Plexus (PLXS) Q4 2019 Earnings Call Transcript

Plexus (PLXS 1.02%)
Q4 2019 Earnings Call
Oct 24, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Plexus Corporation conference call regarding its fiscal fourth-quarter 2019 earnings announcement. My name is Blanton, and I'll be your operator for today. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open the conference call up 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 of communications and investor relations.

Heather?

Heather Beresford -- Senior Director of Communications and Investor Relations

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 29, 2018, and the safe harbor and fair disclosure statement in yesterday's press release, plus it provides non-GAAP supplemental information, such as ROIC, economic return, adjusted operating income, adjusted operating margin 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's use of 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 Investors at the top of that page.

Joining me today are Todd Kelsey, president and chief executive officer; Steven Frisch, executive vice president and chief operating officer; and Patrick Jermain, executive vice president and chief financial officer. Consistent with prior earnings calls, Todd will provide summary comments before turning the call over to Steven and Pat for further details. Let me now turn the call over to Todd Kelsey. Todd?

Todd Kelsey -- President and Chief Executive Officer

Thank you, Heather, and good morning, everyone. Let's begin with our fiscal fourth-quarter results on Slide 3. Yesterday evening after the close of the market, we reported results for our fiscal fourth quarter of 2019. We achieved record quarterly revenue of $810 million, which exceeded the top end of our guidance range of $760 million to $800 million.

Each of our sectors met or exceeded our expectations entering the quarter. Our aerospace and defense and industrial commercial sectors were exceptionally strong in the quarter, delivering 15% and 6% quarter-over-quarter growth, respectively. Our industrial, commercial results were considerably better than our expectations entering the quarter, in part, due to a modest improvement in semiconductor capital equipment demand. We delivered GAAP EPS of $1.23, including $0.19 of stock-based compensation expense.

Our non-GAAP EPS of $0.93 was above our guidance range of $0.81 to $0.91. The non-GAAP results excluded a $0.35 benefit due to a nonrecurring tax event and a $0.05 expense due to restructuring in order to rightsize our communications business. Through our continued focus on productivity and exceptional execution, our teams achieved fiscal fourth-quarter 2019 adjusted operating margin of 4.8% comfortably within our target range of 4.7% to 5% and at the higher end of our guidance range. Finally, I am quite pleased with the progress we have made through our inventory-reduction efforts.

We reduced inventory by an additional $56 million or eight days within the fiscal fourth quarter. These efforts were critical to our ability to deliver free cash flow of $92 million in the quarter. Over the past two quarters, we have reduced inventory over $100 million or 15 days. Please advance to Slide 4.

Next, I will discuss additional accomplishments within fiscal 2019. First, I'd like to highlight that Plexus celebrated its 40th anniversary in August. The success of the company is a testament to the dedication of our employees both past and present and the strong commitment to our customers and each other. I'm very proud of the Plexus team and believe that we have the people and strategy to drive even greater success in the future.

Please advance to Slide 5. Next, I will highlight our performance to our enduring financial goals of revenue growth and economic return. As we previously communicated, we target revenue growth of 9% to 12% annually. We achieve fiscal 2019 revenue of $3.2 billion.

Representing a 10% increase over fiscal 2018 in the second consecutive year of double-digit growth. We calculate economic return as return on invested capital less weighted average cost of capital. We target consistently, achieving positive economic return with the goal of 500 basis points. In fiscal 2019, our weighted average cost of capital was 9%.

We delivered a return on invested capital of 13.1%, resulting in an economic return of 410 basis points, well into value-creation territory and just shy of our goal. Please advance to Slide 6. I will start with accomplishments related to our fiscal 2019 revenue growth. Our engineering solutions organization grew nearly 25% year over year, highlighting the value our customers see in our differentiated service offering where we help create the products that build a better world.

Our engineering solutions team is a strong contributor to Plexus' profitability and manufacturing growth. Our aerospace and defense sector delivered 32% revenue growth in fiscal 2019. In addition, the team expects another strong result in fiscal 2020. We are pleased to be recognized by our customers as a premier supplier in the highly complex aerospace and defense markets as a result of our focus on zero defects, our utilization of leading-edge technology, our advanced service offerings and our market regulatory expertise.

Our healthcare life sciences sector grew 17% in fiscal 2019. We continue to have exceptional wins performance of funnel growth within this sector as leading OEMs are attracted to our strong brand and expertise in this end market. Our industrial commercial sector overcame the semiconductor capital equipment downturn to post 7% revenue growth in fiscal 2019. The efforts by the team over the past several years to diversify the sector portfolio in markets, such as heavy equipment, rail in 3D printing, led to revenue growth of 30% for the fiscal year in the sector, excluding semiconductor capital equipment.

We are gaining traction in our advanced aftermarket service offering, and the team delivered 83% growth in the fiscal year. We now offer services from four centers of excellence globally. During fiscal 2019, we grew in each of our three geographic regions and across all service offerings. In addition, we prepared new manufacturing facilities in Penang and Guadalajara in order to support our future growth.

We also expanded several engineering solutions design centers in response to the needs of our customers. Next, I will highlight a few significant accomplishments in fiscal 2019 which position Plexus for success in fiscal 2020. Our team has maintained the strong wins performance, achieving fiscal 2019 manufacturing wins of $907 million annualized when fully ramped into production. Our wins exceeded $200 million each quarter within the fiscal year, highlighting the consistency and diligence of our business development processes.

The wins consisted of a healthy mix of programs with new and existing customers across our differentiated portfolio of highly complex products in demanding regulatory environments. In addition to the strong wins performance, our team sustained the funnel of qualified manufacturing opportunities at $2.6 billion, which is a reflection of the diligence and strategic focus of our global market sector teams. This funnel quality and magnitude gives us confidence that we will sustain strong wins momentum into the future. We've made significant progress in our productivity initiatives, delivering operating margin within our target range of 4.7% to 5% in the fiscal fourth quarter.

We are focused on maintaining this level of performance in fiscal 2020. We furthered our capital allocation strategy by repurchasing 3.2 million shares within fiscal 2019. The repurchases represented a total cost of $182 million or $57.19 a share. Further, our board of directors approved an additional $50 million authorization to be completed in fiscal 2020.

Advancing to our guidance for the fiscal first quarter of 2020 on Slide 7. As we look at the fiscal first quarter of 2020, we are getting revenue of $780 million to $820 million. We anticipate sequential growth in our industrial commercial sector and continued strength in our aerospace and defense sector to largely offset near-term softening in healthcare life sciences due to the launch of lower-cost, next-generation programs. Our end markets remain largely stable.

We expect continued sound operating performance with operating margin in the range of 4.5% to 4.9%. As a result, we are guiding GAAP EPS in the range of $0.87 to $0.97. This includes $0.18 of stock-based compensation expense. Please advance to Slide 8.

I will close with a few thoughts regarding fiscal 2020. I'm excited about the traction our Plexus brand has gained as it speaks to our commitment to help create the products that build a better world. It continues to resonate with current and prospective customers and is paramount to the decisions we make as an organization. Our expertise in and focus on highly complex products in demanding regulatory environments provides advantages in operational efficiency and results in a more consistent platform for our customers.

Our brand aligns with the values of our passionate Plexus team and provides a commitment to both our current and future talent as we position Plexus as an employer of choice. Please advance to Slide 9. We anticipate fiscal 2020 will be another growth year, though likely in the single digits. We expect robust aerospace and defense growth, coupled with more moderate growth in industrial, commercial and healthcare life sciences, to overcome a significant communications headwind which developed in fiscal 2019.

Our portfolio continues to further differentiate in the markets that feature highly complex products and demanding regulatory environments. We anticipate fiscal 2020 revenue in the combined healthcare life sciences, industrial, commercial and aerospace and defense sectors to exceed 90% of our portfolio, consistent with our fiscal fourth quarter of 2019. These sectors have programs with longer lifecycles, in many cases 10 years or more. In addition, we have achieved compounded annual growth rates in the teens within these markets.

Our goal is to maintain these growth rates as we move beyond fiscal 2020. 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. We are focused on delivering fiscal 2020 operating margin performance within our target range of 4.7% to 5%, which would enable solid EPS growth in the fiscal year.

In summary, our teams remain focused and aligned to our consistent successful strategy. We are confident in our ability to continue to deliver strong results and create shareholder value. I will now turn the call to Steve for additional analysis of the performance of our market sectors and operations. Steve?

Steven Frisch -- Executive Vice President and Chief Operating Officer

Thank you, Todd. Good morning. Please advance to Slide 10 for a review of the fiscal fourth quarter and the full-year performance of our market sectors for fiscal 2019 as well as our expectations for the sectors for the fiscal first quarter of 2020. Our health life sciences revenue increased 1% in the fiscal fourth quarter.

The result was slightly better than our expectations of flat revenue. For the full year of fiscal 2019, the sector achieved growth of 17%. Strong historical wins performance yielded several new program ramps, which fueled the sector's third consecutive year of double-digit growth. Looking at the fiscal first quarter, the introduction of lower-cost, next-generation products will impact top-line revenue.

As a result, we expect a mid-single-digit decline for our healthcare life sciences sector in the fiscal first quarter. However, we expect the ramp of new programs will return the sector to growth in the fiscal second quarter. Revenue in our industrial commercial sector increased 6% for the fiscal fourth quarter, which was meaningfully better than our expectations of a low single-digit decline. Stronger demand from 12 of the sector's top 15 customers drove the growth.

For the full year of fiscal 2019, the team overcame a 21% headwind in the semiconductor capital equipment sub-sector and grew overall sector revenue by 7%. As we look at the fiscal first quarter of 2020, we see modest strengthening in the semiconductor capital equipment sub-sector being offset by modest softness in the energy management in self-service sub-sectors. The net result is that we anticipate a low single-digit increase for our industrial commercial sector in the fiscal first quarter. Due to strong execution from our global operations teams, our aerospace and defense sector grew an impressive 15% in the fiscal fourth quarter.

The result was significantly above our expectations of a high single-digit increase. The strong quarterly performance capped an outstanding year, resulting in 2019 growth of 32%. A combination of new program ramps and robust end-market demand enabled the increases for the fiscal fourth quarter and the full fiscal year of 2019. As we look toward the fiscal first quarter, our operations teams are extremely busy integrating new programs.

As a result, we are expecting a modest increase for our aerospace and defense sector in the fiscal first quarter and more meaningful growth in the fiscal second quarter. Our communications sector declined 33% in the fiscal fourth quarter, a result that was in our line with expectations of a 35% reduction. For the full fiscal year of 2019, the sector declined 20%. End market softness throughout the year, especially in the cable sub-sector, was the cause for the reductions.

As we look toward the fiscal first quarter, we do not anticipate significant changes in the cable sub-sector market. As a result, we are expecting our revenue to be flat in our communication sector for the fiscal first quarter. Please advance to Slide 11 for an overview of the wins performance of the fiscal fourth quarter. We won 35 new manufacturing programs that we expect to generate $202 million in annualized revenue when fully ramp into production.

The red bars represent our trailing four-quarter manufacturing wins. Our market sector teams had a very productive fiscal 2019 as they finished the year with the qualified manufacturing wins exceeding $900 million. The gray line indicates our win momentum. Even with the robust revenue growth of 10% in fiscal 2019, the strong wins performance kept our wins momentum at a healthy 29% as we exited the fiscal fourth quarter.

Please advance to Slide 12, for further insight into the wins results by region. The Americas region wins of $130 million were exceptionally strong in the fiscal fourth quarter. The Americas strength was led by the aerospace and defense team as a majority of the sectors wins are for our sites in the United States. The APAC region wins of $59 million in the fiscal fourth quarter are largely from existing customers.

The APAC team consistently delivered operational excellence throughout fiscal 2019. Their commitment to excellence is enabling the growth with existing customers and is a great foundation for continued success in fiscal 2020. The EMEA region wins of $11 million included two strategic wins with existing customers. The region grew over 10% in fiscal 2019, mainly through strong customer relationships.

These wins will enable that trend to continue in fiscal 2020. Please advance to Slide 13 for further insight into the manufacturing wins performance by market sector. Our healthcare life sciences team generated wins totaling $52 million in the fiscal fourth quarter. The wins included a new life sciences customer who specializes in DNA sequencing technology.

The industrial commercial sector produced $33 million of manufacturing wins. The highlight is the award of a significant next-generation products from an existing customer and our connectivity sub-sector. The aerospace and defense sector had an extremely productive fiscal fourth quarter with $100 million of new wins. The wins include several new space programs as well as meaningful market share gain with a large aerospace customer.

The sector has set itself up for another strong year in fiscal 2020. Finally, our communications sector wins of $17 million included two programs from a new customer that we expect to start ramping in early fiscal 2020. Please advance to Slide 14. The funnel of qualified manufacturing opportunities continues to be robust with the funnel remaining steady at $2.6 billion in the fiscal fourth quarter.

The healthcare life sciences team exited 2019 with a funnel larger than they had at the start of the year. At $1.6 billion in the fiscal fourth quarter, the sector is poised for another strong year of wins in fiscal 2020. In fiscal 2019, the industrial commercial sector successfully diversified the sector by adding strategic new customers with approximately two-thirds of their almost $400 million funnel associated with new customers. The sector's focus on maintaining a healthy balance will continue in the fiscal 2020.

In spite of the extremely strong wins, the aerospace and defense sector maintained their funnel at almost $1.5 billion in the fiscal fourth quarter. Our market sector leader, Dan Lewis, and his team have set up this fiscal 2020 to be another great year. Next, I would like to turn to operating performance on Slide 15. As Todd highlighted, we achieved record quarterly revenue of $810 million in the fiscal fourth quarter and a record $3.2 billion for fiscal 2019.

Strong execution yielded strong operating margin performance. At 4.8% adjusted operating margin in the fiscal fourth quarter was at the higher end of guidance. As we look at the fiscal first quarter, we remain focused on operational efficiency, and we are guiding operating margin in the range of 4.5% to 4.9%. In addition to strong operating margin performance, our inventory-reduction initiatives continue to generate meaningful improvements.

Our days of inventory in the fiscal fourth quarter finished at 87 days and eight-day sequential reduction from the fiscal third quarter and a 15-day reduction from the fiscal second quarter. We will continue focused on inventory in fiscal 2020. A few final comments. There is a lot to celebrate.

Achieving record revenue of $3.2 billion in our 40th anniversary is a testament to Plexus' differentiated strategy and the team's ability to execute it. However, the cause for celebration goes beyond the financial results. In fiscal 2019, our teams grew our market share in our differentiated market sectors, enabled future growth to the expansion of our engineering, manufacturing and aftermarket service facilities, expanded our higher value-add service offerings in areas like life sciences design and single-use device manufacturing, invested in tools and technology like automated manufacturing in Intersil Enterprise Resource Planning, and most importantly, invested in our people who are the real differentiator for Plexus. I want to thank each of the 19,557 Plexus team members for delivering a great fiscal 2019.

And I want to praise them for positioning Plexus for continued success in fiscal 2020. I will now turn the call to Pat for an in-depth review of our financial performance. Pat?

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Thank you, Steve, and good morning, everyone. Our fiscal fourth-quarter results are summarized on Slide 16. Fourth-quarter revenue of $810 million was above the top end of our guidance and sequentially higher by $10 million. Gross margin of 9.6% was sequentially higher by 70 basis points, primarily due to improved mix, better fixed cost leverage and continued cost-containment efforts.

We experienced margin expansion across all three of our manufacturing regions. Selling and administrative expense of $38.6 million was slightly above our expectations, primarily due to higher variable incentive compensation expense. As a percentage of revenue, SG&A was 4.8% sequentially up 20 basis points. During the fiscal fourth quarter, we completed all restructuring activities to address revenue declines within our communication sector.

These activities resulted in charges of $1.7 million, which were lower than previously anticipated. Before consideration of the restructuring charges, adjusted operating margin of 4.8% was at the higher end of our guidance and sequentially improved by 50 basis points. Included in this quarter's operating margin was approximately 70 basis points of stock-based compensation expense. Non-operating expenses of $4.1 million were lower than expected, in part, due to foreign exchange gains.

Our GAAP effective tax rate for the fiscal fourth quarter was a benefit of 10%. During the quarter, we reasserted that a majority of our undistributed earnings for certain foreign subsidiaries are permanently reinvested therefore do not require liability for withholding taxes. As a result, a related liability of approximately $10.5 million was reversed and benefited the fiscal fourth quarter. GAAP diluted EPS of $1.23 included a non-cash benefit of $0.35 per share related to the special tax item and a charge of $0.05 per share related to the after-tax restructuring activities.

Excluding these items, non-GAAP EPS of $0.93 was above the top end of our guidance, primarily due to strong operational performance. Turning now to the balance sheet and cash flow on Slide 17. In the fiscal fourth quarter, we continued our cash repatriation strategy by bringing back approximately $75 million of offshore cash. Since the enactment of U.S.

tax reform last year, we have brought back approximately $600 million. During the quarter, we purchased approximately 538,000 shares of our stock for $31 million and an average price of $58.38 per share. We completed the $200 million program authorized in 2018 and commenced purchasing shares under the $50 million program authorized during the fiscal fourth quarter. We expect to execute this program on a consistent basis throughout fiscal 2020.

However, we will take market conditions into consideration. For the fiscal fourth quarter, we were pleased with our free cash flow results. We generated $108 million in cash from operations and spent $16 million on capital expenditures resulting in free cash flow of $92 million. For the fiscal year, we generated $115 million in cash from operations and spent $90 million on capital expenditures, resulting in free cash flow of $25 million.

We ended the year with a strong balance sheet. Cash totaled $226 million sequentially higher by $21 million due, in part, to strong cash flow generation. Total balance sheet debt was $288 million, and our gross debt to EBITDA ratio was a healthy 1.5 times at year end. Cash cycle at the end of the fourth quarter was 80 days, a nine-day improvement from the fiscal third quarter.

Please turn to Slide 18 for details on our cash cycle. Sequentially, inventory days improved eight days, primarily due to our continued efforts around inventory management. We are pleased to see our team's commitment to drive a $56 million sequential reduction in the inventory. Over the past two quarters, we have reduced inventory in excess of $100 million.

Days in receivables are sequentially higher three days, primarily due to the timing of shipments. Fiscal fourth-quarter shipments were weighted more toward the last month of the quarter in contrast to last quarter. Sequentially, payable days and customer deposits improved one day each. As Todd has already provided the revenue and EPS guidance for the fiscal first quarter, I'll review some additional details, which are summarized on Slide 19.

Fiscal first-quarter gross margin is expected to be in the range of 9.1% to 9.5%. At the midpoint of this guidance, gross margin would be approximately 30 basis points lower than the fiscal fourth quarter. During the fiscal first quarter, margins are anticipated to be lower as we experience a reduction in billable hours within engineering services as we transition resources on the new programs. For the fiscal first quarter, we expect SG&A expense in the range of $36.5 to $37.5 million.

At the midpoint of our revenue guidance, anticipated SG&A would be 4.6% of revenue, a sequential improvement of 20 basis points, primarily due to lower variable incentive compensation expense. Fiscal first-quarter operating margin is expected to be in the range of 4.5% to 4.9%, which includes 65 basis points of stock-based compensation expense. A few other notes for the fiscal first quarter. Depreciation and amortization expense is expected to be approximately $14 million, slightly higher than the fiscal fourth quarter.

Non-operating expenses are expected to be in the range of $5.1 million to $5.5 million. At the midpoint of this guidance, these expenses will be sequentially higher by $1.2 million. Two primary reasons for the sequential increase. With our second Guadalajara facility operational in the fiscal first quarter of 2020, we will no longer be capitalizing interest.

Also, in the fiscal fourth quarter, we benefited from $500,000 of foreign exchange gains, which we do not anticipate for the fiscal first quarter. We estimate an effective tax rate of 13% to 15% for both the fiscal first quarter and full year. This is before any impacts which might result from the finalization of pending tax regulations. Continuing our share repurchase activity during the fiscal first quarter.

We estimate diluted weighted average shares outstanding to be in the range of 29.7 to 29.9 million shares. Our expectation for the balance sheet is consistent working capital requirements. Based on our revenue forecast, we expect this level of working capital will result in cash cycle days of 80 to 84 days for the fiscal first quarter. At the midpoint of this guidance, cash cycle days would be sequentially higher by two days for the fiscal first quarter.

We expect free cash flow around breakeven as we ramp new programs in our APAC region. We anticipate generating free cash flow as we move through subsequent quarters and expect to deliver free cash flow of approximately $100 million for fiscal 2020. Finally, our capital spending estimate for fiscal 2020 is expected to be in the range of $60 to $75 million, which does not contemplate any site expansions. With that I will now open the call for questions.

Brandon?

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] And from Longbow Research, we have Shawn Harrison. Please go ahead.

Shawn Harrison -- Longbow Research -- Analyst

Good morning everybody, and congrats on a strong finish to the fiscal year. So, hoping to pin you down a little bit more. Single digits is a pretty broad range for looking at the fiscal year. Is that low, mid, high? And what are I guess the biggest unknowns you're looking at out there in terms of trying to triangulate the fiscal year?

Todd Kelsey -- President and Chief Executive Officer

Sure. So, I mean obviously, Shawn, it's a little early to make bold predictions about fiscal '20, but I'll give you our best view as we know it today. So, we're expecting reasonable growth I'd call it in fiscal '20, certainly below the levels of '18 and '19 where we're in double digits. But we'll look at -- we're thinking about mid-singles as we look at it currently in, and I'll tell you how we make that up.

One is we anticipate communications to stay at depressed levels, so we're not modeling in any expansion of -- any meaningful expansion beyond new program ramps within communications. So, no end market expansions. Semi-cap, while we're seeing I would call it some modest growth and slightly above fiscal '19, it's modeled nowhere near fiscal '18. And then if we look at the rest of the sectors that we talked about A&D, we're expecting really strong growth again in A&D.

Probably wouldn't approach the 32% of last year, but strong growth nonetheless due to new program ramps and good end markets there. Industrial, commercial markets or look are reasonably stable there. Healthcare we have a little bit of a headwind going on with these transition into some lower cost programs that's going on right now. So that's hurting our top line in the near term.

So not a stronger growth from healthcare in '20 as opposed to '19, although we're positioning ourselves for a really good '21 in healthcare because we have a number of very significant game changing programs that are ramping, but they're more -- if we're fortunate, they're late F20, but they're really looking more like F21 of really moving the needle on revenue.So that's kind of how things look from a revenue standpoint. But with that said, I mean our big focus for '20 is around cash and operating margin expansion. So, Pat talked about us targeting free cash flow in the area of $100 million. We think that's a very achievable level as we continue to make progress on our working capital initiatives.

And then operating margin, we're looking for expansion so we really believe we can be in this double-digit EPS growth range in fiscal '20.

Shawn Harrison -- Longbow Research -- Analyst

That was great, and it was a good segue for my follow-up to Pat. As we think about kind of the components of EBIT margin expansion in fiscal '20, you're going to see a dip in gross margin here in the December quarter. But how do -- or how should we model both gross profit -- or think about gross profit margin expansion, as well as SG&A, as you move through fiscal '20 where you're going to get more of the leverage?

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Yes, so you're right. This first quarter, gross margins will be a bit depressed as you recall in the second quarter as well, we do merit increases. So, I think the first half of the year, we're going to be in a similar level for gross margin. I think the back half is where we can see some improvement in gross margin, probably 10 to 20 basis points.

I also think with SG&A, that's where we'll gain some leverage, and this year fiscal '19 we ended at 4.7%. I think we can gain at least 10 basis points with our operating expenses as we leverage those.

Shawn Harrison -- Longbow Research -- Analyst

Great, thank you.

Operator

From Stifel, we have Matt Sheerin. Please go ahead.

Matt Sheerin -- Stifel Financial Corp. -- Analyst

Yes, thanks. Good morning. Just a question on the commentary regarding the product or customer transitions in the healthcare life sciences space. Is that concentrated to one customer or are you just seeing for any reasons -- typical reason you have multiple customers transitioning?

Steven Frisch -- Executive Vice President and Chief Operating Officer

This is Steve. It's associated with multiple customers. The healthcare life science team has done a phenomenal job with wins through fiscal '19 and we're going through NPIs with several different programs, and as Todd highlighted it looks like the timing of those are late '20 and '21 in terms of where they hit manufacturing and volume.

Todd Kelsey -- President and Chief Executive Officer

And one of the challenges with healthcare and predicting revenue growth is that the transitions can be quite long based on the qualification and FDA cycle that's involved with the various products. So, some of the wins are just -- they just have a longer qualification and validation cycles than would maybe be typical in other sectors.

Matt Sheerin -- Stifel Financial Corp. -- Analyst

OK, that's helpful. And then on semi-cap, I know that you and most of your peers have been really not expecting any kind of pickup in semi-cap area until early next year, you're seeing a modest pickup but have relative cautious outlook looking for just modest growth relative to big declines that you saw this year. Do you have any better visibility into that business that gives you any more or less confidence?

Steven Frisch -- Executive Vice President and Chief Operating Officer

Yes, this is Steve again. We've been all talking to customers and I think there is an expectation that there will be an increase in the mid-term horizon. And probably the feedback from the customers and even the industry publications are talking about a meaningful increase in '21. The question is does that come in a little early; does it push out a little bit.

I guess probably recapping what Todd said a little bit, as we expect our fiscal '20 to be stronger than our fiscal '19 but not as strong as our fiscal '18, and some of these modest increases that Todd's talking about is kind of short-term drop-ins, and so we'll be monitoring that throughout fiscal '20 to see if those start picking up or not as we end calendar '19 to maybe get a little bit more visibility as to when that increase may happen.

Matt Sheerin -- Stifel Financial Corp. -- Analyst

OK. And then my last question regarding the inventory and you've seen some really nice progress in bringing those inventory days down back to where you were a couple of years ago. Are you comfortable at those levels? Do you see continued progress also given your mix of business seems to be different today than it was maybe four years ago when you were back into the '80s? So, I'm wondering what the targets are there. And then relative to that tight supply environment that we saw a year ago, I know every quarter it's improving.

Are you seeing any areas of tight supply where there are some shortages still or is everything pretty much easy to get?

Patrick Jermain -- Executive Vice President and Chief Financial Officer

So Matt, this Pat. I'll start with the first part and maybe have Steve touch on the supply and demand. But with regard to inventory days, there is work still to be done. I mean really pleased with the improvement our teams did over the last couple of quarters, but we've got to keep that up and the teams are very engaged in driving continued improvement.

From a target standpoint, I think we can get a few more days out of inventory throughout fiscal '20 and that's what we're driving toward. But we do have to manage that with some of our regions are ramping new programs and that's part of the reason why cash cycle in the fiscal first quarter will be up a couple of days. So, we have to balance those two but by all means, our teams are still focused on driving improvements.

Steven Frisch -- Executive Vice President and Chief Operating Officer

Yes. This is Steven. And maybe I'll hit your supply chain question. I'd say there is nothing that is -- from a component standpoint that's driving significant challenges for us at the moment.

You used the word easy, there are always challenges in terms of tracking something down. For us, it's probably more associated with customer forecast in short-term drop-ins causes us the scramble and chase components. I think that's probably more of our supply chain headaches than there is any kind of just industry trends.

Operator

From J.P. Morgan, we have Paul Coster. Please go ahead. Paul, your line is open.

I think you might be on mute. OK. We'll take the next question from Sidoti & Company. We have Anja Soderstrom.

Please go ahead. Anja, your line is open.

Anja Soderstrom -- Sidoti and Company -- Analyst

Yes, I'm here, are you there. Congratulations on good ending the year. There has been a lot of good questions asked already, but first of all, I think you said in the presence here that 2020 is more of a layup here and 2021 should be better, is that a correct comment or?

Todd Kelsey -- President and Chief Executive Officer

Well, potentially from a revenue growth standpoint, I expect '20 to be a strong year from an EPS standpoint. The one thing that is really factoring into to '20 that shouldn't be overlooked is we're expecting more than a $100 million headwind in the communications business of '20 versus '19. So, to overcome that is really taking a certain amount or depressing a certain amount of the growth that we expect.

Anja Soderstrom -- Sidoti and Company -- Analyst

OK. And then when we talk about the communications segment, it seems like that you expect to be sort of flattish for this year, do you expect it to come back in 2020 or how do you think can happen with that.

Steven Frisch -- Executive Vice President and Chief Operating Officer

This is Steve. I think the thing that we need to watch for is what the capital spending patterns of the MSOs look like as we come through the end of calendar 2019. So, pre-coming out with their expectations probably in the December, January timeframe and I expect that to kind of set the tone for what fiscal '20 is going to look like for our customers and for us for the full year.

Todd Kelsey -- President and Chief Executive Officer

And what I'd say is we're modeling it as if it doesn't come back, although if you read some of the industry press there's an expectation that at some point, it is going to. So, it's just a question, I think of when.

Anja Soderstrom -- Sidoti and Company -- Analyst

It is going to be this year or next year. OK. And then also on the non-operating expenses and the guidance, there's a little bit higher than the run rate in the past and not Patrick mentioned you're not going to capitalize the interest expense and also some foreign into that not expecting to get. So, is this sort of the run rate we should be looking at for the year the first quarter?

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Yes, I think we'll see it come down a bit as we generate free cash flow and pay down our revolver. The street right now has a little above $18 million for the full year for all non-operating expenses. I think that's a little light. I think it's closer to $19 million is probably what the forecast should be.

So, it won't be at the run rate that we're at in the fiscal first quarter. It will come down from that. But I think in total, around $19 million is a good number for the full year.

Operator

And from JP Morgan, we have Paul Coster. Please go ahead, sir.

Paul Coster -- J.P. Morgan -- Analyst

A few quick ones. First of all, in the healthcare and life sciences segment, you talked of the next-generation programs launching at lower cost, but you also went on to sort of pick that as a temporary condition. Why is it temporary and not something that we'll persist?

Todd Kelsey -- President and Chief Executive Officer

I think what we are looking at is the revenue dip in healthcare life science has been a temporary situation as basically the launch or the ramp of these additional programs or other programs will overcome the revenue dip as a result of the lower cost next-gen programs.

Paul Coster -- J.P. Morgan -- Analyst

Also, I heard your commentary around the mid-single digit growth expectations for 2020, what kind of macro assumptions have you made in that assuming that we continue to see modest growth across the global and what are the swing factors for you?

Todd Kelsey -- President and Chief Executive Officer

I would say it's consistent with where we're at today. So, no meaningful change in trade dynamics or end markets, certain market dynamics from what it is today. So, I'd call it a modest growth economy.

Paul Coster -- J.P. Morgan -- Analyst

Got it. And then the aftermarket services. How do those split across your segments, and how do they compare from a margin perspective with your traditional business?

Todd Kelsey -- President and Chief Executive Officer

It's still ramping. So, it's not at its ultimate margins yet, but we'd anticipate over time it would be superior to corporate margins. And the business itself, it goes across all our sectors, but I would say the best play forward is in healthcare life sciences but we have business across all four of our sectors in the aftermarket space.

Paul Coster -- J.P. Morgan -- Analyst

Got it. And then finally, your debt. You obviously have near zero on a net basis. So, what is the strategy that why not take on more debt, maybe get some leverage buy back some shares, et cetera?

Patrick Jermain -- Executive Vice President and Chief Financial Officer

One thing to recognize, Paul is at the end of the quarter, we always see a high mark with our cash balance and then right at the start of the next quarter, a lot of that cash is going out the door to pay vendors. So, we need that type of level of cash on the balance sheet, but we will look at this as we continue to generate free cash flow, the type of position we want to be in. Right now, we've got the $50 million buyback that we'll execute this year and we'll look at next May, our strategy going forward depending on our free cash flow generation.

Operator

[Operator instructions] And from Needham & Company, we have Jim Ricchiuti. Please go ahead.

Mike Cikos -- Needham and Company -- Analyst

This is Mike Cikos on for Jim Ricchiuti. Couple of questions here. The first on the healthcare vertical. I understand that you guys have won a number of new programs here, particularly, in the robot assisted surgery space.

When should we expect those historic contributing more meaningful revenue? Are those the programs you're alluding to ramping early in fiscal '21?

Steven Frisch -- Executive Vice President and Chief Operating Officer

This is Steve. They're definitely part of it, but not exclusive to those.

Jim Ricchiuti -- Needham and Company -- Analyst

OK. And are those the programs then that we're looking for coming on maybe the back half of this year to help offset some of these lower cost programs that are ramping in the next-gen space?

Steven Frisch -- Executive Vice President and Chief Operating Officer

Yes. Our expectation is as Todd kind of talked about. The short term here, the headwinds are the pressure is putting on our topline revenue in Q1 with a couple of these lower cost programs, we expect that to be overcome as we look into Q2 and beyond with growth with these other programs. And so, it's more of a temporary issue just associated with the introduction of those lower cost programs and we expect to return back to growth sequentially in Q2.

Mike Cikos -- Needham and Company -- Analyst

OK. And in the aerospace and defense sector, can you help us better understand the manufacturing wins that you guys had. Was there any budget flush there, was it mortgage share gains with new customers or existing customers?

Steven Frisch -- Executive Vice President and Chief Operating Officer

Yes. So with aerospace, we are definitely gaining market share with some of our larger customers. We know explicitly where the products are coming from. And I think our operations team's execution and ability to meet the customers demand is driving our strength there.

In the defense side, we are seeing an uptick of defense work for the sector. In the wins there are newer programs and not one that we've had in the past. So a lot of the stuff is all associated with growth, with new programs. It's not exclusively related to just increases in current programs.

Operator

And we have no further questions at this time. I will now turn it back to your CEO, Todd Kelsey for closing comments.

Todd Kelsey -- President and Chief Executive Officer

All right. Thank you, Brandon. So, I'd like to take a moment and end by thanking our Plexus team members globally for delivering an outstanding fiscal 2019. It's through your passion that you help create the products that build a better world and this leads to exceptional customer service and a vigorous culture.

In the process, you achieved outstanding revenue growth, produced strong profitability and positioned Plexus for future success. It's your efforts that differentiate Plexus in markets with highly complex products and demanding regulatory environments. And the results of fiscal 2019 leave me optimistic that we'll have continued future success. So keep up the tremendous work.

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

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Heather Beresford -- Senior Director of Communications and Investor Relations

Todd Kelsey -- President and Chief Executive Officer

Steven Frisch -- Executive Vice President and Chief Operating Officer

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Shawn Harrison -- Longbow Research -- Analyst

Matt Sheerin -- Stifel Financial Corp. -- Analyst

Anja Soderstrom -- Sidoti and Company -- Analyst

Paul Coster -- J.P. Morgan -- Analyst

Mike Cikos -- Needham and Company -- Analyst

Jim Ricchiuti -- Needham and Company -- Analyst

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