins performance of the fiscal second quarter, approximately one half of the $154 million of Americas wins is targeted for our Boise Idaho facility, while approximately one third is targeted to our Healthcare Life Sciences Center of Excellence in Chicago, Illinois.

The APAC region also benefited significantly from the fiscal second quarter wins performance, most of the $77 million in manufacturing wins for the APAC region are targeted to our Penang, Malaysia campus.

With the opening of the Riverside East facility in early fiscal 2019, our Penang campus provides a unique full value stream solution in that region that is attracting new customers.

The EMEA region's manufacturing wins of $16 million included a strategic new customer for our facility in Harare [ph] Romania. The team is executing our strategy to add a few select new customers to build upon the strong growth the region has been experiencing.

Our wins performance highlights that our ability to provide a global solution across the three regions to the differentiated markets we serve continues to be a unique [indiscernible] proposition that our customers desire.

Please advance to Slide 10 for further insight into the manufacturing wins performance by market sector. The Healthcare Life Sciences, Industrial, Commercial and Aerospace Defense sectors all had exceptionally strong results in the fiscal second quarter.

The Healthcare Life Sciences sector generated strong manufacturing wins of $89 million. The new programs cover a diverse range of products, including a robotic assisted medical device, a medium volume diabetes monitor and a single use vision system.

The Industrial Commercial sector produced a robust $82 million of manufacturing wins, including into the winds as is new relationship with a EMEA [ph] based company providing high end industrial printing solutions.

The Aerospace and Defense sectors healthy wins of $56 million was the result of growth with two customers within our Aerospace subsector, as well as the addition of a new customer in the Defense subsector.

Finally, the addition of a meaningful new customer revised specialized networking solutions is the main highlight for the Communication sector in the fiscal second quarter.

Please advance to slide 11. After the exceptionally strong wins performance of $247 million in the fiscal second quarter, the funnel of qualified manufacturing opportunities finished at a healthy $2.4 billion.

With our Healthcare Life Sciences at $1.4 billion and our Aerospace and Defense funnel at $468 million dollars. These two diversified sectors have a substantial pipeline of opportunities to continue robust wins performance.

For the trailing four quarters the manufacturing wins in excess of $300 million. Our Industrial Commercial team has produced the most wins. They have a solid funnel to support continued wins performance. In addition, they have a significant quantum [ph] of leads that can support the back sale of their funnel.

Our Communication sector is focused on growing their $106 million funnel. They have a robust quality [ph] leads that they are in a process of quality flying. In a red [ph] our go to market teams have compiled a strong track record of wins performance and we expect that streak to continue in the fiscal third quarter.

Next, we would like to turn to operating performance on Slide 12. As Todd highlighted, we achieved record quarterly revenue of $789 million in the fiscal second quarter. The team did an outstanding job reacting to this significant demand and mix changes that occurred within the quarter to deliver for our customers.

They shipped approximately 50% of the total manufacturing revenue in the last month of the quarter. Unfortunately the sizable mix changes created significant operational efficiencies that we cannot address within the quarter.

As a result, our operating margins at 4.2% were slightly below our expectations for the first - fiscal second quarter. As we looked at the fiscal third quarter, we are adjusting our cost structure and driving productivity improvements that align with the new demand profile.

We expect to realize improvements in the fiscal third quarter. So we are guiding operating margins in the range of 4.3% to 4.7% for the fiscal third quarter. We anticipate the improvements to be largely complete within the quarter to enable us to return to our targeted operating margin in the range of 4.7% to 5% in the fiscal fourth quarter.

In addition to operating margin, we are continuing our focus on inventory improvements. Our days of inventory in the fiscal second quarter finished at 102 days, a three day sequential reduction from the fiscal first quarter. We are implementing additional initiatives that we believe will generate meaningful improvements by the end of calendar 2019.

If you final comments. The team could have used the mix changes in the fiscal second quarter as an excuse to not deliver for our customers. Instead they followed our culture of customer service excellence and delivered record revenue.

In a similar fashion, they are following our culture of operational excellence to drive improvements and start using the exchange as an excuse they're using as an opportunity to make Plexus stronger. Its rewarding to see the team's dedication to our core values, as well as their commitment to a strong second half of fiscal 2019.

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

[Patrick Jermain, Senior VP & CFO]

Thank you, Steve and good morning everyone. Our fiscal second quarter results are summarized on Slide 13. Second quarter revenue of $789 million was above the midpoint of our guidance while gross margin 9% was at the lower end of guidance. Customer mix and the under absorption of fixed costs across all of our regions led to the lower gross margin.

Selling and administrative expense of approximately $37.5 million was slightly above guidance. However as a percentage of revenue SG&A was consistent with our expectations at 4.7%. Impacted by lower gross margin, operating margin of 4.2% was slightly below our quarterly guidance.

Included in this quarter's operating margin is approximately 65 basis points of stock based compensation expense. Non operating expenses a $4.5 million and our effective tax rate of 13.7% were both in line with our fiscal second quarter guidance.

GAAP diluted EPS of $0.79 was a penny below our guidance range, while the number of diluted shares outstanding was slightly favorable to guidance due to elevated share repurchase activity.

Turning now to the balance sheet and cash flow on Slide 14. During the quarter we continued our cash repatriation strategy by bringing back approximately $28 million of offshore cash. Since the enactment of U.S. tax reform last year, we have brought back close to $480 million.

During the quarter we purchased close to a 1 million shares of our stock for $56 million at an average price of $56.72 per share. At the end of the fiscal second quarter we had approximately $73 million remaining under the authorization.

For the fiscal second quarter we used $1 million in cash for operations and spent $30 million on capital expenditures, resulting in negative free cash flow of $31 million lower than our expectation due to the timing of working capital requirements.

At the end of the fiscal second quarter, our cash balance was $184 million, slightly lower than last quarter. Cash cycle at the end of the second quarter was 86 days, one day above guidance and three days higher than our results in the fiscal first quarter.

Please turn to Slide 15 for details on our cash cycle. With regard to inventory availability. We are seeing improvement in the component market and reductions in lead times. However is still well above the lead times, we experienced before last year's supply chain constraints.

Sequentially inventory days improve three days primarily due to our concerted efforts around inventory management. Corresponding to the reduced inventory, payable days were sequentially lower by seven days.

Customer deposit days sequentially improved by one day as we continue to work with customers to cover higher inventory balances. Sequentially days and receivables were flat at 51 days. However two days unfavorable to our forecast.

Customer mix negatively impacted days outstanding. In addition, second quarter shipments were weighted more toward the last month of the quarter compared to our expectation.

Relative to our forecast, the higher receivable balance primarily drove the negative free cash flow for the quarter. We continue to expect $40 million to $60 million in free cash flow for fiscal 2019, as we believe the second quarter shipping pattern was unique to the quarter and not expected to impact full year results.

As Todd has already provide the revenue and EPS guidance for the fiscal third quarter, I will share some additional details which are summarized on slide 16. Fiscal third quarter gross margin is expected to be in the range of 9.2% to 9.5%. At the midpoint of this guidance, gross margin would be approximately 40 basis points higher than the fiscal second quarter.

Improved customer mix, better fixed cost utilization and the initiation of cost containment actions are contributing to the anticipated higher gross margin. For the fiscal third quarter we expect SG&A expense in the range of $37.5 million to $38.5 million. At the midpoint of our revenue guidance anticipated SG&A would be 4.9% of revenues sequentially up 20 basis points.

Fiscal third quarter operating margin is expected to be in the range of 4.3% to 4.7% which includes approximately 70 basis points of stock based compensation expense. A few other notes depreciation and amortization expense for the fiscal third quarter is expected to be approximately $13 million, slightly higher than the fiscal second quarter.

Non-operating expenses for the fiscal third quarter are expected to be in the range of $5.1 million to $5.5 million dollars. At the midpoint of this guidance, these expenses would be sequentially higher by $800,000. This increase is primarily related to additional interest expense from increased borrowing under our revolving credit facility and a full quarter of interest expense related to the capital lease for a new facility in Guadalajara, Mexico.

In future quarters we would expect to see a reduction in interest expense as we generate cash from working capital reductions specifically inventory. We estimate an effective tax rate of 13% to 15 % for both the fiscal third quarter and full year.

Continuing our share repurchase activity during the fiscal third quarter we estimate diluted weighted average shares outstanding to be in the range of 30.7 to 31.1 million shares.

Our expectation for the balance sheet is a reduction in working capital requirements. Based on forecasted levels of revenue, we expect the lower working capital will result in cash cycle days of 81 to 85 days for the fiscal third quarter.

At the midpoint of this guidance cash cycle days would sequentially improve three days. 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 dollars.

With that, I will now open the call for questions. Sylvia?

[Operator]

Thank you. [Operator Instructions] And our first question comes from Shawn Harrison from Longbow Research.

[Shawn Harrison, Longbow Research]

Good morning, everybody. I guess coming is no surprise I want to dig into the comm weakness. I think the implication is that business will be down 30% from where it was in the December quarter. And so I'm wondering was there any feedback on this is customer specific issue or customer specifics issues, is it market share losses with your customers, as it continue to decline into the end of the year. Because it looks like this business is now on track to be around 10% of sales which would be an all time low in terms of know past five or 10 years?

[Todd Kelsey, President, CEO]

Morning, Shawn. This is Todd. So if we looked at - I mean, you highlighted it, we're down about 30% if you - if you take Q1 actuals versus Q3 guide. And the interesting thing is it doesn't have to do at all with share losses, in fact we're gaining share and we don't believe it has anything to do with specific customers and then what we saw was a broad decline in Q2 and further broad weakness in Q3 and that was across wireless broadband, as well as cable.

So it was like I say broad based, more than we had anticipated. And something that that we didn't anticipate coming into the quarter in any way shape or form. So…

[Shawn Harrison, Longbow Research]

Does it continue to weaken? I mean throughout the year knowing that you probably think - it's difficult to trust the forecast you're getting at this point in time, but is the June quarter the bottom or is there further risk into the back half of the calendar year?

[Todd Kelsey, President, CEO]

Yes, we think we're near the bottom in this June quarter and we could potentially be bouncing around the bottom for a quarter. Our expectations are beyond that. And if you looked at the new program wins for the comm sector they've been strong. We're adding about roughly five new customers that were ramping right now.

So those new ramps should begin to overtake the weakness in the sector as we enter into at ’20.

[Shawn Harrison, Longbow Research]

Got you. And then just on the semi cap business, I know last quarter or I guess coming into the March quarter you're cut off guard – or bit by some forecast reductions, if you now seen stability in that business. And so we're at a bottom and know it'll recover at some point in time from here?

[Todd Kelsey, President, CEO]

Yes, we're seeing it right at the bottom now and it's been consistent for probably three quarters now. Right now our outlook looks like about early calendar 2020 for the recovery, although some customers are more bullish than others, I would say, some see it as being a little bit earlier than that, some a little bit later.

[Shawn Harrison, Longbow Research]

Okay. Perfect. Helpful.

[Todd Kelsey, President, CEO]

And one of the things to point out to Shawn, I mean, you hit on and certainly the two areas of weakness within our business right now, the communications and the semi cap. So the comm sector, the semi cap subsector and the reality is that some 25% of our business and the remaining 75 which is the balance of Industrial, Commercial, the Healthcare Life Sciences business and the Aerospace and Defense business is quite robust right now.

I mean, as I highlighted in the script we're showing about high teens, maybe even approaching 20% growth within that balance of the business within the fiscal year. So even though we're seeing this weakness in comms and Industrial Commercial we think we can I should say it comes in semi –cap – excuse me, we think we can more than overcome it in the rest of the business and deliver good growth.

[Shawn Harrison, Longbow Research]

And Todd to that point maybe just quickly, if you separate semi cap in the rest of industrial what is the non semi cap industrial business going to grow this year potentially?

[Todd Kelsey, President, CEO]

Potentially 30% right in that range.

[Shawn Harrison, Longbow Research]

Okay.

[Todd Kelsey, President, CEO]

So the dream has done a great job of diversifying that portfolio. So that's where - I mean, I'm excited from the standpoint that if we - if these markets recover should they recover there's some real tailwinds.

[Operator]

[Operator Instructions] We have no further questions at this time.

[Todd Kelsey, President, CEO]

All right. Thank you. Thanks, Sylvia. One of the things I'd like to do before exiting the call is I'd like to remind the analyst who joined us today that we're hosting an Analyst Day neuro [ph] Wisconsin headquarters on June 5th 2019 and during the event we'll be highlighting our differentiated strategies and capabilities. Invitations were recently mailed, but if you didn't receive your invitation please contact Heather. And we see there's another caller in the queue, so we will take further questions at this point before I wrap up formally.

[Operator]

We have Matt Sheerin from Stifel

[Matt Sheerin, Stifel]

Yes. Thanks for fitting me in. I just wanted to just follow up on Shawn's questions, and regarding the communication sector. How concentrated is your customer mix there and I know one of your customers is going through a big merger, any disruptions from that and in an efforts to diversify within that sector?

[Steven Frisch, Executive VP & COO]

Matt. This is Steve. We talked in the past and they actually demonstrated I think with some of the recent wins there. The team has been working on focused on diversifying across that sector. And so from - you know, from a mix standpoint and a concentration standpoint we think we're headed in the right direction.

Specifically as it relates to the customers that are in that thing, I think Todd kind of hit it from a - from a weakness standpoint, it's pretty broad based across the spectrum of the customers that we have there.

So I went to tribute you know, the downside is due to a concentration mix at all. It's really a broad based problem that we experienced.

[Todd Kelsey, President, CEO]

Yes. The one thing I'd add on that Matt too, you and asked about the recent merger within that space that impacted one of our customers and from our standpoint now it looks like business as usual. I mean, there's been some press releases on what's been going on with some of the senior management there and that manager has been integrated, we’re viewed as a strategic supplier to that company. We continued to build executive level relationships or have executive level relationships with the one company and are working towards it with the others as well too.

So we don't any more significant risk than would be normal in that – in that merger that's going on.

[Matt Sheerin, Stifel]

Okay. Thank you. And on the cost containment actions you're taking to improve margins here. Could you elaborate maybe Pat a little bit on that. Is there a number behind that and are there any charges behind that as well?

[Steven Frisch, Executive VP & COO]

So this is Steven, maybe I'll hit it first, if Pat wants to add on he can. You know as I look at the upside business that we had and the inefficiencies with that I would have expected at a normal run rate 10 or 15 basis points better margin with that business.

As I look at the downside business in the facilities in the factories that we're executing that you know they should have been able to do better by 20 to 25 basis points in a normal mode of operation.

So our activity and my expectation as I look to Q3 here is you know 25 to 35 basis point improvement from those, as well as looking at additional things in that same range as we go into Q4 and Pad if you want to anything.

[Patrick Jermain, Senior VP & CFO]

Yes. So we mentioned getting back to our target range in Q4 for [indiscernible] in Q3 we could have some initial costs that are offsetting the benefits just as we execute some of these initiatives and actions. So we'll see more of the benefits flowing through in Q4 where we expect to return to that target margin range.

[Steven Frisch, Executive VP & COO]

I would add though Matt you asked about charges and we don't anticipate any charges at this point that would be just normal would be built right into our guidance here that we have today.

[Matt Sheerin, Stifel]

Okay, great. And my last question regarding the working capital reduction plans inventory, I think you mentioned in the lead times are improving, meaning easier to get partsm but could you elaborate on that or is it pretty much you know at this point more of a buyer's market than a seller's market, given that we're seeing some inventory correction going on or there's still some problems?

[Steven Frisch, Executive VP & COO]

Yes, I'd say it's pretty. This is Steve. I'll say it's pretty sporadic. You know for example if you look at large package MLCCs those continue to be a challenge. And if anything there's a little bit of pressure on the price of those. As you look at the more commodities MLCCs those are definitely from a lead time standpoint reduced and we're seeing a little relief on the price.

And so as you look at it by a kind of commodity by commodity there is definitely more freeing up than there is that's basically a challenge for us. So going forward we expect that to continue to improve with maybe pockets of things that we need to continue to drive and manage. But overall we're feeling much more comfortable with where the pricing of the components are going and the availability of them.

[Matt Sheerin, Stifel]

Okay. Thanks. Thank you very much.

[Operator]

And we have Shawn Harrison from Longbow Research, only with a question.

[Shawn Harrison, Longbow Research]

Two follow ups. I think Steve you mentioned that 50% of the business was shipped out in the final month of this quarter. What's typically normal, I know that most quarters are back end loaded, but how much of that - how different was that than what you would typically see?

[Steven Frisch, Executive VP & COO]

There were $30 million to $40 million more shipped in the last month of the quarter than what's typical for us.

[Shawn Harrison, Longbow Research]

Okay. And then Pat, I can remember the last quarter or not if you had a target cash cycle exiting of fiscal year. But do you have a new target cash cycle for us for fiscal ‘19 days at the year?

[Patrick Jermain, Senior VP & CFO]

Yes, I think we can get into the kind of mid to high 70s by the fourth quarter fiscal fourth quarter, by the calendar fourth quarter I'd like to see us back in the lower 70s.

[Shawn Harrison, Longbow Research]

And how much of that is - is it solely inventories or is it little bit of work that you have to do and the AR and AP [ph] site?

[Patrick Jermain, Senior VP & CFO]

Some of its AR just because of what we were just talking about the timing of shipments and even more so not just in the third month of the quarter, but like the last 10 days of the quarter where we saw significant shipments.

So I think there's going to be more level loading we'll see as we go through the year. So there is an element of receivables that we see improvement, but the majority is going to be around inventory and Todd mentioned the dedicated team and our executive that is driving that initiative. So that's driving the improvement.

[Shawn Harrison, Longbow Research]

Great. Thank you.

[Patrick Jermain, Senior VP & CFO]

Sure.

[Operator]

No further questions at this time.

[Todd Kelsey, President, CEO]

All right. Well, I'd like to thank everybody who joined us on our call today and we certainly appreciate your support and your interest in Plexus. Have a nice day.

[Operator]

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