Plexus (PLXS) Dean A. Foate on Q3 2016 Results - Earnings Call Transcript

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Plexus Corp. (NASDAQ:PLXS)

Q3 2016 Earnings Call

July 21, 2016 8:30 am ET

Executives

Susan Hanson - Director-Corporate Communications & Brand Management

Dean A. Foate - Chairman, President & Chief Executive Officer

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Patrick J. Jermain - Chief Financial Officer & Senior Vice President

Steven J. Frisch - Chief Customer Officer & Executive Vice President

Analysts

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Sherri A. Scribner - Deutsche Bank Securities, Inc.

Steven Fox - Cross Research LLC

Shawn M. Harrison - Longbow Research LLC

Mitch Steves - RBC Capital Markets LLC

James Dickey Suva - Citigroup Global Markets, Inc. (Broker)

Herve Daniel Francois - B. Riley & Co. LLC

Sean K. F. Hannan - Needham & Co. LLC

Operator

Good morning and welcome to the Plexus Corp. Conference Call Regarding its Fiscal Third Quarter 2016 Earnings Announcement. My name is Sylvia and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open the conference call for questions. The conference call is scheduled to last approximately one hour.

I would now turn the call over to Ms. Susan Hanson, Plexus Director of Communications & Brand Management. Susan?

Susan Hanson - Director-Corporate Communications & Brand Management

Thank you, Sylvia. 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, 2015, and the Safe Harbor and Fair Disclosure Statement in yesterday's press release.

Plexus provides non-GAAP supplemental information such as ROIC, economic return and free cash flow because those measures are used for internal management goals and decision-making and because they provide additional insight into financial performance. In addition, management uses these and other non-GAAP measures such as adjusted net income and adjusted operating margin to provide a better understanding of core performance for purposes of period-to-period comparison.

For a full reconciliation of non-GAAP supplemental information, please refer to yesterday's press release and our periodic SEC filings. We encourage participants on the call this morning to access the live webcast and supporting materials at Plexus website at www.plexus.com, clicking on Investor Relations at the top of that page and then Event Calendar.

Joining me today are Dean Foate, Chairman, President and Chief Executive Officer; Todd Kelsey, Executive Vice President and Chief Operating Officer; Pat Jermain, Senior Vice President and Chief Financial Officer; and Steve Frisch, Executive Vice President and Chief Customer Officer. Consistent with prior earnings call, Dean will provide summary comments before turning the call over to Todd and Pat for further details.

Let me now turn the call over to Dean Foate. Dean?

Dean A. Foate - Chairman, President & Chief Executive Officer

Thank you, Susan, and good morning, everyone. Yesterday, after the close of the market, we reported results for our fiscal third quarter of 2016. Revenue was $668 million, at the high-end of our guidance range. Our non-GAAP diluted EPS result was $0.82, above our guidance range due to strong operating performance. Overall, revenue grew approximately 8% sequentially and played out largely as expected across our sectors. Notably, new program ramps drove strong sequential growth in our Industrial/Commercial sector and to some extent in our Healthcare/Life Sciences sector.

Overall, I am pleased with our performance this quarter. And I am especially gratified that we delivered operating margins solidly in our target range of 4.7% to 5% one quarter ahead of earlier expectations. The stronger margin performance in combination with better balance sheet management resulted in ROIC improving to 13% or 200 basis points of economic return. Consequently, free cash flow was above expectations for the quarter. Shifting our focus to top-line growth, new business wins were again healthy this quarter, providing optimism for accelerating growth in the coming fiscal year.

I will now turn the call over to Todd.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Thank you, Dean. Good morning, everyone. Advancing to our fiscal fourth quarter guidance on slide four. After exceptionally strong sequential growth in our fiscal third quarter, we expect revenue growth to moderate in the fiscal fourth quarter. We're guiding fiscal fourth quarter revenue in the range of $655 million to $685 million as new program ramps in our Industrial/Commercial and Defense/Security/Aerospace market sectors offset anticipated near-term end-market weakness in our Networking/Communications sector.

We expect our operating margin to be near the high-end of our 4.7% to 5% target range for the second consecutive quarter as a result of the excellent work by our teams in delivering our cost reduction and productivity improvement initiatives. With our sustained operating performance and the expected revenue level, we're guiding non-GAAP diluted EPS in the range of $0.76 to $0.84. This includes $0.11 of stock-based compensation expense.

Next, I would like to turn to operating performance on slide five. Our fiscal third quarter revenue, which was at the high-end of our guidance range at $668 million, was up 8% sequentially from Q2. We benefited from modest strengthening within the quarter across all our sectors with the exception of Defense/Security/Aerospace.

Our operating margin finished near the top end of our target range at 4.9% as our three manufacturing regions continued to deliver meaningful results associated with our cost reduction and productivity improvement initiatives. As a result of the strong revenue and operating margin, in Q3, we delivered record adjusted operating profit of $32.7 million. As we look forward to Q4, we expect we will continue this level of operating performance.

Please advance to slide six for additional insight into our recent operating margin performance. As discussed on previous calls, at the beginning of our fiscal first quarter of 2016, we've put in place plans to improve operating profit $6 million to $8 million per quarter by our fiscal third quarter of 2016, resulting in a 90 basis point to 120 basis point improvement to operating margin.

We finished our fiscal third quarter at the high-end of our target range with 120 basis points of total improvement. When including the 20 basis point improvement resulting from the successful Guadalajara ramp, we exited the quarter at 4.9% operating margin. Looking ahead to our fiscal fourth quarter of 2016, we will complete our near-term cost reduction and productivity improvement initiatives with the closure of the Fremont facility.

The end result of these combined efforts will be a 140 basis point improvement to operating margin, positioning us to maintain performance in our 4.7% to 5% target operating margin range. Looking to the future, we anticipate additional positive margin benefit as a result of achieving sustained growth in the EMEA region. We believe we are well-positioned to fund our future growth investments, while achieving our target operating margin range.

Please advance to slide seven for insight into the performance of our market sectors during the fiscal third quarter of 2016 as well as our expectations for the fiscal fourth quarter. Our Networking/Communications sector was down 1% in Q3, which was in line with our expectations of down low single-digits. Three of our top customers outperformed prior forecast.

The remainder of the sector was mixed to expectations. Looking to Q4, we expect Networking/Communications revenue to be down in the low double-digit percentage point range due to near-term end-market weakness and headwinds associated with the previously announced program completion. Demand within the sector remains volatile.

Our Healthcare/Life Sciences sector was up 9% sequentially in Q3, which was better than our expectations of a mid-single-digit increase. Overall demand exceeded expectations with 12 of the top 15 customers with one customer stronger than forecast to support a program transition to another Plexus site.

Looking ahead to the fiscal fourth quarter, we anticipate revenue in our Healthcare/Life Sciences sector to be down in the low single-digits relative to Q3. We see end-market weakness with two larger customers, an unfavorable product mix shift with another significant customer and a more normalized run rate with a program transition mentioned earlier. These impacts are somewhat offset by new program ramps.

Our Industrial/Commercial sector was up 20% sequentially in our fiscal third quarter, slightly above our expectations of up high teens. The strong results were primarily driven by new program ramps with a major customer. As we look ahead to Q4, we currently anticipate that our Industrial/Commercial sector will be up in the high single-digit percentage point range on the strength of new program wins with several customers in the sector.

Our Defense/Security/Aerospace sector was flat in Q3, a result that was largely in line with expectations as demand softened slightly within the quarter. We currently expect Q4 to be up in the mid-single-digits sequentially, mainly due to end-market strength of a security customer and new program ramps.

Next to new business wins on slide eight. During the fiscal third quarter, we won 46 new programs in our Manufacturing Solutions group that we anticipate will generate $194 million in annualized revenue when fully ramped in production. The result is well above our goal and our strongest since the second quarter of fiscal 2015. The wins for our Americas and APAC region were robust at $113 million and $75 million, respectively. Our wins result in our EMEA region was below expectations. And our team is focused on improvement actions.

Please advance to slide nine for further insight into the wins performance of our market sectors. In the fiscal third quarter, our Manufacturing Solutions wins were led by the Industrial/Commercial sector. The wins included significant business expansions with a top customer and a new division of an existing customer. Our Healthcare/Life Sciences sector also won a significant program with a new customer and further expanded our relationship with one of our top customers. Healthcare/Life Sciences and Industrial/Commercial sectors continued their trend of wins momentum well above our 25% goal, supporting our strategy to further shift our business mix and deliver a healthier, differentiated portfolio.

Now advancing to Manufacturing wins momentum on slide 10. Our trailing four-quarter Manufacturing wins, as shown by the dark blue bars, is at $714 million. This performance results in a wins momentum of 28%, above our target of 25%, and a 200 basis point improvement from last quarter. Our Engineering Solutions wins totaled approximately $27 million in the fiscal third quarter, a strong result that was in line with our expectations. The funnel for Engineering Solutions continues to be robust. And we expect another strong quarter of wins in the fiscal fourth quarter. Our backlog in our higher margin Engineering Solutions organization remains quite healthy.

Please advance to slide 11. Our Manufacturing funnel remains robust at $2.3 billion of qualified opportunities. The sector breakdown of our funnel supports the revenue goals of our differentiated portfolio.

I will now turn the call to Pat for a detailed review of our financial performance. Pat?

Patrick J. Jermain - Chief Financial Officer & Senior Vice President

Thank you, Todd, and good morning, everyone. Our fiscal third quarter results are summarized on slide 12. Revenue of $668 million was at the high-end of our guidance due to better performance from three of our market sectors. Gross margin of 9.4% was within our guidance and 75 basis points above the fiscal second quarter. Our continuing efforts to manage costs and improve productivity while increasing our top-line contributed to the gross margin expansion.

Selling and administrative expense of approximately $30 million was at the top-end of our guidance, primarily due to higher variable incentive compensation. For the third quarter, SG&A as a percentage of revenue was approximately 4.5%, which was consistent with the fiscal second quarter. We are pleased to achieve our target operating margin range this quarter. Before restructuring, our adjusted operating margin of 4.9% was at the top-end of our guidance and included approximately 55 basis points of stock-based compensation.

We experienced minimal impact from foreign exchange volatility as we continue to hedge significant balance sheet exposures. The devaluation of the British pound had no significant impact on our fiscal third quarter as we utilize an average exchange rate to translate income statement results. During the fiscal fourth quarter, we anticipate that the currency devaluation will have a minor impact overall as less than 3% of Plexus revenue is generated in the UK.

Diluted EPS of $0.76 includes a $0.06 per share detriment as a result of after-tax restructuring charges of $1.8 million related primarily to the closure of our Fremont, California facility. Excluding restructuring charges, non-GAAP EPS of $0.82 exceeded our guidance of $0.73 to $0.81.

Turning now to the balance sheet on slide 13. Return on invested capital was 13% for the fiscal third quarter, 140 basis point improvement from the prior quarter, and 200 basis points above our fiscal 2016 weighted average cost of capital of 11%. A stronger margin performance combined with disciplined invested capital management drove the improvement in our return on invested capital performance.

During the quarter, we purchased approximately 170,000 of our shares for $7.2 million at a weighted average price of $42.13 per share. The shares were purchased under our $30 million stock repurchase program. We have approximately $7 million remaining under the authorization, which we plan to use to repurchase shares on a relatively consistent basis over the fiscal fourth quarter.

During the quarter, our board of directors authorized $150 million multi-year stock repurchase program, which reflects our continued commitment to maximize shareholder value by returning excess cash to shareholders. This program will commence in fiscal 2017 and repurchases will be dependent on market conditions.

As discussed in the press release, on July 5, we amended our senior unsecured credit agreement to take advantage of favorable pricing. As a result of the amendment, the credit facility was expanded to $300 million with the ability to increase it by an additional $200 million. The amended facility provides us with ample borrowing capacity and flexibility in anticipation of future growth and in part to fund the previously announced share repurchase program. In addition to the expansion, we extended the termination date of the credit facility from May 2019 to July 2021.

During the quarter, we generated $31 million in cash from operations and spent $7 million on capital expenditures resulting in free cash flow of $24 million. This result exceeded our $5 million to $15 million free cash flow guidance for the fiscal third quarter. Lower capital expenditures and continued emphasis on working capital management contributed to the improvements in free cash flow. Cash cycle at the end of the third quarter was 63 days, a sequential improvement of three days and favorable to the midpoint of our guidance.

Please turn to slide 14 for details on our cash cycle. Days in inventory were sequentially down four days driven by the higher revenue for the fiscal third quarter. Inventory increased approximately $12 million or 2% compared to the 8% revenue increase. Sequentially, days in receivables were up three days due to a higher level of shipments at the end of our quarter and a mix change to customers with less favorable payment terms. Sequentially, payable days were consistent, while customer deposit days increased two days as we secured $17 million in additional deposits.

As Todd has already provided the revenue and EPS guidance for the fiscal fourth quarter, I will now turn to some additional details which are summarized on slide 15. We expect additional restructuring charges of approximately $0.5 million to $1 million in the fiscal fourth quarter, primarily related to our Fremont, California facility. These restructuring charges are excluded from the guidance discussed today. We have also excluded from our guidance any charges related to special items, which are not known or reasonably quantifiable at this time.

We expect all restructuring activities to be completed in fiscal 2016. Total restructuring charges are expected to be in the range of $5 million to $6 million for the year. Gross margin is expected to be in the range of 9.4% to 9.7%. The midpoint of this guidance suggests a sequential increase of 20 basis points. Driven primarily by a sequential increase in variable incentive compensation expense, we expect SG&A dollars in the fiscal fourth quarter to be slightly higher in the range of $30 million to $31 million.

Fiscal fourth quarter adjusted operating margin is expected to be in the range of 4.8% to 5.1%, which includes approximately 55 basis points of stock-based compensation expense. The midpoint of this guidance suggests a slight sequential improvement to our margin and positions us at the top-end of our target operating margin range.

A few other notes. Depreciation expense for the fiscal fourth quarter is expected to be approximately $12 million, consistent with the fiscal third quarter. Before restructuring charges and other special items, we estimate an effective tax rate of 9% to 11% for the fiscal fourth quarter and 10% to 12% for the full year. The slightly higher tax rate forecasted for the fiscal fourth quarter compared to the third quarter is largely attributed to changes in the geographic distribution of earnings.

Our expectation for the balance sheet is a sequential increase in working capital dollars. Cash cycle days are expected to be in the range of 64 days to 68 days for the fiscal fourth quarter suggesting a sequential increase of three days at the midpoint of this guidance. The increase in working capital dollars and cash cycle days is primarily related to an increase in accounts receivable due to a continued mix change to customers with less favorable payment terms.

We expect free cash flow in the range of $5 million to $25 million for the fiscal fourth quarter. As a result, we are increasing our fiscal 2016 expectation of free cash flow by $10 million at the midpoint. Our new range is $100 million to $120 million. Fiscal 2016 capital spending is anticipated to be approximately $40 million, which will support new program ramps and productivity improvements.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Matt Sheerin from Stifel.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Yes. Thank you and good morning, everyone. Just a question regarding the Networking/Communications business. It sounds like a rather soft outlook there. And it also seems like it's going to have a positive effect on your overall margins due to mix. But if that sector continues to weaken on lower volumes, what should we think about the negative leverage within that business offset by positive mix because revenue in the other sectors just by defaults are higher as a percentage?

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Sure. So, Matt, this is Todd. I'll take this question. So, first of all, with respect to the Networking/Communications business, we have a soft outlook in Q4. And, in this case, we're seeing seven of our top 10 customers weakening. We also have the impact of the program disengagement that we talked about in the past as a headwind. But as we look to Q1 and really the balance of F2015 – or F2017, we see the Networking/Communications sector recovering. So, we would expect at this point Q1 to look much like Q3 does from a revenue standpoint. And we do see growth within that sector in fiscal 2017 although not necessarily at the rate of our other sectors. So, I think, you'll continue to see it from a percentage of our portfolio standpoint to be at or trend slightly lower than the other sectors as we continue to grow the other sectors. But we do expect growth within that sector and we view this as really a short-term issue.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Okay. And then after deselecting some of the lower margin or less desirable programs, should we see margins within the Net and Communications business improve through next year as volumes start to come back?

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Well, I think, we look at it overall as a portfolio across Plexus. And, again, we're really driving toward this 4.7% to 5% target operating margin on really a consistent quarterly basis. So, that's the way we look at running the business. Certainly some of the things that we did in Networking/Communications helped that profile and helped us get to that range where we're at in Q4 and Q3 as well.

But as we look forward, there's other factors and pressures that come into play that drive the operating margins such as inflationary pressures within our business itself, customers and their cost down pressures and cost pressures, as well as the need to really focus on growth and invest in growth investments. So, we believe that 4.7% to 5% is a healthy place to be, a place that we expect to stay. But we think we're positioned well to stay in that range.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc.

Okay. Got it. Thanks very much.

Operator

Our next question comes from Sherri Scribner from Deutsche Bank.

Sherri A. Scribner - Deutsche Bank Securities, Inc.

Hi. Thanks. Thanks for the detail on the FX impact from the pound. Can you give us some sense of what you're seeing in Europe? I know you guys don't have a ton of exposure but it seems like some of your wins were a little bit weaker in the EMEA region and maybe some detail on that would be helpful.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Yes. So maybe I'll let Pat give a little more color around Europe and the impact of Brexit and such as that. And then I'll talk more about wins and growth in the EMEA region.

Patrick J. Jermain - Chief Financial Officer & Senior Vice President

Yeah. I'll start. So, Sherri, as I mentioned, Q3, we didn't see much of an impact because we use an average exchange rate. But for fiscal fourth quarter if the exchange rate continues at the level it's at, the British pound, we would expect probably a couple million dollar impact just simply from translating results from the UK into U.S. dollars. Now, that's already factored into our guidance that we provided today. So, that's a piece just from translation. We don't see much of an impact from the Romania business. That's a euro functional currency. So just simply translating those results wouldn't result in a significant impact.

From a demand standpoint, we are seeing some softness from our UK customers. We're still trying to work through whether that's Brexit related or just softer end-market demand. But that's probably a couple million dollars as well. So, overall, the impact at this point we're not seeing as significant. But I think wait and see how this continues to play out.

Sherri A. Scribner - Deutsche Bank Securities, Inc.

Okay.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

So next from a standpoint of wins and the revenue trajectory within the region, so from a standpoint of the wins, we had what we felt was an abnormally low quarter in Q3 in the EMEA region. And we would expect that to recover as we move forward in Q4 and beyond. So, we don't view it as a long-term trend within that region. And as we look at the revenue growth and if you look at the wins momentum within that region, it is strong. And you can probably interpolate (25:57) and do the math and see that we're expecting roughly mid-20s% growth within the region in our fiscal 2016. And as we look to fiscal 2017, we would expect something in that region or perhaps even better.

Sherri A. Scribner - Deutsche Bank Securities, Inc.

Okay. That's helpful. And then just looking at the operating margin, you guys have done a very good job of improving that and getting back into the target range – at the high-end of the target range. Should we assume that you're in that target range for every quarter in fiscal 2017 because if I look at the full year Street numbers it implies that you guys are pretty heavily in that range for 2017? Thanks.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Yes. I think, Sherri, for most of the quarters, we'll be in that range. The one we typically have challenges with would be our March quarter where we have the compensation, the merit increases and the U.S. payroll tax reset. And that's a quarter where I could see us tipping below that 4.7%, low-end of our target range.

Sherri A. Scribner - Deutsche Bank Securities, Inc.

Thank you.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Sure.

Operator

Our next question comes from Steven Fox from Cross Research.

Steven Fox - Cross Research LLC

Thanks. Good morning. First question just on the Industrial/Commercial sales performance in the quarter and the outlook. So, the ramp into September, I guess, there's a lot of Plexus-specific stuff going on. I was curious if there's any other seasonal factors that we should think of and given all the other markets if there's anything else you would call out within Industrial/Commercial that's affecting that guidance. And then just any kind of hints you can provide in terms of what kind of seasonality or new program ramps we should think affecting December quarter would be helpful.

Steven J. Frisch - Chief Customer Officer & Executive Vice President

Steven, this is Steve Frisch. And I've got a little bit of a cold this morning. So, hopefully, you can hear me.

Steven Fox - Cross Research LLC

Yes.

Steven J. Frisch - Chief Customer Officer & Executive Vice President

In regards to the new program ramps, it really is the strength – is in the new program ramps. We're very successful at converting opportunities and they've been ramping nicely. Todd talked about the one that we have a continuation with a current customer. We've also talked that we've added a new division with an existing customer and we expect those to continue to ramp in 2017.

In regards to the seasonality, the semiconductor market is flat to where it has been. We were kind of expecting to see some growth – more growth in that as we entered the back half of 2016. It hasn't picked up to the levels that we would have anticipated, but it hasn't gone down either. Very similar story with oil and gas. So what you're seeing for us is really growth through new program ramps and not a lot of effect of seasonality.

Steven Fox - Cross Research LLC

And was this an especially big quarter where the revenues are coming from the new programs or should we see more of that in the December quarter?

Steven J. Frisch - Chief Customer Officer & Executive Vice President

There's a little bit of a spike as we ramp for the first time, but we do expect the levels to not dip appreciably as we go through the year.

Steven Fox - Cross Research LLC

Thanks. And then just real quick on the new program ramps, so it looks – from the margins, it appears like everything is ramping efficiently. I'm just wondering how you would grade yourselves out on some of these ramps given some of the big areas you said you've entered with new divisions, et cetera. Is there anything that's changed in the model that has made this more predictable for you or have there been hiccups that you've been able to overcome? Thanks.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

I would say, overall, we've been efficient in the new program ramps. I mean there's always challenges that occur during a new program ramp. Because it's new, it's often it's a new customer. It's always a new program. It can be issues related around the design. It can be issues related around process or what have you. So there's always challenges to overcome. But one of our key focuses has been on putting in the proper investments ahead of the ramp within our sites. So, I think, that's helped us to be more consistent and more predictable within those ramps. And we would expect to be able to continue that as we move forward.

Dean A. Foate - Chairman, President & Chief Executive Officer

I'd just add. I think Todd's being somewhat modest. There's been an enormous, I think, cultural shift in the organization to really get back to performing for our customers. And underpinning that is a heavy focus on operational excellence and standard work across the organization getting rid of variation. And we've made an enormous move in that direction which has really helped our performance for our customers, but also made the manufacturing floor much more predictable, with less heroics to get product out the door at very high quality levels. Frankly, there's quite a bit more work to do to get us up to a point where we would say that we're in really excellent shape and those that would drive these sort of initiatives know that this is kind of work that's never done. There's always opportunity for improvement. But we've got a significant shift going on in terms of how we do work across our manufacturing platform.

Steven Fox - Cross Research LLC

That's very helpful. Thanks very much.

Dean A. Foate - Chairman, President & Chief Executive Officer

Thank you.

Operator

Our next question comes from Shawn Harrison from Longbow Research.

Shawn M. Harrison - Longbow Research LLC

Morning, everyone. I guess I just like to see if we could dig in a little bit more on Networking comment. It sounds from the comment that this is either a short-term demand disruption or an inventory correction maybe if you could parse it between either. And then the better view on 2017, is that because the demand gets better or is that because some of the new program wins you've won over the past few quarters ramp and indicates what's still a soft end-market environment?

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Yes. So, Shawn, demand versus inventory, I would call it a demand issue. And when we look further out, I think, we see some level of recovery in the demand but we're also benefiting from new program ramps as well. The other advantage we have as we go forward within Networking/Communications is we don't have the headwind of the large program disengagement that we talked about to deal with any further.

Shawn M. Harrison - Longbow Research LLC

I guess on that topic, Todd, will both the program disengagements be complete exiting here in the fiscal year?

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Yes. So we talked about the two different programs, the one being the Industrial/Commercial program and that is complete already as we speak. And the Networking/Communications program, you can consider that complete after this quarter. Just taking a quick look at the headwinds to make sure I get this right as well, too. So we have about a $6 million headwind impacting our current quarter, our Q4. And then really that trails down after that point.

Shawn M. Harrison - Longbow Research LLC

Okay. And then just finally as a quick follow-up. Coming to the, I guess, or going into fiscal 2017, do you have any additional thoughts in terms of how you're going to deploy the new larger buyback? And I know at the Analyst Day, I think, you said you'd be – I don't know if the right term was selective or opportunistic. But right now we may be model something of $50 million over the next three years or is there potential to front-load it?

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Yeah. I don't think there's much potential to front-load it, Shawn. What we're going through right now is our planning process both our annual planning process and our long range plan. And what I look at is our intrinsic value. I look at where we're trading our trading multiple and make decisions based on that. But at least we want to be covering our equity dilution and then setting up a strategy that's consistent. And that's kind of the strategy we've had in the past, just had a little larger amount going forward.

Shawn M. Harrison - Longbow Research LLC

Okay. Perfect. Thanks so much and congrats on the results.

Dean A. Foate - Chairman, President & Chief Executive Officer

Thank you.

Patrick J. Jermain - Chief Financial Officer & Senior Vice President

Thank you.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Thank you.

Operator

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

Mitch Steves - RBC Capital Markets LLC

Hey, guys. Just a first quick one. So if you were to look at the midpoint of the guide, kind of, call it six 75% or so, somewhere around there, I mean would you have two 10% customers like you had last year or is that expected to decline at the midpoint?

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Yeah. I'd say that – well, first of all, we won't announce or talk about 10% customers until we release our 10-K after the fiscal fourth quarter. What I can say is that if you looked at the – we announced two, of course, last year. We don't – from a percentage standpoint, they're staying relatively consistent.

Mitch Steves - RBC Capital Markets LLC

Got it. So pretty much the same as it was last year on a rough basis, okay. And then, secondly, if I look at the Industrial side, it looks like that's ramping up pretty materially. So, is there a specific, I guess, product line you guys are now making or how did you essentially displace the Industrial headwind you had about a year ago?

Steven J. Frisch - Chief Customer Officer & Executive Vice President

There's two – this is Steve Frisch. There's two customers in that sector that we've been very successful with this last year. One is the customer is outsourcing one. So, this is stuff that they've done internally and they've decided to go to an outsource model. And we've benefited from that significantly. The other customer that we've been wrapping is a takeaway from the competition. So we're very happy about that as well. So, there's two customers in there that are performing really well for us in the year.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

The one thing I'd add to that as well, Mitch, is that we're not seeing end-market strength in Industrial/Commercial. The growth that we're able to achieve and the headwind we're able to overcome is a result of wins and winning new programs.

Mitch Steves - RBC Capital Markets LLC

Got it. And then just one really small one. So, I know you guys mentioned that you expect kind of the June quarter to be the similar run rate in December for the Networking/Communications. Is that just mean that the product transition essentially snaps back in the December quarter? I'm just trying to get an idea for why it goes down 10 and then effectively up 10.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

We see some level of demand increase, but we also see the impact of some new programs that we're ramping right now.

Mitch Steves - RBC Capital Markets LLC

Got it. So there's no real material inflection item to call out.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

No.

Mitch Steves - RBC Capital Markets LLC

Okay. Thank you so much.

Operator

Next question comes from Jim Suva from Citi.

James Dickey Suva - Citigroup Global Markets, Inc. (Broker)

Thank you and congratulations to you and your team at Plexus. Your operating margin performance has been very impressive and then we compare that to your goals and you're hitting them basically very strong if not above. So, I guess, this is more of a strategy question. As you look ahead to the next year or two, you kind of face roads of too good decisions. Do you walk away from business that could be higher sales but maybe – prevent you from taking your margins even higher? Or do you look at considering, hey, now that your scale has been ramped up a little bit, restructuring is done, do you look at kind of potentially taking on some margin business that's, say, maybe some of your competitors would take on, but maybe a little bit lower margin? Thank you.

Dean A. Foate - Chairman, President & Chief Executive Officer

Yes. That's a good question, Jim, because, of course, once we're up into our margin range, the story shifts to top-line growth. I think, just philosophically, the way we look at this is our drive towards shareholder value is about ever increasing economic profit. And, of course, having our margin performance up where in the range that it is and improved working capital metrics is going to drive our ROIC higher here in the coming quarters. Because our balance sheet metric portion of that, the denominator is on a five-quarter average. So we'll see that improve and then it's about driving top-line growth which requires us to increase the capital base and then achieving an ever consistent return on that ever increasing capital base that's there to support higher revenues.

And I think one of the boundaries that we look at in terms of accepting businesses is can we achieve our operating margin over a long time – our target range over a long time with that new piece of business. And fundamental to that is whether or not we think we can sustain some level of competitive advantage with that program versus our competition. And so it's not extraordinarily complicated. We also understand that not all pieces of business from a margin standpoint are priced the same. Not all pieces of business require the same level of relative invested capital.

And so we give our sector teams some latitude to manage their portfolio but at the same time we expect them to deliver our targeted metrics kind of on an overall basis within that portfolio. And so being up in the range that we are now, I mean, gives us a little bit of room, all right, to maneuver where previously it was difficult for us to really maneuver with customers and be more competitive when we needed to get additional engagement with new customers. So I'll expect us to start seeing acceleration of top-line growth now that we're in the spot that we're in.

James Dickey Suva - Citigroup Global Markets, Inc. (Broker)

Great. And now that – as a different topic, regarding tax rate, now that you're restructuring, you've done some moves there and repositioned some of your customers and facility for preferential things (39:36) like that, a long-range tax rate planning, how should we think about that?

Patrick J. Jermain - Chief Financial Officer & Senior Vice President

I think, Jim, we can probably still stay within the kind of low double-digit range for the next few years. I'm guiding 10% to 12% for the full year in fiscal 2016. I would expect something similar in 2017. Maybe it ticks up a little bit as we go past F2017 but nothing dramatic.

James Dickey Suva - Citigroup Global Markets, Inc. (Broker)

Great. Thank you and congratulations to you and your teams at Plexus.

Dean A. Foate - Chairman, President & Chief Executive Officer

Thank you.

Patrick J. Jermain - Chief Financial Officer & Senior Vice President

Thanks, Jim.

Operator

Our following question comes from Herve Francois from B. Riley.

Herve Daniel Francois - B. Riley & Co. LLC

Hi, Herve Francois. I'd apologize I have a little bit of a cold.

Dean A. Foate - Chairman, President & Chief Executive Officer

No. We're not alone in that, no.

Herve Daniel Francois - B. Riley & Co. LLC

Yeah. We're not alone. We're not alone, hopefully ends soon. But on your Healthcare/Life Sciences business, I mean, as you were giving some color, commentary on the Industrial business, can you give similar commentary on your Healthcare/Life Sciences? Is it a combination of some demand strength on your program wins that you've been seeing for those customers and as it kind of funnels into your business as well, the $2.5 billion, that you talked about?

Steven J. Frisch - Chief Customer Officer & Executive Vice President

This is Steve. It's very similar to the Industrial/Commercial story where a certain amount of the growth is coming from new program ramps that we've announced over the last several quarters. Keep in mind the ramp schedule for Healthcare/Life Sciences is a bit longer. So the stuff that we're seeing ramping now are actually from wins that would go back into the beginning of the year, at the end of F2015. So, that is where the strength is coming from. The end-markets is – I think Todd mentioned are flattened a little bit. I don't think these will evolve (41:35) but – because they don't move around a lot. But we haven't seen significant growth from the end-markets themselves.

Herve Daniel Francois - B. Riley & Co. LLC

Got it. Got it. Got it. Thank you very much. And then also when you look at some of the program wins that you had been getting from your Industrial customers, can you talk about the size of the wins? Have you seen any increase in the size of the program wins that you've been getting from some of the customers in that sector?

Steven J. Frisch - Chief Customer Officer & Executive Vice President

Yes. This is Steve again. Yeah. The program wins that we've been experiencing in Industrial/Commercial and the two that we've kind of talked about a little bit, the size of those programs are decent size programs, bigger than what I would say is a traditional Industrial/Commercial opportunity. And it's really led by a couple things. One is – in one case the customer decided to outsource the significant portion of their work. And so that came in, in a nice size chunk. And the other one, the product line is quite substantial. So – and we're sole-sourced on being able to build that, so we won the entire project. So, again, two really healthy sized program there. I think the other part that's key here is that we're also making inroads into other divisions of those entities. And so we see there's a nice continued relationship with both of those customers.

Herve Daniel Francois - B. Riley & Co. LLC

And is that having any – just, lastly, is that having any long lead impact? Would you expect it to have any kind of impact in your operating margins as these program wins – their size get a little bit bigger from the size of the product lines?

Steven J. Frisch - Chief Customer Officer & Executive Vice President

I think from a pricing standpoint, as we ramp new programs, they're always a bit more challenged on the margins because there's a lot of expenses that go into ramping a program. So as we've talked about before, we model the sectors and strive towards a 4.7% to 5% goal. And so we're actually a little bit more challenged in the beginning. And as we ramp them up, our expectation is that their performance is going to fall in to help us achieve our operating margin goals.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

The other thing I'd add though too is when we said our operating margin goals is 4.7% to 5%, that includes ramping the new business that we need to fuel our growth. So, our expectation is that we can grow and maintain those margins.

Herve Daniel Francois - B. Riley & Co. LLC

All right. Thanks very much, guys. Nice quarter.

Operator

Our next question comes from Sean Hannan from Needham & Company.

Sean K. F. Hannan - Needham & Co. LLC

Yes. Hi. Thanks. Can you hear me?

Dean A. Foate - Chairman, President & Chief Executive Officer

Yeah.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

Yes.

Sean K. F. Hannan - Needham & Co. LLC

Congrats on the quarter. Just another set of questions around some of your wins here. And particularly when I look at this slide nine that you have within the presentation, just trying to get a little bit more context around when you think about the wins that have been accumulated through, say, the end of fiscal 2015, is there a way if you can characterize for us how much for each of your segments is now in full production mode for those that were won through the end of fiscal 2015? And then as we look at the groupings of wins that we have taken on here in 2016 and especially say Industrial comes to mind because you've had some good momentum there to get some context around how much of that is in play. Clearly, the non-traditional markets take a bit longer to ramp, but any more color would be helpful. Thanks.

Dean A. Foate - Chairman, President & Chief Executive Officer

You're trying to get at how much of the revenue growth is already in the bag, I guess, is what you're -

Sean K. F. Hannan - Needham & Co. LLC

In effect but obviously if there's some color we can interpret or extrapolate for how much further momentum there could be as well.

Steven J. Frisch - Chief Customer Officer & Executive Vice President

Yeah. So, this is Steve. I'll take a shot at this. And what I'm going to say is very high level and generic because every program can be significantly different. But you kind of hit on it is that Networking/Communication, the ramp on those programs, is – if you had to give it an average, you're looking at six months. So anything that we win is – we typically expect to be ramped in six months' timeframe – six months to eight months. Healthcare/Life Sciences can be substantially longer. It can be anywhere from probably 18 months to 24 months before we see a volume ramp. Defense/Security/Aerospace is a similar story in terms of a length of ramp. And Industrial/Commercial can be similar between – we can see things ramp relatively quickly, six months. It can be longer, 12 months to 18 months, especially if you look at like a semiconductor kind of customer.

And the caveat I'll put on this is also where it comes from, our Healthcare/Life Sciences wins, a lot of those are products that we're designing. And so the ramp schedule can be a bit longer. In the case of the Industrial/Commercial, that customer that I talked about where we – basically they decided to outsource, it's a pretty significant fast ramp. And so that's also the challenges – is that whether or not this is a new program that they're trying to penetrate the market or whether it's existing business that we're transitioning in. The ramps can be all over the place. So hopefully that gives you a little bit of color. But it's really hard to say that there's a specific one for each one.

Todd P. Kelsey - Chief Operating Officer & Executive Vice President

So, Sean, I think, I'll add just a little bit more color around F2017 too just to give you and the others a bit better idea of our view. So if we go back to June when we had an Investor Day, we painted an optimistic picture for F2017 and beyond from a growth perspective. And what I would say is we still feel that way. And then we talked about the potential for solid growth in F2017 with a goal to get to the low double-digits. We still view that as a reasonable goal. It's certainly too early to guide. It's too early to call the year because a lot of things can change in a big way. But if end-markets hold up, if we don't see end-markets crash, if new program ramps go as we anticipate, we expect to really grow meaningfully on a year-over-year basis in each of our quarters. We do believe that all our sectors are going to show growth within the year and that's how things are lining up at the moment.

Sean K. F. Hannan - Needham & Co. LLC

All very helpful color. Thanks so much, folks.

Dean A. Foate - Chairman, President & Chief Executive Officer

Thank you.

Operator

We have no further questions at this time. I'd like to turn the call back over to Dean Foate.

Dean A. Foate - Chairman, President & Chief Executive Officer

All right. Well, again, I want to thank, of course, the sell-side analysts who just do a fantastic job covering Plexus and our story. And I want to thank the investors who are on the call for supporting Plexus. This is my last earnings call. And so I want to thank all of you for the great support. And, of course, I appreciate you all on an individual basis as well. I know many of you personally, so thanks for the support over the years. And with that, we'll close down the call. Thank you.

Operator

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

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