Plexus Corp (PLXS) Q2 2021 Earnings Call Transcript

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Plexus Corp (PLXS 0.13%)
Q2 2021 Earnings Call
Apr 22, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Plexus Corp Conference Call regarding its Fiscal Second Quarter 2021 Earnings Announcement. My name is Tiffany, and I will be your operator for today's call. [Operator Instructions] After a brief discussion by management, we will open the conference call for questions. [Operator Instructions] I would now like to turn the call over to Mr. Shawn Harrison, Plexus' Vice President of Communication and Investor Relations. Shawn?

Shawn Harrison -- Vice President, Communications & Investor Relations

Thank you, Tiffany. 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 October 3, 2020 as supplemented by our Form 10-Q filings in 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 operating income, adjusted operating margin, adjusted net income and adjusted net 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.

In order to maintain appropriate social distancing, we are again conducting this quarter's call virtually. Joining me today are Todd Kelsey, President and Chief Executive Officer, Steve Frisch, Executive Vice President and Chief Operating Officer and Pat Jermain, Executive Vice President, Chief Financial Officer. Consistent with prior earnings calls, Todd will provide summary comments before turning the call over to Steve and Pat for further details. Let me now turn the call over to Todd Kelsey. Todd? Thank you, Shawn, and good morning everyone. Please advance to Slide 3 for a discussion of our fiscal second quarter results. Our robust fiscal second quarter results highlight the advantages of our unique value proposition and consistent focus on operational excellence. We expanded our industry-leading GAAP operating margin to 5.8%, improving on last quarter's performance by 11 basis points. This was achieved through our focus on productivity improvements and expense management, along with continued solid performance from our engineering solutions and aftermarket services teams. The result includes 23 basis points of restructuring expense and 73 basis points of stock-based compensation expense. It is our best performance in over a decade since 2008 and represents the fourth consecutive quarter of GAAP operating margin in excess of 5%. We achieved quarterly revenue of $881 million, which was in line with our expectations and at the midpoint of our guidance range. Our Industrial sector exceeded our high expectations entering the quarter, led by upside from semiconductor capital equipment customers. Our Healthcare/Life Sciences sector had an exceptional quarter. We are seeing signs of improving demand for equipment used for elective procedures. Finally, Aerospace and Defense underperformed the forecast, primarily due to labor availability late in the quarter as a result of the COVID-19 pandemic. Through this combination of strong operating performance and in-line revenue, we delivered GAAP diluted earnings per share of $1.42 including $0.07 associated with a modest restructuring of our operations in Scotland and Idaho, and $0.22 of stock-based compensation expense. This result was well above the top end of our guidance range. I'm extremely proud of our global Plexus team as they continue to deliver outstanding results while navigating the challenges stemming from COVID-19. Please advance to Slide 4. I will now highlight fiscal second quarter accomplishments that we expect will enable accelerated future revenue growth. Our team produced another exceptional quarter of wins, delivering $284 million of manufacturing revenue when fully ramped into production. With this result, our trailing fourth quarter wins was again over $1 billion and hit a new record. The quarterly wins included six new logos, another very strong result that enables further growth as these relationships expand. The wins also consist of a notable aftermarket services engagement. We continue to make great progress in expanding our capabilities and growing revenue, with this higher margin differentiated offering. In addition to the manufacturing wins, our team delivered its highest level of quarterly engineering wins since fiscal 2019. Strong engineering wins are generally a leading indicator of accelerating manufacturing growth. The strong wins result highlights the success of our innovative virtual business development efforts and underscores the market recognition of our strong execution. Our go-to-market team continues to be successful in leveraging our reputation as the leader in highly complex products and demanding regulatory environments to produce several consecutive quarters of exceptional results. In addition, we announced the commencement of construction of our new manufacturing facility in Bangkok, Thailand. This 400,000 square foot facility will be complete in the fiscal third quarter of 2022. Bangkok is known for its highly skilled workforce and established supply chain. It provides us an additional growth engine in the APAC region to support customers across all three of our market sectors. Existing customers have already expressed significant interest in the facility and we look forward to welcoming approximately 1,800 new Plexus team members upon its completion. Please advance to Slide 5. We anticipate our robust performance will continue for the fiscal third quarter, based upon incrementally stronger demand, particularly in our Healthcare/Life sciences sector and our confidence in our ability to consistently execute. We are seeing broad-based strengthening of healthcare/life sciences demand over the next several quarters led by the start of a recovery for devices related to elective procedures. These increases more than offset a slowdown in point-of-care diagnostics orders. Likewise, as we look beyond the fiscal third quarter, our Industrial sector is showing significant broad-based demand increases. Semiconductor capital equipment and Communications forecasts are robust. We believe our Aerospace and Defense sector revenues troughed and forecast should begin to inflect higher. Taking these factors into consideration, we are guiding fiscal third quarter revenue of $875 million to $915 million. Overall, our customer demand exceeds our guidance, but we are limited in our ability to meet upside due to supply chain constraints. As a result of effective expense control and the efforts of our operations team in driving sustainable productivity gains, we are guiding GAAP operating margin in the range of 5.1% to 5.6% including 72 basis points of stock-based compensation expense. With the strong operating performance, we anticipate delivering GAAP diluted earnings per share of $1.23 to $1.38 including $0.22 of stock-based compensation expense. Our guidance assumes that neither supply chain constraints nor COVID-19 will materially impact end markets or our operations beyond what is already anticipated. Next, a few thoughts regarding our longer-term outlook. Fiscal 2021 is shaping up to be a solid year with mid single-digit revenue growth, operating margin well above 5% and EPS growth potentially above 30%. Leveraging this foundation, we believe we have a platform to sustain strong revenue growth moving forward through the strengthening in the overall demand environment, including equipment used in elective medical procedures, an eventual commercial aerospace recovery, our ability to support secular growth markets, and the acceleration in new program wins. We're particularly excited about new program ramps related to robotic surgery, blood processing and warehouse automation. Looking beyond fiscal 2021, we are confident these demand catalysts support our grow -- our goal of achieving 9% to 12% annual revenue growth while continuing to deliver industry-leading operating performance, with operating margins consistently above 5%. Please advance to Slide 6. Prior to concluding my comments, I'd like to touch on a long-standing cornerstone of our Plexus culture and a critical component to achieving our vision of creating the products that build a better world. This cornerstone is our Environmental Social and Governance efforts. It represents our responsibility as a company to our many stakeholders and we reflect it through five pillars. We recognize we must be a responsible employer, community partner, global citizen and industry steward. And that we are accountable to our stakeholders in the way we govern our company. We recognize that this responsibility wholly aligns with our commitment to create long-term shareholder value. A key part of our ESG efforts is ensuring that leaders across Plexus fully understand these commitments and are accountable engaged in our ESG initiatives. Our leaders ensure an ESG focus is integrated into our strategy in the way we operate our business. It is also important that we effectively capture and communicate the positive impacts we pursue, just as we communicate our financial results. Addressing ESG matters is not only the right thing to do but can also result in increased operational efficiencies, innovation and expanded team member engagement and retention, all of which are critical to realizing our goal of delivering $5 billion in revenue at greater than 5% operating margin by fiscal 2025. Specific areas of immediate focus are expanding our diversity inclusion efforts, which is a non-negotiable aspect of our culture at Plexus, and an enabler of our ability to engage and retain top talent. We're also making capital investments to measure and reduce energy consumption and seeking opportunities to reduce waste to landfill. When we build new factories, they will leverage green technologies, which is occurring with our new facility in Thailand. It's not lost on us that in order to fulfill our vision to create the products that build a better world, we must go beyond that and also take action to build a better world. These actions include treating our people exceptionally well, improving the communities that we touch, minimizing our impact on the planet and influencing our business partners to do the same. As our ESG strategy continues to develop, investments occur and milestones are realized, we are committed to providing updates on the benefits and value to our team members, customers, partners and shareholders. In closing, I would like to thank our approximately 19,000 Plexus team members for not only helping to create the products that build a better world but for your efforts in building a better world. I'm proud of your commitments and accomplishments. I will now turn the call over to Steve for additional analysis of the performance of our market sectors and operations. Steve?

Steve Frisch -- Executive Vice President and Chief Operating Officer

Thank you, Todd. Good morning. I will start on Slide 7 with a review of the performance of our market sectors for the fiscal second quarter of 2021 as well as our expectations for the fiscal third quarter of 2021. Revenue within our Industrial sector increased 8% for the fiscal second quarter. The result was better than our expectations of a mid single-digit increase. Greater demand across several sub sectors including semiconductor capital equipment, test and measurement and communications contributed to the stronger result. As we look at the fiscal third quarter, demand in the semiconductor capital equipment sub-sector remains robust but supply chain constraints will limit our ability to capture the full potential. In addition, new program ramps in our industrial equipment sub-sector are being offset by two programs that are ramping down this quarter. The net result of that, we anticipate a low single-digit decrease for our industrial sector in the fiscal third quarter before an expected return to growth in the fiscal fourth quarter. Our Healthcare/Life Sciences sector revenue increased 10% in the fiscal second quarter. The result exceeded our expectations of a high single-digit increase. Strong demand for analyzers used to test for COVID and strengthening demand for some elective medical devices were the main contributors to the healthy performance.

Looking at the fiscal third quarter, we see the forecast for elective medical products continuing to improve. As a result, we anticipate a mid single-digit increase for our Healthcare/Life Sciences sector in the fiscal third quarter. Revenue in our Aerospace and Defense sector was down 7% in the fiscal second quarter. The result was meaningfully short of our expectations of a low single-digit increase. Broad softness across the sector combined with labor shortages due to COVID quarantines late in the quarter were the reason for the miss. Looking at the fiscal third quarter, end-market demand, especially in commercial aerospace is not anticipated to start to improve until later this fiscal year. Therefore, we are forecasting revenue to be flat for our Aerospace and Defense sector in the fiscal third quarter.

Please advance to Slide 8 for an overview of our wins performance for the fiscal second quarter. We won 42 new manufacturing programs that we expect to generate $284 million in annualized revenue when fully ramped into production. The mix of wins between existing and new customers was well balanced again this quarter, with 27 of the wins coming from current customers and 15 as a result of new relationships. Included in the 15 new relationships are the addition of six new logos and the expansion into new groups with nine of our existing customers. The continued strong wins performance lifted our trailing fourth quarter wins to another record level in excess of $1 billion. At that magnitude, our wins momentum remains very healthy at 30% which is above our 25% goal and supports our long-term growth strategy.

We can advance to Slide 9 to review the manufacturing wins by region for the first -- fiscal second quarter. The APAC region recorded its highest quarterly wins in over six years at $130 million. The region's trailing fourth quarter wins grew 7% to finish at $419 million. The unique value proposition of our Health Care Center of Excellence in Penang, Malaysia is being recognized by our customers. 70% of the APAC regions wins in the fiscal second quarter are associated with this center of excellence. The American regions wins of $119 million increased the regions trailing fourth quarter wins by 8% to $481 million. Similar to the APAC region, our Healthcare Center of Excellence in Guadalajara, Mexico is generating robust wins. Almost 40% of the Americas regions wins were contributed to that center of excellence. The EMEA region wins of $35 million includes a meaningful program from a new logo who desires in-region manufacturing. The fiscal second quarter wins performance puts the regions trailing fourth quarter wins at $144 million.

Please advance to Slide 10 for further insight into the manufacturing wins performance by market sector. Our Healthcare/Life Sciences team produced a record wins result of $153 million in the fiscal second quarter. The sector team's impressive wins performance this quarter increased our trailing fourth quarter wins to $0.5 billion, which is also a new record level. The Industrial sector healthy wins performance continued in the fiscal second quarter with $96 million in new wins. The team continued to execute on their strategy to expand the sector's customer base by adding two new logos in the quarter. The Aerospace and Defense sector captured wins totaling $35 million in the fiscal second quarter. Included in the wins are two new logos for our growing space sub sector.

Please advance to Slide 11 for further insight into some of the fiscal second quarter wins. Included in the healthcare/life science wins is a Class III defibrillator that is doing that will be deployed and urgent care situations the large program is the transfer of production from the customers' internal manufacturing to our Penang, Malaysia healthcare facility. In addition, the Penang facility will be ramping a single-use device that collects tissue samples that are used in the detection of breast cancer. The healthcare/life sciences team also won the manufacturing in next generation diabetes monitor from a current customer. The production of the new device will be in our Guadalajara, Mexico facility that specializes in healthcare products. Included in industrial wins is another opportunity from a recently added customer who specializes in warehouse automation. The automated picking system will be manufactured in our Appleton, Wisconsin facility. Our industrial team also secured the manufacturing of a next generation distributed architectural Cable Access product. We expect to start ramping the device in our Guadalajara facility later this year.

Included in the Aerospace and Defense wins is a program with a meaningful new defense customer. The company selected Plexus' Boise, Idaho facility because of the site's ability to produce advanced technology assemblies in volume within the United States. Finally, the Aerospace and Defense team also won the production of a new device for secure communications. This new program will be added to the current family of products that we build for this customer in our Oradea, Romania facility.

We can proceed to Slide 12 for highlights of our funnel of qualified manufacturing opportunities. Our funnel finished the fiscal second quarter at a very robust $3 billion. Our industrial sector funnel closed the fiscal second quarter at $583 million, impacting the sector's funnel with a strong wins performance and our decision to not pursue a large outsourcing opportunity as it would have been dilutive to our operating results. The team's choice highlights our commitment to profitable revenue growth.

The Healthcare/Life Sciences sector exceptionally robust wins performance in the fiscal second quarter caused their funnel to dip slightly, however, new opportunities with a robotic assisted surgical device in a catheter monitoring system kept the funnel at a very healthy $1.8 billion. We expect the funnel to continue to support strong wins performance. Our Aerospace and Defense sector increased their funnel by $33 million in the fiscal second quarter to finish at $700 million. The result represents the fourth consecutive quarter of funnel expansion. Although the Aerospace and Defense end markets may be muted, the business development activity is robust, including a meaningful new space program that the team added to their funnel during the quarter.

Next, I'd like to turn to operating performance on Slide 13. The team produced strong GAAP operating margin of 5.8% for the fiscal second quarter, an outstanding outcome. Although it takes an entire organization to generate the result, our operations team in the Americas has steadily increased operational efficiency over the past several quarters. Their focus on continuous improvement are a meaningful part of the robust fiscal second quarter results. Their improved contributions is one of the reason why our operating margin has been above 5% and why we believe it will stay there.

A few final comments. When we talk about operational excellence, it's natural to think about the manufacturing process, however, operational excellence is much broader, you cannot manufacture anything if you don't have the materials. Plexus' global and regional supply chain teams are demonstrating their commitment to operational excellence in a significant way. They are leading the organization through a very challenging supply chain environment, enabling our factories to continue to deliver for our customers. I want to thank each of them as their dedication and hard work have and will continue to differentiate Plexus in the marketplace.

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 second quarter results are summarized on Slide 14. Second quarter revenue of $881 million was at the midpoint of our guidance, while gross margin of 10.3% exceeded the top end of our guidance. Favorable gross margin resulted from improvements in our Americas region due to better business mix and operational performance. In addition, we experienced lower than anticipated healthcare costs due to a reduction in claims activity. Selling and administrative expenses of $38.3 million were in line with expectations for the quarter. Our GAAP operating margin of 5.8% was above our guidance due to the improvement in gross margin. This is the fourth consecutive quarter with operating margin above 5%.

Inclusive in our GAAP operating margin was 73 basis points of stock-based compensation expense and 23 basis points of restructuring expense. Non-operating expenses of $4.3 million were favorable to expectations primarily due to lower interest expense. Given the strength of our balance sheet and free cash flow generation, we elected to repay our 364-day term loan early. This loan totaled $138 million and was originally due at the end of April. The early repayment led to lower interest expense for the quarter. GAAP diluted EPS of $1.42 was above the top end of our guidance range for the reasons already mentioned.

Turning now to our cash flow and balance sheet on Slide 15. We delivered $82 million in cash from operations and spent $7 million on capital expenditures, resulting in significant free cash flow for the quarter of $75 million, a result well in excess of our quarterly net income. During the fiscal second quarter, we purchased approximately 349,000 shares of our stock for $29.2 million at an average price of $83.39 per share. At the end of the second quarter, we had approximately $53 million remaining under the $100 million fiscal 2021 authorization. We expect to repurchase the balance of the authorized amount on a consistent basis throughout the remainder of fiscal 2021, while taking market conditions into consideration.

At quarter end, cash totaled approximately $295 million sequentially lower by $62 million. The lower balance was a result of the early repayment of our term loan, which was funded with cash and capacity under our revolving credit facility. With the term loan repayment during the quarter, our total debt was sequentially lower by almost $100 million. At quarter end, we had $38 million borrowed under our $350 million revolving credit facility. With our exceptional operating performance, we delivered return on invested capital of 17.3%, sequentially higher by 100 basis points and the highest return in four years. This result generated economic return of 920 basis points above our weighted average cost of capital, creating considerable shareholder value. At quarter end, we were pleased with our cash cycle, which came in favorable to our guidance. With the result of 72 days, our cash cycle was sequentially improved by eight days.

Please turn to Slide 16 for details on our cash cycle. While inventory dollars were essentially flat compared to last quarter, inventory days reduced by four. The improvement in days, primarily related to a higher level of revenue in the fiscal second quarter and continued diligent inventory management. Adding to the better cash cycle days were modest improvements in both our payable days and customer deposit days. The dollar value of customer deposits increased by approximately $20 million during the quarter.

As Todd has already provided the revenue and EPS guidance for the fiscal third quarter, I'll review some additional details, which are summarized on Slide 17. Fiscal third quarter gross margin is expected to be in the range of 9.5% to 10%. At the midpoint of this guidance, gross margin would be sequentially lower, primarily due to rise in healthcare costs, representing a return to a more normalized pre-pandemic level. In addition, we expect additional incentive compensation expense linked to the increased revenue and return. For the fiscal third quarter, we expect SG&A expense in the range of $39 million to $40 million. At the midpoint of our revenue guidance, anticipated SG&A would be 4.4% of revenue, slightly higher than the fiscal second quarter. Again increased healthcare costs and incentive compensation expense are impacting the guidance. Fiscal third quarter GAAP operating margin is expected to be in the range of 5.1% to 5.6%, which includes 72 basis points of stock-based compensation expense.

A few other notes for the fiscal third quarter. Depreciation and amortization expense is expected to be approximately $15 million, which would be slightly lower than the fiscal second quarter. Non-operating expenses are expected to be in the range of $3.8 million to $4.2 million. At the midpoint of this guidance, these expenses would be approximately $250,000 below last quarter, primarily due to lower interest expense. We are estimating an effective tax rate of 12% to 14% and diluted shares outstanding of approximately 29.2 million shares. Our full year effective tax rate is also expected to be in the range of 12% to 14%, which does not assume any legislative changes.

Our expectation for the balance sheet is that working capital investments will increase compared to the fiscal second quarter. We expect additional inventory as we increase procurement activity to meet the anticipated higher second half demand. Based on our revenue forecast, we expect this level of working capital will result in cash cycle days of 77 to 81 days. At the midpoint of this guidance, cash cycle would increased 7 days compared to the fiscal second quarter, primarily due to the inventory requirements. Finally, our capital spending estimate for fiscal 2021 remains in the range of $70 million to $85 million, which includes approximately $23 million related to our expansion in Thailand. For the full year, we continue to expect free cash flow generation of approximately $100 million. This amount will be dependent on the timing of capital expenditures for Thailand and working capital investments needed to support the revenue outlook as we enter next year.

With that, Tiffany, let's now open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of Jim Ricchiuti with Needham & Company.

Todd Kelsey -- President and Chief Executive Officer

Hi, good morning.

James Ricchiuti -- Needham & Company -- Analyst

Good morning. Couple of questions. Just with -- I wanted to just focus on the supply chain constraints that you're alluding to, and I assume this is all tied to what we've been hearing about for a while now, just the chip shortages, is that basically representing the bulk of these constraints?

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yes, I would -- this is Steve. If you look across the commodities, we track about 60 commodities as a company and it is a pretty widespread challenge, I think, everybody is facing, it's not just us. And if you look at those 60 commodities, there's about 85% of them that we've identified as either pricing increasing or lead time challenges associated with them. So it is a broad-based supply chain challenge, I think our teams are doing an exceptional job working through it, but it's not anything outside of what you've probably heard from other companies in the industry in general.

James Ricchiuti -- Needham & Company -- Analyst

Got it. So if we think about what -- at least we're hearing out there is that it doesn't sound like this is going to be resolved anytime soon. And so, I guess what I'm wondering is, is there a potential risk that this remains a headwind in Q4 for you guys? At the same time, we're hearing about an economy that could grow 6% or more in the U.S. this year and so it seems like you've got the potential for customers to potentially accelerate activity. And so, I'm wondering how we should think about that as we think about Q4, and even into early next year?

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yeah, so it's reasonably comfortable as we look at what our forecast from our customers have been in terms of our ability to secure supply and produce for them. I think, I mentioned it last quarter, I think one thing that we were concerned about and we are seeing is customers that start dropping in upside demand within the quarter within lead time, it's getting -- though it is -- it's more difficult for us to deliver for that and we have a fair amount of revenue that we could capture in the quarter, if we could get supply chain. So from my viewpoint, it's more about our ability to capture upside than it is our concern about downside.

Todd Kelsey -- President and Chief Executive Officer

Yeah, the one thing I'd add to that too, Jim, and this is Todd, is as we look to Q4 and as we look at fiscal '22, we're bullish about the demand that's out there and our supply chain guys are working to clear all the challenges that we have out there, but there is solid demand and our ability to execute on the demand that comes in, in under more normal circumstances is strong as ever. The challenge becomes when you're dropping in things inside the quarter or inside the lead time with certain components that are out there right now.

James Ricchiuti -- Needham & Company -- Analyst

Got it. Just a final question. I'm wondering, you called out this aftermarket services engage and I'm wondering if you could say anything more about that with respect to size, type of customer and whether this is maybe an area that you think you're going to be able to further leverage your capabilities with maybe other customers like this?

Todd Kelsey -- President and Chief Executive Officer

Yeah. Yeah, we're really excited about this one, Jim, and it's a healthcare customer, is what I'll say, I won't get into any details of the product lines, but it's across all three of our regions, it's many different sites, it's significant. From a revenue standpoint, so we've talked about aftermarket and our ability in the longer term to be able to grow it to 5% to 10% of revenue. I think this is a good step in that direction. I mean, this opportunity by itself could get us to a pretty meaningful level of revenue within aftermarket and especially when you put it on top of the book of business that's already within those -- within our aftermarket offering.

James Ricchiuti -- Needham & Company -- Analyst

Got it, thanks. Thanks for that additional color, and congratulations on the quarter, guys.

Todd Kelsey -- President and Chief Executive Officer

Thanks, Jim.

Steve Frisch -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Your next question comes from the line of David Williams with Loop Capital.

David Williams -- Loop Capital Markets -- Analyst

Hey, good morning, and thanks for taking my questions, and congrats on the solid quarter. I guess my first question really is around some of the shortage you were seeing and you provided some color there. Just kind of curious what your thoughts are in terms of how that may be impacting your customers, so beyond the manufacturing process, but once it gets to your customers, are you -- do you get a sense that maybe they are facing any shortage issues that may be constraining their ability to sell into their markets?

Steve Frisch -- Executive Vice President and Chief Operating Officer

I would say, typically, a lot of the stuff that we're doing is pretty close to a finished good, our customers do add value in some areas. So I don't believe that they're getting significant constraints beyond what -- as long as we're able to deliver, I think for the most part, they are able to deliver. With that said, I mean, obviously there are some customers that have secondary things and other products that they add to it, but I think the biggest challenge has been one, the electronics and other things at this point.

David Williams -- Loop Capital Markets -- Analyst

Okay, great. And maybe...

Todd Kelsey -- President and Chief Executive Officer

Yeah, the other thing I'd add to on that, David, is we're seeing really strong demand from our semiconductor capital equipment customers, of course, because they're the ones you can help the FABs and the manufacturers get beyond the situation that we're in right now.

David Williams -- Loop Capital Markets -- Analyst

Definitely makes good sense. And I guess the tone from your customers from their in demand, are they seeing, I guess -- are you seeing the -- I guess, the drop in orders at the same pace you did in the previous quarter? How are you thinking about in demand and is that accelerating or what has that pace been like I guess?

Todd Kelsey -- President and Chief Executive Officer

The demand environment itself is just really strong right now. I mean, if we look at what we saw in the out quarters, one quarter ago versus today, it's completely different. I mean, particularly within our industrial sector, where semiconductor capital equipment and communications are very strong and then, in healthcare where elective is coming up very rapidly. So we're seeing major demand increases across those two sectors in particular.

David Williams -- Loop Capital Markets -- Analyst

Great. And then, lastly for me, maybe. The Industrial segment is an area that we've thought would see a nice uptick as we kind of got through COVID here, and it seems like maybe some of the automation has finally began -- becoming a bigger play there, what is your sense in terms of that segment in particular and just the demand that you're seeing now? Do you think this is something that maybe we're in the beginning of a new cycle for some of the Industrial especially on automation or do you think this is maybe just a blip and it settles down as we get into next year?

Todd Kelsey -- President and Chief Executive Officer

Yeah, so I'll just hit specifically on the warehouse and factory automation and then maybe Steve can provide a little bit more color on the sector overall, but that's one of the areas -- I mean, I highlighted a bit in my script that we're very excited about a few different program ramps that we have going on in there and we think it's a huge secular growth market for us, so it's just outstanding potential. It's particularly an F '22 type event for us, not really an F '21, but in a major way. But we're very excited about what's happening within warehouse and factory automation.

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yeah, I mean, just to reiterate what Todd said, I think we got two things going on. One is we are winning new customers and taking market share in that space and that market space is also set for growth. And so, we got both things going and working in the right direction. So as Todd said, we're pretty optimistic about that as we get into '22.

David Williams -- Loop Capital Markets -- Analyst

Great. Thank you so much. Appreciate the time, guys.

Todd Kelsey -- President and Chief Executive Officer

Thank you, David.

Operator

Your next question comes from the line of Adam Tindle with Raymond James.

Adam Tindle -- Raymond James -- Analyst

Okay, thanks. Good morning. Todd, I just wanted to start on wins in funnel, another healthy quarter here. Maybe you could touch on the composition of the incremental wins from a profitability profile basis. Are those layered in, what sort of kind of gross and operating margin profile on that incremental contribution? And then, secondly for Steve, and just kind of on this topic, from an operating standpoint, recognize these wins are healthy, what lanes do the salespeople have to work within and maybe why not expand those lanes given margins are at record levels, economic return is so far in excess of cost of capital, you talked about passing on a large outsourcing opportunity. So just wanted to ask from an operating standpoint, why not expand the lanes? Thank you.

Todd Kelsey -- President and Chief Executive Officer

Yeah. So from a standpoint of the margin profile of the new wins, I would say they fit nicely within our model and what we do is we give our sector leaders the leeway to manage their portfolio as a book of business and they know that as they bring in certain new business, it will be at lower margins as it typically is as it ramps up and particularly with new customers. But then they layer on top of that some better margin business in essence, run a portfolio that meets their target. So we give them a lot of leeway but in general, they're good at targeting business that fits the type of financial model that we want to deliver.

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yeah, and I'll take the second part of it. The sector teams have a pretty significant amount of leeway in terms of what they want to do and for me a couple of examples are, the Healthcare team, Life sciences team going after robotic surgery, the industrial team going after automation and warehouse automation and the Aerospace and Defense sector going after space products. And so, they are quite free to go chase where they believe the future business is going to go as long it falls in line with our overall Plexus strategy. On the specific opportunity, you talked about -- I'm glad you brought it up, because to me it really demonstrates the -- I'd say the discipline that the teams have. In this specific example, the customer is switching more from a hardware platform to more of a software platform, that's where the industry is going and to be honest with you, this one would've probably been a nice revenue pop for the next year or two, but we really saw that, that end market was getting a bit -- probably going to be a bit more commoditized and the volume products they need is going to go down. And so, although we would have chased it, won it and it would have been a margin challenge in the beginning. We also believe that it wasn't necessarily the right thing long term either. And so, sometimes it's always hard to walk away from revenue and an opportunity, but to me, it's really the impressive part of what our teams have been able to do -- to go, quite frankly, chase the right business and the stuff that isn't right for us, they walk away from. So I was pretty impressed with their decision.

Todd Kelsey -- President and Chief Executive Officer

One additional thing I'd add on that is -- well, Adam, is when we think about our markets and our pricing, we believe that at our financial model, our markets support the low double-digit growth target that we have.

Adam Tindle -- Raymond James -- Analyst

Yeah, that makes sense and helpful color. Appreciate it. Maybe just a follow up for Pat. One of the other impressive stories that you've driven so far at the company is the opex trends, ratios have improved significantly, you've had productivity gains, expense management, I remember years ago trying to get below 5% operating expense as a percent of revenue and you're now pushing to the low-4% range. Just talk about the trajectory from here on opex, is the right way to think about the normalized model still mid-4%, has it become lower than that, is there additional opportunity? Just maybe -- just walk us through the opex line. Thank you.

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Sure. Yeah, I think there is opportunity. I think we're still going to be operating within this 4% to 4.5% range. So depending on investments we make in certain quarters, but I think it does have the ability to trend down, especially if we're driving double-digit topline growth, we can really leverage our opex expenses to see some improvement, but I think, Adam, working within that low-4s is probably reasonable going forward.

Adam Tindle -- Raymond James -- Analyst

Understood. Thank you very much.

Todd Kelsey -- President and Chief Executive Officer

Thanks, Adam.

Operator

Your next question comes from the line of Steven Fox with Fox Advisors.

Steven Fox -- Fox Advisors LLC -- Analyst

Hi, good morning. I guess, I had another question just on the component supply situation. During the quarter you guys actually reduced inventories, even though things were sort of tightening up, so I know you don't speculate on inventory, but why weren't you able to convince some of your customers to maybe sort of get ahead of the curve, so that you maybe have opportunities to do some upside and then, I had a -- to produce some upside? And then I had a follow up question.

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yeah, I would say that some of our customers didn't get ahead of it. We were definitely building inventory for a few customers, especially in semiconductor capital equipment and as Pat talked about the deposits that some of our customers put, they're asking to get ahead of the financial forecast as they saw it coming. I would say some other industries, specifically like the elective procedures in Healthcare/Life Sciences, it's coming back a little bit quicker than what people thought. And so, there is a question about how quickly they should have brought in inventory in working with them. I can tell you that in our aerospace customers, we are having those conversations with some of our aerospace customers now by starting to procure inventory for the eventual return of that market. So it's a case-by-case situation and we are doing that and we are working effectively with customers in many cases -- other cases, it's really about a belief in terms of what their forecasts are going to be. So I think we got a good balance and we're able to do that.

In terms of inventories, the dollars numbers, from a dollar standpoint, it's up. Days were down as we look through the quarter here, so you will see inventories continue to build here for a little bit before we start to bully them off as the markets clear up a little bit.

Steven Fox -- Fox Advisors LLC -- Analyst

Great. That's helpful. And then, just on the labor shortages, you mentioned, there is sort of headwind. Can you just sort of go into some more details on whether that was your own facilities or -- so are they up or down the supply chain and how do you expect that to clear given that other regions outside the U.S. still seem to be struggling with COVID? Thanks.

Todd Kelsey -- President and Chief Executive Officer

Yeah. So they -- it was related to our facilities and basically, we had a number of positive cases that allowed us to lose some time late in the quarter. And I mean generally, it's just one of those things that we've been managing through and been managing very effectively, the same way it became an issue this quarter is, because it was so late in the quarter, there wasn't enough time to recover. But generally, we're able to recover from those without really much of an impact.

Steven Fox -- Fox Advisors LLC -- Analyst

Got it. Thank you so much.

Operator

Your next question comes from the line of Matt Sheerin with Stifel.

Matt Sheerin -- Stifel Nicolaus & Co. -- Analyst

Just a follow up regarding the supply constraints. Could you quantify any missed upside opportunity, you talked, Steve, about some headwinds in terms of revenue on semi-cap, even though it sounds like customers are trying to get ahead of it. Are we talking about like a 5% opportunity missed. Could you just quantify that?

Todd Kelsey -- President and Chief Executive Officer

Sure. The upside that we saw in the fiscal second quarter that customers dropped in was probably $10 million to $15 million, but as quickly as it got dropped -- and there was no way we are going to realize that. What we're looking at for the current fiscal quarter is about $40 million to $50 million of demand that we do not have loaded into our financial forecast that if we could get materials, we think we could execute on.

Matt Sheerin -- Stifel Nicolaus & Co. -- Analyst

Okay, great. And are you seeing -- and those projects didn't get just pushed out and as the component constraints ease, you'll start to see some acceleration there?

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yeah, it's a great question. I would say that we do believe some of the demand is going to push and we do see it building in future quarters. One of the conversations we're having with customers is, how much of it is perishable. I would say, it's a little early to quantify exactly that entire $40 million to $50 million going to be realized in future quarters versus how much is perishable, but I guess my message is that some of it is going to push, some of it is going to be perishable but we haven't really been able to quantify it completely yet.

Matt Sheerin -- Stifel Nicolaus & Co. -- Analyst

Okay, great. And on the aerospace side, it sounds like fundamentals are bottoming there and do you expect to sort of bounce along the bottom here for a couple or three quarters or is there any signs for instance, the MRO picking up or any sort of indicators that give you some more confidence that it's going to be a faster recovery?

Todd Kelsey -- President and Chief Executive Officer

Yeah. So what we expect is this quarter to be kind of -- somewhat around the bottom and then it start to pick up a bit. What we're seeing pick operate now is MRO as well as business jets is picking up rather nicely right now. Now, we think the next thing to come would be the single-aisle, but that's probably a few quarters out yet and then it could be a long time before we start to see the multi-aisle start to pick up within commercial aerospace.

Matt Sheerin -- Stifel Nicolaus & Co. -- Analyst

Okay. And lastly, just a quick housekeeping for Pat, regarding how we should be thinking about interest expense, and tax rate beyond the -- what you're guiding to for the June quarter, sort of guiding or modeling flattish in out quarters, does that makes sense or will the interest expense change based on working capital or other metrics?

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Yeah, I think our interest expense, if you're looking at other income expense that I guide, I think we could see that come down $1 million or $2 million going into fiscal '22 with lower interest expense, if we keep the capital structure the way it is. Tax rate is real uncertainty at this point, I think what I can tell you is we're in the same boat as every other company that if changes go through, our tax expense is going to go up whether it's domestic tax or offshore profit -- tax on offshore profits. So very similar to other companies there.

Matt Sheerin -- Stifel Nicolaus & Co. -- Analyst

Got it. Okay, thank you so much.

Operator

Your next question comes from the line of Paul Coster with J.P. Morgan.

Paul Chung -- J.P. Morgan -- Analyst

Hi, this is Paul Chung on for Coster. Thanks for taking my question. So just on competition, can you expand on the pricing environment? Your peers are also seeing pretty strong margin performance, just your thoughts on the reasons behind kind of the more favorable pricing environment in your view, and how do you kind of continue to stay disciplined on pricing in your expectations over the year and longer term for the industry?

Todd Kelsey -- President and Chief Executive Officer

In general, there's just a lot more discipline in the pricing environment in the current environment than there had been maybe previously within our industry. So I think that's good for everybody. I mean, of course, there is a lot of newer management teams that are in the various competitors that we have, which I think that, that's factored into it quite a lot and it's been a good environment from a pricing standpoint, but, I mean, in ways, though, partly for us too, we've tried to stake out differentiated positions where we're -- where perhaps, we're not -- it's not solely a price or a price competition that's going on, but it's more of a capabilities competition that's going on. So that's one of the things that works in our favor as well.

Paul Chung -- J.P. Morgan -- Analyst

Gotcha. And then, as we kind of think about post-COVID, do you expect some of your existing customers to kind of accelerate the shift to outsource manufacturing and how are those conversations evolving? And then, same question for new customers and new logos, and then anything you want to call out in Asia in particular strength there?

Steve Frisch -- Executive Vice President and Chief Operating Officer

In terms of our customers outsourcing, I think any time there is a disruption, whether it's COVID or a recession or something like that, I think customers in general take a look at their sourcing strategies and adjust them, and so we are seeing a little bit of an uptick in customers looking at their strategies. The one talk -- Todd talked about for aftermarket services is one where the customer looked at it and said, hey, we're going to start outsourcing this, I talked about a win where customers transitioning from internal production to external production. And so, any time there is a disruption, it causes people to -- we see an uptick in those kinds of decisions. And so, I wouldn't be surprised if we see a bit more as we go forward.

In terms of APAC. I mean our APAC team just continues to execute really, really well. The strategy that we have over there is working well. Our expansion into Thailand is to add capacity in Southeast Asia as we see our facilities in Malaysia start to get more full. And so, I would say, it's kind of steady as it goes, the team's winning, as you saw this quarter, won record wins. So it's a -- we're really satisfied with what's happening over there.

Paul Chung -- J.P. Morgan -- Analyst

Okay, great. And then, lastly for Pat on free cash flow. If I take your guidance for 3Q, it seems there might be -- maybe slight usage, but 4Q has been quite strong for past two years, it's hit close to $100 million on average. So any thoughts on the kind of annual free cash flow guide, is there some conservatism baked in there? Thanks.

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Yeah, some of -- like I said, Paul, some of it's going to depend on timing of the capital expenditures for Thailand. We've got $23 million in this year and some of that could push to next year, which would improve our free cash flow. We're going to be procuring quite a bit for the growth we expect in fiscal '22 and I think that will impact our working capital and increase in our investments and that is factored into my numbers. So I think, still around $100 million is reasonable depending on kind of how next year shapes up and we'll know more about that over the next three months.

Paul Chung -- J.P. Morgan -- Analyst

Okay, great. Thank you.

Todd Kelsey -- President and Chief Executive Officer

Welcome. Thanks, Paul.

Operator

Your next question comes from the line of Anja Soderstrom with Sidoti Company.

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

Hi, thank you for taking my question, and congratulations on a great quarter. A lot of good questions asked already, but I have a question on the Thailand expansion. So when that is ramping and that you expect the margins to be a little bit pressured, right, is there any other parts of your businesses that you can push to make up for that pressure?

Todd Kelsey -- President and Chief Executive Officer

Yeah, I think, in general, the answer is yes, Anja. And we don't anticipate our margins to suffer as the Thailand facility is coming online. There's a couple of factors in that too, I mean, one, as Steve had already mentioned, the performance of the APAC team, but our APAC team is incredibly efficient at launching new facilities and bringing them to corporate level profitability. So we have high confidence, they will be able to do it in very short order, but we do have other parts of the business that we're investing in right now, that we anticipate margins will come up to, in essence, be able to offset the Thailand expansion and that includes aftermarket. We're not at our target level there. EMEA, we're not at our target level yet, so we have opportunities. We have opportunities to bring up margins to offset any Thailand investment.

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

Okay. Thank you and I noted in the EMEA, the manufacturing wins have been a bit softer over the couple of quarters. What are you seeing there? Is that like COVID related or it's anything else?

Steve Frisch -- Executive Vice President and Chief Operating Officer

The -- I don't know, if I completely cover. I mean, the manufacturing wins have actually been quite strong over the past couple of quarters. If I look back over fiscal '20 and into '21 year, for the most part, we've been at $250 million or north of it for quite some time. And so I guess, the -- I think, the teams are doing a great job, bringing in the wins that we need to continue to support the growth. And if I look at our trailing four quarter wins metric sitting at 30%, I mean, we're well above our 25% goal. So we're actually pretty pleased with the number of wins that we've had.

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

Okay. I was more alluding to the European and Middle East...

Steve Frisch -- Executive Vice President and Chief Operating Officer

Okay.

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

Wins for regional color.

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yeah, so it's a regional color. EMEA is the one, if you look at that region, their wins have been -- they have a trailing four quarter numbers of $144 million, which -- it is a smaller region for us, that supports growth. It doesn't -- as Todd highlighted, it doesn't support maybe the corporate growth goals that we want. And so that is definitely an area of focus for us to basically to be able to add wins there, to basically allow us to continue to support our growth there, but we're growing. It's just not at the rate that we want to, but again, we feel comfortable with our strategy there.

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

Okay, thank you. That was all for me.

Operator

At this time, I'm currently showing no further questions in queue. I will now turn the call back over to Mr. Todd Kelsey.

Todd Kelsey -- President and Chief Executive Officer

All right. Thank you, Tiffany. And before closing, I would again like to thank our Plexus team members globally. Want to thank you for your exceptional performance, another excellent quarter and for continuing to work incredibly hard to meet the needs of our customers. And I also want to thank everybody who joined our call today. Again, we appreciate your interest in Plexus and we appreciate your support.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Shawn Harrison -- Vice President, Communications & Investor Relations

Steve Frisch -- Executive Vice President and Chief Operating Officer

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Todd Kelsey -- President and Chief Executive Officer

James Ricchiuti -- Needham & Company -- Analyst

David Williams -- Loop Capital Markets -- Analyst

Adam Tindle -- Raymond James -- Analyst

Steven Fox -- Fox Advisors LLC -- Analyst

Matt Sheerin -- Stifel Nicolaus & Co. -- Analyst

Paul Chung -- J.P. Morgan -- Analyst

Anja Soderstrom -- Sidoti & Company, LLC -- Analyst

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