Plexus Corp (PLXS) 2002 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the 2002 fiscal fourth quarter earnings conference call for Plexus Corporation. At this time all participants are in a listen-only mode. After a brief discussion by management we will open the conference for questions. The conference call is scheduled to last approximately one hour. I would now like to turn the call over to Mr. Kristian Talvitie, Plexus's Director of Investor Relations. Mr. Talvitie, please go ahead sir.

Good morning. Thanks for joining us today. Before we begin I would like to establish the statements made during this conference call that are not historical in nature are forward-looking statements. Forward-looking statements or not guaranteed 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 list of major factors that could cause actual results to differ materially from those projected. Please refer to the company periodic SEC fillings. Before we begin with the call, I would like to remind everyone that we are having our investor day in Wisconsin on November 7, 2002. This will involves facility towards presentations by management and presentation by one of our customers. In addition we will be presenting at the out coming Prudential Tech conference in New York on October 29, 2002. The national bank financial EMS conference in Toronto on October 30, 2002, Thomas Weisel Conference in New York and Boston on October 30, 2002, and October 31, 2002 as well as Lehman's Tech conference in San Francisco on November 19, 2002. Please feel free to contact us for more information on any these events. I will now turn the call over to Dean A. Foate, President and CEO.

Thank you Christen. Thank you every one for joining us this morning especially those of you on the West Coast we know it is very early in the morning. As many of you probably know we issued two press releases this morning we have been searching a CFO since Tom's transition to COO in July. Today, I am happy to announce that Gordon Bidder as our new Chief Financial Officer. He will he joining us very shortly. So we may know him from his time at Hedkel Gordon brings a great deal of industry experience as well as international experience to Plexus. We look forward to his enthusiasm and expertise on our management team. This morning we also announced sales for the fourth quarter of $217 million and diluted cash earnings per share of $0.4. This excludes non-recurring charges of $2.4 million related to the write down of certain under utilized assets. These results are $8 million in revenue and one-penny in EPS below the low end of the guidance we gave during last quarters call. The EMS industry continues to be impacted by limited forecast visibility and weekend market demands. In spite of our healthy diversification across to industry sectors Plexus is not amune. We felt the most significant decline in the networking/data communications, which made up 32% of revenues this quarter compared to 36% last quarter. We did see some growth in our medical sector, which now makes up 30% of revenues compared to 27% last quarter. Our other primary industry sector remain relatively unchanged at the percentage of revenues for the quarter. Industrial commercial is 21%, computer was 12%, and transportation/other sectors were 5%. We had 10 new customer wins during the quarter including four engineering, three NPI and three manufacturing customers. By industry 5 were networking/data communications, one was medical, two were industrial commercial and two were transportation/other. Two of these new customers represent potential top 10 customers as they ramp up over the next few quarters. However, it will have limited impact on our fiscal first quarter. We did see an increase in concentration from our top 10 of customers, which represented 52% of our business up from 48% last quarter. Siemens represent a 11% of sales this quarter and was our only customer over 10% of sales. Our top 10 customers in alphabetical order are Extreme Networks, GE, Juniper Networks, Powerwave, Sure, Siemens, and Unisys. Our revenues exposure to merging customers continue to decline as end market issues continue to impact these companies. For a several of these companies continue to receive funding and some are gaining traction in their end markets. Turning now to our guidance.

Based on the existing end market environment we currently expect sales for the first quarter of fiscal 2003 to be in a range of $205 to $215 million close to our break even level. Assuming these level of sales we would expect our diluted cash earnings per share before any non recurring charges or approximately $0.2 in loss and $0.2 in earnings. The unexpected softness in revenue is primarily related to weakness in industrial sector for the margin continue to be impacted by softness and engineering and overall capacity utilization. Despite our weak top line revenue we continue to generate positive cash flow our cash in short-term investments now total over $116 million and we have a little debt. We will continue investing in our global IC infrastructure to support the evolving customer requirements, which are predicated on agile manufacturing, supply chain transparencies, and global fulfillment. I will now turn the call over to Thomas B. Sabol our Chief Operating Officer.

Thanks Steve for the quarter close margins excluding non-recurring charges and goodwill amortization increased to 10.3% from 9.8% in our fiscal third quarter. However, operating margins declined from 1.9% to 0.8% excluding approximately $2.4 million in non-recurring pretax restructuring charges. These charges primarily related to the writedown of certain under utilized assets. Selling and administrative expenses were $19.3 million or 8.9% of the sales for the quarter largely due to the combination of the continued investment in our global IT infrastructure along with weak sales. We are focused on generating new business and controlling cost in order to expand margins. We are intensifying our sales efforts to expand existing relationships targeting end markets and customers that benefit from our product realization model as well. However, as Dean indicated we will continue to invest in initiatives that will drive the long-term competitiveness of the company. We expect to take a minimum of $2.5 million of additional pretax restructuring charges in the first fiscal quarter on 2003 related to the facility closures previously announced in May 2002 and from additional cost control actions. Turning now to the balance sheet. We saw continued improvement this quarter on asset management and we continue to strengthen and already strong balance sheet. Days and accounts receivable improved to 48 days compared to 49 days from a year ago. Inventory levels were down approximately $4 million compared to last quarter with annualized quarterly inventory turns improving to 8.1 turns compared to 7.6 turns last quarter and compared to 5.5 turns from fiscal Q4 of last year. We generated approximately $19 million in cash flow from operations during the quarter. As Dean indicated we now have over a $116 million in cash and short-term investment with limited debt and a debt-to-equity ratio of approximately 6% the lowest in the industry. Our off balance sheet financing associated with our $50 million asset securitiziation facility remains at approximately $17 million at September 30, 2002 reflecting no change from last quarter. Capital expenditure for the quarter was approximately $8 million and we expect fiscal 2003 capital expenditure to be approximately $25-30 million. Goodwill amortization for the quarter totalled $1.3 million and depreciation was approximately $8 million. Please note that this will be the last quarter that we will be amortizing goodwill. I will now turn the call back to Dean for some closing comments and then we will open it up for questions.

Thanks Tom. In closing the end market environment remains tough. Given our value added engineering services and manufacturing model and our global fulfillment capabilities we are well positioned in service are market niche. We are taking surgical action to rely our cash structure with demand without sacrificing service to our customers or ability to take advantage of strategic opportunities. We believe we can be patient and we will make the right long-term decisions for our customers and shareholders or being mindful of profitability in the short-term. We clearly have the balance sheet to aggressively execute on our business model and we remain committed to improve regardless of end market environment. We will now take questions. And please remember some of the statements made will be forward-looking statements and you should refer to our SEC fillings for a list of risks and uncertainties. Operator.

Thank you. We will now begin the question and answer session. Given the time allotted we will ask that you please limit your questions to one question and one follow up per person. If you have a question please press the 1 on our touchtone telephone. If your question has been answered and if you wish to be removed from the queue please press the pound sign. Your questions will be queued in the order that they are received. If you are using a speakerphone please pick up your handset before pressing the numbers. If you are unable to get your questions during this call please call Plexus investor office at 920-969-6160 after the conclusion of the call. Once again if there are any questions please press the 1 on your touchtone phone. We will take our first question from Scott Craig from Morgan Stanley. Please go ahead sir.

Hi Good morning guys. Can you help us a little bit on the gross margin line it looks a lot better than expected and then secondly with regards to the cost structure back in the December 2001 quarter you guys did around one penny on $200 million of sales I know you have added acquisition since then can you describe the trend of the break even point and where that might go going forward. Thanks.

Yes Scott with regards to the gross margin again we saw medical business being up you know the mix of business clearly helps during the current quarter along with the restructuring charges that we have done that have mainly been focused at the fixed cost side of the company clearly have enabled us to expand the margins here. With the regards to the second part of the question with regards to break even levels you are correct we added the MCMS acquisition which added the two sites in Asia and the site in Boise. Again at roughly around $205 million to $215 million basically would be with the restructuring charges we have done along with the addition of MCMS roughly are the current break even levels. We would expect those to go down slightly with the closing of plants the plant here in Neenah which is expected to close in February 2003.

Okay thanks.

We will take our next question from Brian White from Merrill Lynch. Please go ahead sir.

Dean, could you talk a little bit about SG&A that seemed little bit higher that expected investment in some of the software you discussed.

Brian I think it is exactly correct. Right now we feel that it is important for us to continue driving our investments in our IT infrastructure and in fact during the quarter we brought up our first full manufacturing site on the new ERP platform. So we now have one MPI facility and one manufacturing site running on the new platform. So we continue to invest heavily on that in that part of the company right now.

There has been a lot of discussion about the strength of Plexus's customer relationships with Juniper, (Inaudible), and Powerwave, how would you guys characterize these relationships today and what is a probability that two or more of these customers will no longer work with Plexus as you look at 12-18 months.

We has been asked to be careful about we say about all three of those customers, but we are saying is that they are customers today and they are very good customers and we are working very hard to make sure that they are going to customers for the long run. So we feel that we have good relationships with them and we are servicing them well and we have the capabilities to continue to service them in the future.

Okay. Thank you.

You are welcome

Thank you. We will take our next question from Lou Miscioscia from Lehman Brothers. Please go ahead sir.

Yes I guess if you could go back to SG&A and just give you us a thought where that might go for I guess the next quarter the next fiscal year, I actually though with some of the restructuring that might have been closure to flat and I obviously realize that you are investing in IT, but still you may be taking cost at other areas to offset that.

We did invest heavily in IT and we really feel that is adding probably a 150 basis points to the SG&A line at this point that it is not a little bit more than that. We decided to really kind of accelerate some of our activities with the IT infrastructure going forward. So we find to bring another plant up during the upcoming quarter and you can expect us to continue to add another plant into our new IT infrastructure here probably about one plant per quarter on a going forward. I think I will give it to Tom who will give you a little bit more fine detail and granularity on the SG&A numbers

Yeah. We would expect SG&A to come down in dollar terms in the next quarter as we are going to take some additional restructuring initiatives in addition to closing the closing here in February of the plant in Neenah. One other item with regards to we are also bringing up we did bring globally all of our materials site all of our site up on JD Edwards from a material standpoint. So we now have global access to all of our materials which also came up during the current quarter as well which also help drive the gross margins and we believe will help the gross margins going forward as well.

Okay then as a follow up could you just talk about December quarter seasonality, I mean usually there are many areas I do see some what of an uptake but I guess after looking at Selectron, Scott and looking at Selectron good sky and you have gotten for I guess flatten down quarter-to-quarter that will be surprising to me. Can you sort of just give me a view as you what you think is going on obviously now companies are weak, but still would have thought that we will see little bit more seasonality.

We would normally expect to see some seasonality as well but clearly things are not playing out the way they have historically here in the end markets. As we look at our different industry sectors we actually are seeing a little bit of strength in the telecom sector into the upcoming quarter as we begin to ramp some new programs to some of our existing customer base, but we see other that are not doing as well. The computer sector will be off it is unusual would have expected to see a little bit more strength in that sector giving our customer base there. Medical is going to be flat slightly down in the upcoming quarter and really does the big impact for us our industrial commercial segment which is doing a little bit of the repeat of the comparable quarter last year and we are seeing significant downturn in the industrial commercial segment primarily limited to the upcoming quarter with the returning to the little bit more growth in the following quarter. So we are seeing some unusual seasonalities things going on right now.

Okay Thank you.

Thank you. We will take our next question from Shawn Severson from Raymond James. Please go ahead.

Thank you. Good morning. Just could you collect keeping could you update on the number of engineers that you have today.

The engineering organization overall has deployed around 500 people and roughly about 400 or so engineers.

Okay. Just on the MTI side could you sort of add a little color the transit that you are seeing there in terms of the developing pipeline of new business I guess from the engineering standpoint over six months ago and three months ago versus today.

Certainly really we are two separate in engineering and MTI and the engineering organizations pipeline of opportunities for new product development continues to be weak. We see occasional cycles of strength but they don't seen to play out and any kind of a longer term trend. As a result of the weakness in the engineering world not driving as much new programs into our MTI and pro detecting organizations. We are also not seeing quite as much as of a development activity that we have seen historically from out customers engineering organizations driving into MTI as well. So we are still seeing substantial weakness in new product introductions in the rapid pro-detecting capability and we have a pipeline of business, but it is just not healthy as we need to be kind of profitability that we normally expect from both of those organizations.

That is probably one the highest levered parts of your business correct demand we are now working obviously those big swing factor on the margin.

Well certainly is particularly in engineering.

And that kind of bring it out my last question what point are you kind of say well this is an easy cost fixed but may be, I don't know if you call it damaging but changes the model of that going forward, but is there applying where you kind of saying that business does not get better then we have to cut that engineering group to buy 25% just a lot of cost savings would be available to you.

Well we have already gone through some reduction in size there the engineering organization over the course of the last 18 months or so and we believe right now that we downsized that organization as much as we are going to do and we believe that it is still critically important for us as the differentiated going forward and still brings a lot of value to our customers. So we are just really looking at the models in terms of the way that we provide services to customers and the way that we price and leverage engineering services to expand relationships to customers and we believe most of the changes there. And hopefully some help eventually in end market that will be fine there, but we really believe it is important continue to sustain that and it is critically important to the Plexus model going forward.

Great thank you.

Thank you. We will take our next question from [Steve Savich] from Goldman Sachs. Please go ahead sir.

Thanks good morning. I will just ask one question. Obviously you have a strong balance sheet which is great but you do have a share repurchase program out there. Can you just describe I guess of doing a share repurchase given the end market conditions and the fact that you need working capital once the next upturn happens.

Steve we currently have not repurchased any share of stock today on the repurchase plan, because of the hope that end markets would return and that we would need the cash not only for working capital but also for M&A activity as we continue to look into both Europe and Asia for opportunities to expand our regional product realization model. So we have not yet triggered that plan, but we do have that repurchase plan in place if we feel it is appropriate.

Okay and at this time you don't see it appropriate to start buying shares back.

Not necessarily you know it will really depend up on the stock price as well as on what we expect near term future needs to be for cash. Of course we do have a line of credit as well. So in addition to the cash on the balance sheet we do have access to our line of credit. Sure.

Okay. Thank you.

Thank you. We will take our next question from Michael Schneider from Robert W. Baird. Please go ahead.

Good morning. Just wondering seeing medical for the first time now was over 10% and for the year as well. I am wondering if there is new programs coming on or this is still the ultrasound ramp that we have talked about for a couple of quarters.

We continue to have a quite bit of success developing business with Siemens, but the current strength of the numbers with the medical and Siemens are certainly related to the ramp up of the problem that we have talked about over the last several quarter.

You have been able to penetrate other divisions of Siemens now beyond the medical unit.

We do business with several divisions of Siemens that primarily in the medical electronic sector.

Okay this is a follow up on the medical side. GE gave up the top position wondering if indeed there is some program transitions going on or if business is indeed soft in that market as well.

The GE business continues to be very soft. We were continued to develop our relationships there and are beginning to utilization of our Asian assets as well. So just see it is more really the near term strength of Siemens and it is any sort of any change with GE.

Okay. Thank you.

You are welcome.

Thank you. We will take our next question from John McManus from Needham and Company. Please go ahead.

Yes could you talk about the nature of the restructuring charges to be taking in the next quarter and how much will that over what the original $5 million you have indicated a few quarter back.

Of the $2.5 million minimum that we are expecting to take during the current quarter roughly $1.5 million of that relates to the previously announced closing of the Neenah site as we reduced the work force there over the quarter here as we transition programs into other Neenah were down to our Chicago facility. Approximately $1 million is additional restructuring charges associated with various actions to control cost both on the fixed cost side as well as on the SG&A side.

Can you be any more specific than that as far is $1 million enough there looking at what some of the target you have going forward would like to be.

Again we feel currently that is the right level at this point in time at a minimum to do doesn't mean that if end market and top line would remain at these levels that we would not do additional restructuring, but at this point in time we feel comfortable with the current plans.

One last question you indicated two customers which could bring could be possibly in the top 10 over the next two or three quarters. Could you tell us what industry those customers arise from the manufacturing customers?

They are both in the telecommunication and networking sector for us.

Thank you very much

Thank you. We will take our next question from Jim Savage from Thomas Weisel Partners. Please go ahead.

Good morning. You said that for the fourth calendar quarter you were seeing a little telecommunication strength that was existing customers with new programs or existing programs.

It was new program ramp with some of our existing customers that are giving us near term strength.

And are those major customers.

They are.

Okay, I guess that may answer some of the questions earlier about your major customers. In terms of your SG&A expenses the IT pro lease expenses part of it capitalized.

A portion of the IT is capitalized, but all of the training cost and deployment cost are expensed.

And how much of an impact did that has the expense to have that during the quarter in terms of the dollar impact on SG&A expense.

Again as Dean indicated it was an incremental about 1.5 basis points on the SG&A line.

1.5 basis points?

I am sorry 150 basis point [INAUDIBLE].

Okay and that will continue for how many quarters do you expect.

We would expect that to continue probably three to possibly four more quarters.

And with the weakness the overall weakness in business right now just for you and throughout the electronic sector are you seeing in terms of our competitive position are you seeing any significant pricing pressure and pressure from your customers to reduce prices more than normally.

Well I think with our existing customer base there is normally a process that we go on quarterly basis or we have business reviews with our customers and there is always pricing pressure. There is doesn't seem to be anything unusual there they states on competitive environment. So we need to be competitive on pricing and we continue to work with them and leverage our engineering capability to help drive pricing down with our existing customers. What you see it more significantly is that when you are competing for new business and we are seeing substantial competitiveness in the market place within the pricing of new programs.

Thank you very much.

You are welcome.

Thank you. We will take our next question from Roger Norberg from J.P. Morgan. Please go ahead.

Hi good morning. Could you tell us on the MTI engineering business segments of yours in terms of just looking at how that business is doing? The comparisons for that business on revenue on earnings about the same as the overall business right now or they materially better or materially worse when you look at the overall numbers.

Those would be right now materially worse that our overall numbers.

On the long side that you mentioned that you got a pretty big what sounds like a pretty big drop on you industrial commercial segments but you seemed to indicate that there was more of a one quarter phenomenon yet some visibility on that corresponding quarter after this. Could you be provide us some little bit of color what you see going on there you see problems with very specific customers or just an inventory situation with customers or end of life what that be look at your help was on that.

For us it really it is a couple of factors. One is there is some near term weakness with a couple of customers that are going to drive it down in the upcoming quarter and also the lack of anticipated strength seasonality strength that we would normally see in the quarter it is just not coming to fruition so we are going to see that quarter softer than we would normally anticipated.

Okay and just question on our new programs wins in terms of just looking at the overall size of the programs across the board. The average size of the programs about the same as in the past several quarters or other things that are materially bigger or smaller.

This is the one that we are talking about today are bigger than we would that normally seen on average.

More than 20% larger

Yes.

Okay thanks very much.

Thank you. We will take our next question from Chris Whitmore from Deutsche Banc. Please go ahead.

Good morning. Why don't they get a feel for utilization in the engineering group and your manufacturing operations?

Overall manufacturing operations is right now our capacity utilization has with the revenue decline has gone back around to 50% level. Engineering continues to hover at 70% may be a little softer and certain weakness it is fairly dynamic situation there in engineering, but it is certainly soft.

And it sounds like utilization will decline into Q4 is that correct in both segments.

Engineering utilization probably would be slightly off not substantially manufacturing will certainly be down with revenue decline.

Why aren't you being more aggressive restructuring with utilization heading below 50% in the manufacturing operations.

We are only giving guidance for a single quarter but we do have forecast the globe further into and we believe that at this point the facility locations and the customers that are in those facilities we need to continue to protect those customers and to maintain those assets and all the service to our customers. We are an early and we make much simpler decisions about what we are going to manufacture products, but with our service model the customers select sites and work with us to select sites and it is not an easy thing with just to shutdown a facility and maintain those customers and in fact we benefited from some of the may be more aggressive cutting that is gone in the industry where customers have been fairly frustrated and disillusioned with what has happened to them and it is come to Plexus. So that is not to say that if things will remain flat or go down there we wouldn't try to do some things here, but at this point we will we feel it is important to continue to service our customers and maintain those locations in order to do that.

Thank you.

You are welcome

Thank you. We will take our next question from Rob Stone from S.G. Cowen Securities. Please go ahead.

Good morning. I wonder if you can just summarize the headcount for the company overall and the other business units besides engineering as you already mentioned.

Headcounts for the company overall is correct me if I am wrong it is around 5700 or just short of 5700.

And they change quarter-to-quarter.

The number right now was down approximately 200 from the previous quarter.

Okay I think a question on gross margin. You talked about the connected business mix and how the mix to medical hope to in this quarter of course you are going to have somewhat lower utilization in the December quarter any comment on the impact on the mix and utilization of margins for that quarter right now.

With the reduction and the impact on capacity utilization gross margins were probably fall to somewhere around 8.5% plus or minus a certain percentage depending upon mix and the actual level of sales in the current quarter.

Thank you.

You are welcome.

Thank you. We will take our next question from Michael Walker from Credit Suisse First Boston. Please go ahead.

Only question I have is left is to what degree was the deterioration is kind of focus at the back end of the quarter did you pretty good result kind through August and July and they dropped off in September at all.

The July and August months were on plan and it was the September months that caused the short fall in the top line and of course impacted our ability on the bottom line.

Okay the second question I have is just one more on the industrial side. Is your perception on the lack of seasonality is that more of a macro thing or you thing it is a function of the type of products and program that you have in your industrial vertical.

We have diversification on industrial segment across many customers and we are seeing the decline. Some of that would have normally have frank seasonality we are seeing very little seasonality or potential decline in the upcoming quarters and others are just soft. I would to say you that the macro condition at least at this point.

Great thanks.

You are welcome.

We will take our next question from Chris Lippincott from McDonald Investments. Please go ahead.

Yeah just quick question you are talking about your gross margins going to about 8.5% next quarter. As I was wondering you could perhaps give me a little color on whether it is more a mixed issue, more of a utilization issue which is dropping it more.

It is a combination of capacity utilization being pressured on the engineering and MPI side of the business along with reduction in capacity utilization on the manufacturing side. That is clearly having a bigger impact on it than the mix.

Okay as far as the restructuring and pay back for your first quarter charges are you expecting any timing for the pay back and what kind of period you are looking for.

We would expect to get a pay back starting in the second quarter of our fiscal year so in our March quarter and we expect over time that along in combination with the closing of the building the Neenah site in February of somewhere around a $1 million plus in savings on a go forward basis when that plant is completely closed and these other restructurings are completely implemented.

Okay last question you would soon assume into the point that your top customers, is that more of a one quarter phenomenon or we so we expect that not to continue or we seeing programs shipping with GE that is designed timing basis what is happening with that.

Really Siemens is having moved up to just over 10% to 11% the really the strength of the business in particular program runs in the Siemens that we talked about and we would expect and our forecast indicate the level of business will continue. So as we see strength in other sectors in all other customers it is hard to say whether that will remain at this point at 11% level. I would expect not as we see all other sectors begin to recover here beyond the first fiscal quarter.

Well it sounds like perhaps GE programs may actually be able to recover some more.

Well the GE programs are really are not down there any substantial point. GE is still doing well still tracking according to what our expectations are so well Siemens is we just a strong program ramp and that is going to continue to generate good revenue for you going forward.

Great thanks.

You are welcome.

We will take our next question from Michael Morris from Salomon Smith Barney. Please go ahead.

Yes Thank you. Good morning everyone. Tom you mentioned the pay back for your restructuring initiatives and I wondered if you had an assumption on end markets in connection with the pay back in other words are you assuming sort of flattish end market flat revenues for Plexus for flat with an upward by us is there an assumption in your work there.

Clearly we would expect the number basically to be at flat revenue not necessarily flat revenue say at the break even level or may be more like at the previous expectation of saying between $225 million to $230 million on the top line.

And then it sounds like every quarter to had a really good track record of new customer wins and it seems like you are penetrating existing accounts at satisfactory plus kind of rate. How would you characterize the revenues associated with the new wins compared to like a year ago, I mean is it developing any faster is that developing slower. You think there is more variability in it today than it was 90 days ago how should we look at those trends.

I don't think there has been a substantial trends here in the last 12 months the business wins still are slow and developing. If they are new program wins the ramps are slow and the customers are very cautious about building inventory in the pipeline and business transitions between industry competitors also occur slowly as inventory numbers carefully worked at the prior suppliers. So the whole process is very lethargic.

Okay. Let me just ask one quick follow up to that being. It sounds as though you are not being affected by share shifts in the current quarter and from your last comment I take it you believe your customers inventories are pretty well under control, so this is a pretty pure demand statements. Plexus stands on the top line of the current quarter. Is that fair to say.

That is fair to say and that is more of reason why we continue to focus so heavily on our IT infrastructures. We want to make sure that we have a very responsive system to be to respond quickly to manufacturing demand changes.

Great. Thank you very much

Thank you. We will take our next question from Daniel Grosbear from SG Cowen. Please go ahead.

Good morning everyone. Just I want if you guys could talk about about differences in between what is controlling your business in the US and in Asia and I know you talked about utilization before, I just wonder you could make a difference in between the two.

If I understood your question your are asking kind of a comparative on the business conditions here and globally, we would say that the European business which has primarily weighted heavier in the industrial commercial sector has held up pretty well up until recently. We are seeing some softness there in the industrial segment and commercial segment in Europe although it is not a substantial problem for us. It is just some softness that we are seeing in the near term. With Asia the locations over there continue to be very attractive to our customers. We are wining new programs because of those facilities the programs will ramp initially in those facilities. We are also seeing some migration of select product that are moving over to those locations as well as preparation for those locations to service in end markets in Asia. So we would expect to see the percent of the revenue growth in our portfolio business in Asia through the course of upcoming year.

Okay on the January quarter SG&A last quarter you guys had a charge for reserves on SG&A where there is something of that nature in this current quarter or not.

No there were no significant charges before reserves.

Okay. Thank you.

Thank you. We will take our next question from Scott Robertson from Investype. Please go ahead.

I just wondered if you could briefly comment as you start to move to see more revenue transition over to the CMS acquisition. How are your tax rates be going forward most particularly in the next quarter and then trending out over the next year.

We would expect with both the Malaysia and China sites of course to having tax holidays that as our business in Asia grows than our overall tax rate would come down. Of course at a break-even level you know it gets difficult assuming that there would be improved profitability we would over time expect our overall rate to in the near terms let us say fall to somewhere around 37-38% with ultimately migrating down to approximately around the 35% as you are become say 15-20% of our overall sales level.

Okay great. Thank you.

Thank you. We will take our next question from Tony Boase from A.G. Edwards. Please go ahead.

Thank you. On the IT expenditures are you experiencing some cost overruns there.

Well I think the program has been tracking very well to our plan. We took a very experienced project plans internally to drive that program-. We also have some very new CIO who came to us roughly about a year or so. He has had a lot of experience in putting in pieces themselves. That part is attracting very very well I am very satisfied with the progress that we are making.

I guess I don't remember much in the way of discussion last quarter about a major IT initiative. Am I wrong in that.

We have mentioned the IT initiative and stay consistently over the last several calls I don't think it has gotten quite as much tension as it has during today call certainly, but I think we are just beginning to talk about little bit more aggressively now because we beginning to bring manufacturing sites up on the new system.

And as far as utilization goes what is to say about your business model if you can close down some under utilized facilities because some customers might be upset with you if you do that.

Without that we cant is just the question of working with the customers by doing a little more customer friendly fashion as that becomes the desired end result that we are after. Right now we have business in all of activities as we would prefer not to take that action at this point.

Tony one thing I would like to add is again we did not go out and by a lot of OEM facilities all over the world and all over the country. Everyone of our acquisitions that we made has been strategic from a customer standpoint and from a technology standpoint. We feel we have a different model than the tier ones do. We are 70% of their business need to be built overseas. We have customers that would need an attempt to have their products overseas. And we think in order to close sites here in the short-term because of near term issue on the top line and then needing to bring that capacity back on here say n 12-18 months or what ever the timeframe might be, would be also grossly inefficient and ineffective and also very costly to the bottom line on ramping to pack up. So I don't want to necessarily get the feeling that we are held hostage to customers per se but in our model and our acquisition strategy has been significantly different that the tier ones.

I agree with every thing that you have just said except isn't there a kind of a new reality out there of what the size of the certain markets are specifically telecomm and maybe in computer and even if you took another 25% manufacturing capacity offline it would seem to me that you would have more than enough to service your customers.

Tony I guess that is your view. I guess our view is that we believe that there is still significant opportunity for growth in companies that have not outsourced today. We have a major initiative drilling for those types of opportunities as you know 85% of the manufacturing is still done internally and we believe that short-term decisions could potentially impact our ability to grow our model on a long-term. That is the step we are taking at this point.

Thank you.

Our next question from Lou Miscioscia for Lehman Brothers. Please go ahead sir.

Great. Quite a lot around tripping here. The question I guess is on a couple of customers some of the feedback I get is that they are getting better service let us from Plexus but then better pricing from some of the bigger guys. So can you just review the eternal battle price or service what do think has shaken out for some of your customers and do you come down to the pricing that some of the other guys are giving.

Well I think on the pricing issue I think it has driven from a competitive standpoint. We can be very competitive on pricing and there has been this issue about whether or not a company of our size can by materials as comparatively is the larger EMS players and we feel that we cannot and we have gone head to head on a number of programs and have been very competitive on pricing. We are also doing a good job what I think education our customers in terms of the total cost solution which for us many times means that we are going to provide several blended performing model between regional manufacturing close to the customers to manage rapid change in demand as well as manufacturing in a lower cost country and provide them kind of a stable cost competitive solution on an overall blended pricing model. We feel that we can very competitive and we think that on total cost basis with offering them flexibility and high level of quality and high levels of service. We can be competitive in the industry and its proving out.

Okay can you go into some more details, I think you mentioned that bigger wins that you're bidding on bigger programs right now and just try to drill into that a little bit more.

There is a number of bigger programs both [INAUDIBLE] recently which were just started up being competitive in the industry these programs work and sought after by some of our bigger competitors and we also have a pipeline of other opportunities that are significant in size. There are opportunities from customers that may not have significantly outsourced historically. So we have a very active business development pipeline there working with targeted companies to help them begin to change their outsourcing models.

Can you give some size in that range you were talking about $50 million, $100 million, and $0.5 billion programs.

The size of the programs bracket any where from $20 million on up to $80 million.

Okay and then one final question I guess you also mentioned that some other things are being the programs are little bit more lethargic is that they are transferring over from somebody else it is sticky or because it is [INAUDIBLE] taking so long to turn.

It is a combination of both of those.

Okay. Thank you.

You are welcome.

Thank you. We will take our next question from Chris Whitmore from Deutsche Banc. Please go ahead.

Thanks just follow up question here. The past couple of quarters you have taken some bank debt reserves did you take any of this quarter.

Nothing significant this quarter.

Do you anticipate taking any during the next several quarters.

No we do not.

Thanks.

Thank you. We will take our next question from Ellen Chae from Prudential Securities. Please go ahead.

Can you just give us a sense of what you think your cash generation will be for the next quarter or where you think you can get your cash conversions [INAUDIBLE].

We have continued in total initiative to improve inventory turns to a minimum of one turn a year so our goal for next year at the fourth quarter would be at nine turns for the fourth quarter of next year. Our days in AR have hovered around the 48-52 day range. We are kind of comfortable in that range of days. We like that to be little bit lower, but in today's kind of current environment we think that is a reasonable range for AR so improvement in the cash cycle days is going to come from overall improvement of inventory turns going forward. That is our internal target. With regards to cash flow at those levels again assuming that top line would again go back to the level of a quarter or so ago. We would expect to be able to generate free cash flow on a go forward basis based on improvement in inventory turns.

What do you think your capital expenditure will be in the next year.

Our capital expenditure range right now for 2003 is between $25 million and $30 million.

Great. Thank you.

Thank you. At this time if you do have any additional questions please the number 1 on your touchtone phone and press pound to withdraw your question. At this time we have no further questions.

Okay thanks again for joining us and for your continued support of Plexus. If you were unable to get your questions during the call please call Kristen his contact information is included on the press release. You may now disconnect.