Plexus Corp (PLXS) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to today's conference call to review Plexus Corporations fiscal 2003 first quarter. At this time all participants are in a listen-only mode. After a brief discussion by management, we will open the conference call for questioning. The conference call is scheduled to last approximately 60 minutes. I would now like to turn the call over to the Director of Investor Relations, Kristian Talvitie.

Good morning and thank you 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 are 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 a list of major factors that could cause actual results to differ materially from those projected, please refer to the company's periodic SEC filing.

I would also like to quickly review our upcoming conference schedule. We will be presenting at the Thomas Weisel conference in San Francisco on February 5th. The RBC conference in Whistler on February 20th. The Goldman Sachs conference in Palm Springs on February 24, the RW Baird conference in New York on February 27 and the Raymond James conference in Orlando on March 3. Please contact the repsective firms sales staff to arrange a one-on-one meeting regarding any of those conferences. I will now turn the conference over to Dean Foate, President and CEO.

Thank you. With me today is Tom Sabal our Chief Operating Officer and Gordon Bitter, our CFO.

This morning we announced sales of $205 million with a proforma APS loss of 2 cents. These results are consistent with what we said on September 13th. Our guidance for the next quarter remain at $190 to $200 million for the top line, with an EPS loss of 2 to 5 cent before any noncurring charges. As mentioned in December, the guidance for our fiscal second quarter reflects Araway's decision to transition the bulk of its business to a nonflexibility in Asia. As well as near term weakness in virtually of all our industry sectors. Although Tom will talk more about our customers and industry sectors, I will address our relationship with Juniper network. We now know definitively where we stand with this customer. We are authorized to say that we have retained our existing business which is quickly moving to a configurative order, direct fulfillment model. Juniper is very pleased with the service we provice them and we are both commited to building a long-term relationship and partnership. This morning, Gordon will spend time detailing and clarifying restructuring charges and accounting charges we took during the quarter. The short of it, is that we took $60 million in charges during the quarter. This includes $31.8 million in restructuring charges and a $28.2 million good will charge as a result of adopting Phase 142. The net result of the restructuring charge is that we have reduced our overall capacity and effected approximately $5 million per quarter in pre-tax savings once all the actions are complete. While minimally painful in the near term, ultimately this is a good thing given the current market reality.

The industry remains very competitive and we certainly have our challenges cut out for us. We have strength in the management team with Gordon Bitter our new CFO and Mike McGuire, our new VP of Sales and Business Development. Not only does this add seasoned leadership and focus to critical business fundamentals, it creates band width for the rest of our leadership team to focus on customers and our strategic initiatives.

As we look forward to 2003, our priorities are number one, return to profitability. A combination of revenue and cost management in addition to efficient and flawless execution will drive profitability improvement. Number two, grow the top line with a priority on organic growth. Our focus is on gain shares and adding strategic customers to our key sectors. Additionally, we will penetrate our customer base with our value-added services to strengthen relationships. Number three, continue to prudently invest in strategic initiatives that enhance our differentiated service offering. One example is our global IT platform, which is a fundamental enabler of our scalable, agile manufacturing model. In addition, the common platform will affect expense reductions and improvement in key metrics such as inventory turns and cash cycle days. And while focusing on our priorities, we will not take our eye off our passion for customer service excellence, a key market differentiator for Plexus. With that, I will turn it over to Gordon.

This morning I will break my discussion into three parts, first I will discuss the quarter's results and hopefully clarify the charges we took, and wrap-up with a brief overview of our balance sheet. Turning first to the current quarter's operation, as Dean mentioned, sales for the first fiscal quarter were $205 million. We reported a proforma loss of 2 cents per share which excludes the restructuring charges and the effects of adopting Phase 142 which relates to good will and other intangible assets. Gross margins were 7.6% of revenues, slightly below the 7.7% earned in the first quarter of the prior year and below the 10.3% gross margin earned in the last quarter. The lower sequential gross margin reflects lower revenues and our relatively high operating leverage. Selling and administrative expense for the quarter was $16.8 million or 8.2% of sales. While these numbers are higher than the prior year's first quarter, they are much better than last quarters expense levels when much higher expenditures for IT programs and marketing expansion, pushed SG&A to $19.3 million or 8.9% of net sales.

We will continue to press for productivity improvements to moderate SG&A expense while maintaining the roll out of a standard IT platform, in each of our manufacturing sites. You may recall that we announced on December 13th a number of actions to reduce expense levels and improve efficiencies. Although the most important action that we announced was the closure of the San Diego, California facility, this action was complimented by additional building consolidations and head count reductions in the U.K., Seattle and at several other smaller sites. As we implement these actions throughout fiscal 2003, we expect to see improvements in both our gross and operating margins. Let me shift gears now and talk about the $31.8 million restructuring charges we took during the first quarter. Please note that $31.8 million restructuring charge does not include the $14.8 million initial impairment of San Diego's good will. The accounting rules require that that component of the charge has to be included in the cumulative effect of the change in accounting for good will, which I will discuss in a few minutes. So the total amount of charges related to the restructuring is $46.6 million, that is $31.8 million of restructuring charges that are on the income statement, and a $14.8 million component of total charge taken as an effect in the change of accounting. Total restructuring charge of $46.6 million is less than the $50 million low end of the range we had originally estimated. Our subsequent reviews and analysis of the cost to exit, sublease of the facilities in San Diego and Seattle were much lower than our earlier estimates. Accordingly, we are now anticipating cash charges for the restructuring, only $14.9 million. This compares very favorably with our mid December estimate of cash charges of between $20 and $30 million dollars. I would remind you that the details of the restructuring charges are included in the proforma income statement which are provided with the press release. The other charge for the quarter is for the initial impairment of good will arising from the adoption of Phase 142, effective October 1, 2002. This charge is reported as the cumulative effect of a change in accounting for good will. The charge is $28.2 million pre-tax or $23.5 million net of taxes. Remember, that the initial impairment of good will associated with San Diego, $14.8 million, as well as similar write-offs associated with Mexico and the E 2 E acquisition are included in this account.

You can see from the balance sheet good will has been reduced by $33.4 million or roughly half of the prior year-end balance of $65 million. And finally, reviewing the balance sheet very quickly. DSL and accounts receivable were 47 days which compares favorably to the 48 days at the year-end '02. Inventory turnover declined slightly from the prior quarter, 8.1 times to 7.7 times. As a result of the start of the production for several new customers and higher finished goods inventory held at the request of an important customer to meet higher expected demand. Capital expenditures for the quarter, approximately $10.7 million. The most significant capital expenditures were for hardware and software to support the IT initiatives which Tom will address in his comments. Cash and short term investments declined to $103.1 million from $116.4 at year end. Although debt remained at approximately the year-end level of $27 million, we reduced our utilization of offbalance sheets, ABS facility from $16.6 million at year end to $12.9 million at the end of December. Thank you for your time. Let me turn the phone over to Tom for his comments.

Thank you, Gordon. Hello, everyone, I will take a few minutes to update on you operational issues. First, with regards to our restructuring activities, we expect them to be completed by the end of our 3rd fiscal quarter and result in up to $20 million of annualized savings. A portion of the savings will occur in each of the next two quarters and we should receive the full benefit in our 4th fiscal quarter. The effect of the current ongoing restructuring activities will result in our manufacturing square footage being reduced from approximately 1.7 million square feet to 1.5 million. In addition, these actions will provide us with a better balance global footprint in over 25% of our manufacturing square footage will be in low-cost areas. This will also result in our capacity to utilization improving just below 50% for the current quarter, to just 55% to 57% in our 4th fiscal quarter even if revenues remain flat. Our head count is expected to decrease from approximately 5,500 employees today to around 5,000 by the end of our 3rd fiscal quarter.

Our engineering organization continues to operate at around 70% of capacity. During the quarter we opened a PCB design center in our Malaysia facility. And in addition, we are looking to add test development capabilities to this site as well. We believe this will help us support the 24/7 business model that our OEM customers are moving towards. Overall, our engineering pipeline is looking a little better, but the OEM decision making process remains lethargic.

I would now like to talk about two areas where we are investing in the company's future. Our global IT platform and sales and new business development. As most of you know, we are rolling out an integrated global IT platform which includes the implementation of J.D. Edwards' ERP system along with key support systems that focus on inventory management, paperless shop floor and documentation control. We currently have three manufacturing sites live on our J.D. Edwards platform and we continue to plan for one additional site per quarter for fiscal 2003. By the end of our fiscal year, over 50% of our revenue will be running through J.D. Edwards.

We also currently expect to be fully integrated worldwide by the end of calendar 2004. We believe that we will be the first EMS player to offer a truly global integrated solution to OEM's. We believe this platform provides for operating efficiencies and cost savings by eliminating duplicate systems and inefficiencies in areas such as inventory management and accounting and IT support. In addition, we are already seeing the benefits of this initiative in recent new customer wins and in the pipeline of activity as new potential customers are evaluating our global IT solution.

Finally, I wanted to talk a little bit about our new business development activities. As Dean mentioned, we recently announced that Mike McGuire has joined our team as VP of Sales and New Business Development. Mike previously headed up sales for New Horizons, a distributor of electronic components and he has over 20 years of sales leadership experience. We are also focusing our sales organization to attain growth in each of our key sectors. We are targeting the opportunities that fit our model, which is designed to address complex, high mix, high reliability products. In addition, we are committed to growing market share with our current customer base.

During the quarter, we won four key opportunities with new manufacturing customers in the networking data com and medical sectors. We won a networking data com customer away from two tier one competitors. In addition, we won two new engineering programs with two significant new medical device companies. In addition to the Juniper news that Dean shared with you earlier, we have also won a number of new programs with other existing customers that should ramp over the next few quarters. Finally, we continue to win smaller opportunities with new customers that we believe over time will help provide the company with future organic growth. So while end market demand continues to impact revenue levels, we would anticipate organic sales growth to accelerate in the second half of calendar 2003, as these new opportunities and programs continue to ramp. With that, I would like to open the call up for questions.

Yes, at this time, if you would like to register your site for question, please press the number one. Star one. We will now begin the question-and-answer session. Given the time allotted, we ask that you limit your questions to one question and one follow-up per person. You will hear an acknowledgement that you have been placed in the cue. If your question has been answered and you wish to be removed from the cue. Please press the pound sign. Your questions will be cued in the order they are received. If you are using a speaker phone, please pick up the handset before pressing the numbers. If we are unable to get your question during this call, please call the Plexus Investor Relations office at 920-969-6160. After the conclusion of the call. Once again, if there are any questions, please press the star and one on your touch-tone phone now. We will take our first question from Scott Craig with Morgan Stanley.

Good morning, guys. Can you just quickly go over the Juniper with the change in dynamics where you go into CTO and some fullfillment and stuff like that. Are we going to see a change in any impact on revenues and profitability. Can you provide the capacity utilization and the NPI segment and manufacturing segment individually? Thanks.

Yeah, let me address the Juniper news here a little bit. We are trying to be very careful about what we say relative to this customer. They have authorized us to make the statement we already made this morning. Certainly, we -- it's an opportunity for more value to add as we move toward the configure, built to order model. We also have an impact on our material position as we move to a supply model for them on materials. In terms of capacity utilization, I'll let Tom address that.

With regards to capacity utilization and our NPI-related facilities versus manufacturing, overall as indicated, we're just under 50%. Our NPI facilities are slightly below that number, probably in the 40 to 45% range, with the manufacturing being slightly above 60%.

All right. I'll keep a chart. Thanks.

We will take the next question from Brian White with Merrill lynch. Please go ahead.

It's been about a year now since you guys have acquired the Malaysia and China operations, how many customers have you added over the past year at these facilities and has this business actually grown in terms of sales?

Well, it has been over a year, and I think that what we've done is actually taken and grown share a little bit with existing customers at those sites and we've also begun to transition some of our existing North American customers, a few of the programs that make sense in the marketplace to those sites. So I won't identify the specific number of total customers at the site, but certainly we have some medical product programs over there, we have gained share with networking and data com and programs that have grown in our Asian facilities and an industrial products customer that we're working to move some of their product manufacturing to our Asia facilities as well.

In addition, one of the new customer wins that we announced this quarter will be transitioned from the customer's internal location here in the U.S. directly over to Malaysia and one of the medical customer wins announced this quarter will be built partially here in the U.S. and in Asia. So we feel like now that the situation there has -- I don't want to say stabilized, but because we've now had this in our pocket to be able to be utilized on a new business development front, we're starting to see traction with regards to new customer wins for Asia.

Just one quick follow-up on Juniper, some of this business -- is this business that Unispeer core business or Juniper core business?

The business we announced today is the existing Unispeer business product line.

Okay. Thanks a lot.

Thank you.

Our next question is from the site of Louis Masocia from Lehman Brothers, please go ahead.

Just a follow-up on Juniper, it's not an extension into anything what Juniper is doing, but more the customer you had before that was acquired by them?

All we're talking about today is a retention of the customer that we had already. And, of course, we're working very hard and we'll hope that we are able to gain share over time. But we don't have any announcements related to that.

Okay. Great. I guess if you could just look at on the calendar year, what are you hearing from your different customers, the medical, the industrial and all the data com, if you could give us some feedback as to what -- maybe what those expectations are.

Well, perhaps the best way to do it is to give you a rundown on sector by sector how we see it, and give you a little bit of color on what's going on here in the industry. Medical obviously was up strong this quarter for us, and it was driven primarily by near term uptick in demand. It was a limited term demand, uptick from a very large customer in that sector so we had a very strong quarter in medical, and as we look further into the year, we don't expect it to be as strong in the 2nd quarter because of the uptick going away, and there's a bit of inventory with one medical customer that has to be worked through. We do expect medical to trend up in the 2nd half, and we expect a growth sector for us again in the coming year. Networking and data com was up in the current quarter a little under 2%, which was encouraging strength and really was a result of share gains and new program ramps. We expect a weaker Q2 as we transition power wave out but current forecasts indicate a positive trend in the second half as we ramp new programs and as we look at our outlook, we see a stronger quarter-by-quarter numbers here as we look out into networking. We would expect it to have a growth trend as the year progresses. Of course, many of you know it's a very volatile state and we're being careful not to build too much in for that. Deutch commercial is down 34% in the current quarter. We expected it to decline. It declined a little sharper than projected. We're seeing continued weakness with many customers. Just to give you a sense of what customers are saying there, we have a long list of customers in the marketplace, and look at some of the bigger ones we have there, six in particular, all in unrelated end markets, all had softness in the quarter and we don't see any real significant improvement in customer forecast as we look out through the year and expect it to remain relatively flat with the current quarter at this point. Computing also declined as expected, a little under 12%. Strength with one customer was really offset by a decline in a list of others. We expect improvement here -- there in Q2, but for the remainder of the year there's no real trend, it's quarter-by-quarter. And transportation, our smallest sector is up just slightly in the current quarter. We are forecasting incremental improvement in that smaller sector for us throughout the year.

Great. That's actually helpful. Last question is that, you know, on occasion, I've done smaller deals where you have purchased plants have gotten business and customers, do you see any business coming in, I guess, in this calendar year that way or do you think the majority of the business will come in from organic wins.

Clearly as I stated, our goal here in revenue growth is a focus very strongly on getting organic growth, and I've got a lot of confidence that we're going to be successful there, particularly as we build competency here in sales and business development also under the leadership of Mike McGuire. Also we have a process where we look at customers or opportunities with OEM's that have not strategically commited to outsourcing yet. We are targeting those kinds of companies and working on executive level discussions to convince them to move their manufacturing out. Hopefully we can do that without acquiring any assets and we can just move the business.

Thank you.

You're welcome.

Our next question is from Alex Blanton with Ingalls and Snyder. Go ahead.

I'm interested in the comment you made earlier about the OEM decision making process. I think you said the pipeline was okay, but the decision making process was lethargic. Could you expand on that, and perhaps give us some reasons for that addition?

Sure. The discussion point around that was associated with the engineering pipeline specifically. What we're seeing there is a couple of things. One, R&D budgets at pretty much most of our customers are being scrutinized by the OEMs because of the overall economic environment as well as the political environment out there. In that regard, customers are more likely to have available resources internally that may be available for them to be utilized in their R&D activities. So that along with the overall softness in the R&D spend appears to be resulting in longer decision making cycles by the OEM's to outsource engineering to companies like Plexus.

Okay. And could you expand then into the rest of your markets as to -- you're focusing on, for example, organic opportunities rather than asset purchases, and what is the decision making process there and how does that look?

Well, on the manufacturing side, again, we continue to see OEM's taking longer to make decisions with regard to the selection of the EMS companies. We believe in the past that a number of decisions were made purely on the basis of who was willing to pay the most for the assets, instead of who was really the best fit from a needs standpoint and from a capabilities standpoint from the EMS companies. And we along with, you know, all of our competitors have commented the decision making cycle, you know, has extended here over the last 12 to 18 months. We continue to see that, but again, based on the wins we announced this past quarter, we do see that there are a number of opportunities in the pipeline that we believe, along with the ones we've already announced will result in organic growth for us in calendar 2003.

Thank you. And do you sense that this greater scrutiny and -- on who to use is truly the desire for better performance from the supplier? Or is it simply because the OEM's are not -- are less eager to outsource the services at this time?

Well, what I would suggest is that we feel that even though the process is long and can be painful, because of the time it takes, we feel that the extra diligence that's put into the process, when the OEM customers really take a good look at their program, and who best fits their program, that the longer the process takes, typically the better the diligence that's done. And quite frankly, that tends to be to our advantage. Particularly for programs that really fit nicely into our niche. So when the process has taken long, we feel we have competed very, very well. It's related to trying to make sure they get the best fit for their programs and they're going to get a company that's going to execute for them and deliver to their fulfillment model.

Thank you.

You're welcome.

Our next question is from the site of Joseph Wolf with UBS Warburg.

I have one question, one quick follow-up. You talked about business opportunities by end market, I know in November you spoke of Europe as an untapped opportunity, and there does seem to be strength in some of the networking companies in Europe, could you give us an update on that geography as it plays out into the 2003 into your plans for growth. And just a quick follow-up for Gordon, the inventories built up and it was attributed to some new builds and holding some finished goods for customers, should we be looking at inventory staying it's that kind of level for the next couple quarters or how should we be thinking about that.

With regards to the question on Europe, our Europe business is mainly industrial. Actually, north of 75% of it is industrial. The remind -- the remainder is mainly medical with a limited amount of teleconference, which has helped us prior to this last couple quarters or so. And clearly the industrial business in Europe has been weakened and is part of the reason for the dropoff in business. So with regards to the telecom in Europe, we would say that we're -- you know, with our customer base, we're really not seeing much if any strength there in Europe. Our strength would be in their ability to sell through into Asia and North America.

Joseph, regarding your question, on inventory, it's a little difficult to be precise as we know, the inventories were up this quarter because of really the start-up of production for some new customers. I think, you know, for financial modeling purposes, you can assume that our inventory turnovers will remain in the high 7.78, perhaps getting into the 8 point turnovers.

Thank you.

Our next question is from the site of Michael Schneider with Robert W.Baird.

You mentioned there were six customers in particular that were weak, were all six of those concentrated in the European geography?

No, they were not. Though 2 of those 6 were European customers that were down pretty significantly. The others were all U.S.-based.

Okay. And then just secondly, on the engineering side, could you give us a sense of how that market stands now in terms of the bigger tier one companies using engineering as a loss leader and if you've been able to maintain your hourly rates and use it as a profit center.

Yeah. I'll answer that. I think, really, when I talk to Mike Persagan, who is the president of that organization, he really sees the competition as more internal. Yet we don't really see a lot of competitive bidding in the engineering space. So we are able to still sell our services -- we have been able to use our rates as an effort to try to improve demand there. Really it does not have a significant impact on demand. We are creative with other models where we may build the NRE into the current model cost. Those are models we're exploring with customers. For the most part, the bulk of the work is still either on a material-time basis or payout on a fixed cost basis. That model still holds up. So we don't see giveaway or cost-cutting as an overwhelming trend here that is taking business away from plexus.

The labor force will go from 5500 to 5,000 roughly, is the engineering organization being reduced accordingly?

Currently at this time the engineering organization is not having any significant reductions here based on the current restructuring that we have going on.

Thank you.

We'll take our next question from the site of Ellen Chay with Prudential Securities.

Can you give us an update on what you think your Cap Ex will be for this year.

It was nearly $11 million in Q1. We don't expect that rate to continue. I would expect Cap Ex to be 28 to 32, something like that.

And then the -- going back to Juniper again, I just want to be clear that you are going to remain the sole source supplier for the UNISPEER program, correct?

That's correct.

Can you give us a sense of the new programs this quarter. If you look into the pipeline, could you give us some characterization of what it looks like, those opportunities.

of new opportunities that we've won? Or how the pipeline looks for new opportunities?

How the pipeline looks for new opportunities.

The pipeline for new opportunities actually looks good, and continues to look better. You know, clearly having Mike McGuire on board, even though he's been on board for just a little bit over a month clearly with his knowledge of the industry being at a, you know, one of the distributors previously, he has a good handle on where business is, where business is not being outsourced. And in addition, the movement to being much more sector focused had really started prior to Mike being brought on board. And that is clearly starting to reap rewards specifically as shown on the call here in both engineering and in networking data com opportunities.

Do you expect the pace of outsourcing this year to equal pace last year or exceed it?

Well, on the new customer -- significant new customer wins, you know, three of those were customers that had not outsourced previously, where one was taking share away from a couple tier ones. So clearly we think that that gives some type of indication that there are a number of companies out there that have not outsourced previously that are looking to -- that are looking to outsource.

Thank you.

Our next question is from the site of Keith Dunn with RBC Capitol Markets

Thank you, good morning. Can you give us a couple questions? Can you give us an indication of what it would do to your revenues if Juniper didn't change any volume. Same kind of units, but you're going to have more material costs because you're going to do more of this configured order. What would that do to your revenues if their units didn't change at this level.

Due to Juniper being a public company and, you know, really them being less than 10% of revenue, that would be a question that we really can't provide any color on. We would expect, though, that that would provide for upside to the revenue numbers going forward with Juniper.

The implication of that, is it a standard 10%?

Again, you guys know the product we're doing. We really can't give, you know -- really can't give that kind of information out with regards to customers.

Okay. Let me move on to GE. They had a nice surge. Is that reflecting a seasonal pattern, or is it some new wins? Is it sustainable.

It's a seasonal pattern at this point.

That's what I thought. My last comment is, you know, with the new accounting rules and everything else. It's harder to record all your charges, what you might want in terms of restructuring. Have we seen all the charges you're anticipating now or are we anticipating some charges related to restructuring?

We really can't comment any more specifically, Keith, if we anticipate new charges, we would record them in announcements, so what we've recorded is what we plan to do at this time.

Okay. Great, thanks very much.

Our next question is from the site of Todd Copeland with CIBC World Markets.

Good morning, everyone. Going back to the engineering question, are you seeing any of the internal engineering departments actually pull business in because they have less to do in this environment beyond extending the decisions that you spoke about?

Clearly, that is a portion of what's causing the softness is some business that was originally outsourced, being pulled back in, or items that we would have thought would have been outsourced where the decision was made to keep it internal.

And so if you look at the types of projects that are in your pipeline, you anticipate that that's going to put pressure on the engineering group in terms of pulling projects in until you start to see an uptick in networking and telecom, et cetera.

I think we're seeing real good proposals on it, in fact quite a bit of improvement. We're just being a little cautious here because the rate continues to be -- you know, it's a slow process. I would also say we tend to focus a lot on engineering, new product developments and design services. But two other areas of engineering services for us are the test -- equipment development services and both here in North America and in the U.K. we have a very strong pipeline for test equipment development as -- to support new manufacturing programs. Also, we're developing a test capability in Malaysa, and hope to provide kind of a blended cost level here to North American customers for test development. PCB Design services, the demand is slightly up. We now have 6 PCB design resources trained and working on programs in Malaysia, leveraging our worldwide EDA agreement. We feel that's going to be an attractive service to our North American customers from a cost model standpoint and by the 24/7 operation.

If we get a little uptick of revenue in June and with your cost cutting, you'll probably be relatively close to break even. So if we look beyond June and assume some sort of revenue ramp, what kind of gross margins and SG&A in either absolute dollars or percentage of revenue are realistic over the following four quarters. Thanks very much.

I'm not sure how to address that without giving more specific guidance than we're prepared to do right now. I would not look for SG&A to spike. I would expect SG&A to kind of bounce along roughly where it is in Q1. I think you can exercise your own models to come through with the gross margins.

Our next question is from the site of Michael Morris with Solomon Smith Barney. Please state your question.

Thank you. Good morning, everybody. Tom, I want to follow-up on a comment that you had made, which I think you said organic sales growth, based on your pipeline what you see today should accelerate through calendar '03. I just want to be careful we understand what you meant by the phrase accelerate. If that meant on a sequential basis. The year-over-year comparisons still look on the negative side. I wanted to ask if you could parse that out a little more for us.

Clearly that was meant with regards to a sequential basis. You know, based on the announced new program wins this quarter as well as last quarter, knowing that typically these programs can take anywhere from, you know, 3 to 6 to 9 months to ultimately get ramped to full volume levels, that even with that market demand we would expect based on the opportunities with these new program wins that have been announced that sales would accelerate on a sequential basis.

And so I know you're not really giving an outlook beyond the current quarter, but the reasonable inference from that is that the March quarter is on target for sales?

Yes.

Let me ask a follow-up question on the configurative order. I don't want to touch on any particular customer, I don't think that's as relevant as the move to that kind of model. If you could talk about the percentage of sales, your current sales that you're doing on a con figured order basis, if you could share that with us, your ability to scale that kind of offering? And really, what are the challenges? And I assume that IT is part of that, as you put in place Plexus.

Well, certainly, it's a capability we've had for a number of years, we just haven't tracked it necessarily as a specific percentage of revenues, we've provided a configurative order to a number of telecom and medical customers now for quite a long time. We have the capability to do it even with many of our legacy IT platforms. Certainly as we move forward here with more complete build, the percent of the revenue is going to continue to grow, and it's the model that was adopted by Juniper here with the UNISERVE business, and we have several other customers in our two biggest market sectors that we provide service.

And just for a little color, three of the four manufacturing wins are con figured order or block spills. There may not be different configurations with like the medical customer, but those are our box build configured to order. In addition to the new program wins with current customers, you know, which would include the Juniper, a couple of those in addition are box-level. Actually three of those are box level, board level and box level pieces of business. So we're -- we feel like there's clearly a trend towards more box level con figured to order outsourcing that is occurring.

I just want to ask one clarifying question, and then I'll shut up here. We were there in November and a lot of us went through your plants. It seemed that, you know, a lot of those networking customers boxes were going out looking pretty complete. Could you just differentiate what you're going to do for let's say a UNISPEER versus what you're doing today. Is it a software loading that was not being done before it went out on Plexus' side or whats different from what we saw in November?

For Juniper, there were certain products for Juniper that we were already doing configure to order and direct ship. However, on a couple of the higher end products, we were still shipping those to their location out in Boston, and they were doing the configuration and ultimate box loading of the software and ultimately doing the final shipment, that -- those higher end programs is moving from the -- their Boston site.

Thanks very much.

We will take our next question from the site of Roger Norburg from J.P. Morgan.

A couple quick things, on Wednesday you announced -- if you could characterize on two fronts for me a little bit, that's my only question. First, when you look at quantifying your win rate this quarter, how did that compare roughly speaking with what the trend has been the last few quarters, is it significantly higher in dollars or lower in dollars? I know it's hard to do in exact numbers, but -- a pattern that's shown me what the trend is. And then number two, in the networking customers that you announced. How would you characterize those customers in general? Are they more what you would think of as emerging customers or more what you would think of as mature customers? Thanks.

With regards to the trend on the size of opportunities, we would say over the last two quarters that trend has improved over prior quarters with some significant wins with regards to taking customers away from tier one or tier two companies. So that those are kind of known entities so to speak, clearly on the networking data com. Markets can impact those. We feel that those wins have been better. With regards to the four new significant wins on the manufacturing side, all four of those are with established companies. None of those are start-up companies. And, of course, as mentioned on the engineering, both of the two major new engineering programs, those are with new tier one medical device companies.

Thank you.

The next question comes from Chris Lippencot with McDonald Investments.

I know you briefly touched on it before, I was wondering if you could give us a little bit of color as far as the lookout towards the end of the year, your own targets as far as the income statement, just after you're taking the restructuring, I was wondering what the model would look like.

I'm not going to give you specific guidance for the rest of the year. As Tom said earlier, we expect about $20 million dollars a year in improvement from the restructured actions we've taken. If these approved, we phased in we have virtually no impact from restructuring. We expect 15% in Q2, 60% in Q3 and having the full board effect in Q4. Beyond that, I'm not sure I can be more specific.

Okay. Just one follow-up. The -- as far as your customers at this point, are you starting to see your own customers improve any of their own R&D spending or even just next generation products. Are you seeing any activity to pick up. Or is the trend essentially flat still.

From our standpoint, in terms of our engineering services revenue, we're not seeing any real big resurgence here in R&D spend that's outsourced. You know, we are seeing better proposal activity, but in terms of what they're actually going to -- at the end of the day put on the outside, we're not seeing any significant change there.

Okay. Thanks.

You're welcome.

The next question comes from John McMenis with Needham & Co.

Could you comment on the reasons why you won one of your new manufacturing customers there from tier one companies.

Yeah, with regard to the dual win this quarter, John, clearly we would say that the new supply chain management initiatives that we have along with flexible models that we have associated with inventory management were really a key driver in the decision making process. In addition to the engineering support. Not necessarily associated with full product development, but more focused on the value ad engineering and cost reduction programs that we have associated with that. We're really the two main drivers associated with this customer selecting Plexus over the current year one's that they deal with.

And a financial question, do you expect to be cashflow positive in the fiscal second quarter? And maybe if you can give us some idea of what the depreciation amortization was both this quarter and would be in the 2nd quarter.

John, it's Gordon. Depreciation runs about $8 to $9 million per quarter, there's no more amortization to good will, as you know. I'm a little uncertain about cash flow from operations in Q2 because alot of the restructuring severance costs will come out in Q2. We're still working on those detailed projections, I would not expect a positive cashflow from operations.

One other item too is that -- one of the items putting pressure on the inventory turns is the new program wins, and we would expect those to ramp up here over the next quarter or two, which will also put a little bit of pressure on the cash cycle days. We view that is an extreme positive with regards to the expected uptick in revenue volumes starting with Q3.

Thank you.

The next question comes from Michael Walker with Credit Suisse First Boston. State your question.

Actually, all my questions are answered. Thanks a lot.

Okay. Then, we'll move on to our next question from the site of Carter Shoop with Deutche Banc.

I have a couple quick questions regarding the gross margin line here, it looks like revenue came out 3% or so while gross margins have actually come down about 10 basis points, restructuring in every quarter in fiscal 2002. I was hoping you could give me a little bit of color in the pricing environment? Has that picked up in the last couple of quarters. And also, if you could give a little color on how many basis points you have lost to pricing. I think you had mentioned on a previous call about 150 to 200 basis points. Has that picked up at all in the 2nd quart summer.

Certainly the marketplace is extremely competitive, some would call it hypercompetitive. It's competitive in our space here with complex products. Mid to low volume programs, so it's a highly competitive marketplace, and everybody's competing for many of the same pieces of business. So there's no question that pricing is having an impact on our long-term gross margins, and we had talked about the 1 1/2 to 2%, and I would say that we're definitely attending toward the 2% at this point based on the current pricing volume when you look back to our historical earnings model. Really, I think when you look at many of these programs, I think bidding lower prices on some of these complex high-technology programs is really going to put some pressure on the industry in terms of performance. And we really believe that our focus factory model positions us much better to make money at these pricing levels for programs that fit our capabilities in our niche.

Okay. And in the medical division, you've had a couple larger acquisitions in that space. Have you seen the pricing pressure really acceleration in the medical market more so than any of the other markets?

I don't think we're seeing any real acceleration here. Clearly we've worked with some of these large medical companies, they have very strong procurement organizations and they have put the pressure on us in terms of managing price, but our value and our proactive procurement sourcing strategies has really helped us remain competitive there. So based on the current acquisition activity in that marketplace, I think that creates some opportunities for us, quite frankly. And I don't think it's going to have a big change relative to pricing that we have with existing programs that, of course, the smaller companies that may have been acquired, there may be changes as time goes by relative to outsourcing.

One follow-up question. Could you breakout the geographic revenues split? I didn't hear that this quarter.

We do. Right now I think -- we've broken it out -- this is about 85% of our revenue now is what we consider in high-cost geographies in the U.S. and U.K. If you look at it, roughly 7% of it is in the U.K. the lower cost markets being Asia and Mexico representing about 15% of our overall revenue.

could you break that out between Asia and Mexico.

Asia, roughly 5%.

Okay. Great. Thank you very much.

You're welcome.

The next question is from Steve Sabbitz with Goldman Sachs.

I think last conference call you had mentioned you were bidding on some deals that -- were on the order of $20 to $80 million in size. I don't think you mentioned what might be the size of some of these new wins either in aggregate or, you know, grouping them together.

Yeah, with regards to the announced wins, one of those wins is clearly in the range of $20 to probably not quite $80 million. We are continuing to see in the pipeline a number of opportunities in the range for $20 to $80 million. The other three are probably in the $10 to $20 million dollar range. Ultimately, though not necessarily, we've not necessarily won to date all of the programs associated with those revenue ranges at those new -- or that those new wins have.

Okay. And then from the last call I think -- or last quarter's call, there were two wins that were in the order of kind of $20 to $30 million or so, one of them being NMF. A ramp on those or are you feeling like they'll be at full ramp for the 3rd quarter.

Actually, it should be fully ramped actually here in the March quarter, a little bit ahead of schedule. The other new customer that we announced, yes, we currently expect that that would be fully ramped for us in the June quarter.

Okay. Thank you.

The next question comes from Tony Boase of A G Edwards

Essentially all my questions have been answered, but just to clarify, what was depreciation this quarter?

About $7 1/2 million.

Thanks a lot.

The next question comes from Thomas Hopkins of Bear Sterns. Please state your question.

Good morning, if you guys could review the case for Plexus in the medical segment again, just quickly, a number of your bigger competitors have talked about recent wins in the space and talked about getting some space including some of the larger forum factor items, could you just give in your view, in your key relationships, how strong are they, and what would be your differential advantage over some of these intentions of some of your bigger competitors here.

Well, we've known there's competition in that space than there has been for quite some time. Historically the competition has focused on higher volumes, what we referred to as commodity type medical products that don't have the same regulatory requirements or high-level regulatory requirements in the space. That's certainly a generalization. We do know of a certain competitors that have other products that do have regulatory requirements. I think our competitive advantage here is -- our long track record for managing medical programs, the deep understanding of the regulatory requirements, both class two and class three, the strength of our engineering services in medical which runs roughly around 50% of the services organization. So we have a very strong track record here for execution with medical customers. We've got a strong relationship with the FDA, and I think that, you know, there are certain advantages there, and switching costs involved with medical programs, they're just not there for the other industry sectors. And I think Tom wants to add a little bit here.

Yeah, I would say one other thing that differentiates us as well too, is that, Tom, we currently build medical products here in the U.S. in Mexico, in Europe, and in Asia. You know, we're not talking about having one site medically, you know, registered. We have a number of our sites medically registered across the globe, and again, I think the track record as Dean mentioned, of building medical products for as long as we have. As well as the number of medical products that we build -- as far as any other contract manufacturer, and we would anticipate that medical companies that focus on looking at some of these tier ones that are starting to get into medical actually ultimately will help us, because we believe the companies will look for the best provider going-forward. They're not going to be looking at the class 2 and class 3 for the lowest costs, they're going to be slow unit costs. They've going to be looking for the quality, the knowledge of the industry, and we believe that ultimately this is a positive for us on a go-forward basis, because it brings additional advise ability -- visibility to Plexus going-forward.

You talked about the engineering services contract being 50% on some of the products. Let me ask you, is there any advantage in medical for some of the larger foreign factor items of doing any of the vertical components, enclosures, boards, plastics, cables. Any advantage of a competitor to gain over you by having that capability?

With regards to that, because the volumes are significantly lower in the breadth and different requirements, you know, this isn't -- these are not boxes that are 6-foot, 7-foot high sheet metal type boxes or the plastics as well too. We actually believe that it helps us not being vertically integrated with regards to those types of products, because the tooling costs and requirements and all of those types of items trying to run that across one customer we believe -- or one set of products with a customer become extremely expensive with regards to having that internal.

Okay. Great. Thanks.

I think we'll take one more question.

Very good. The final question will come from Shawn Seversen with Raymond James.

I hate to hassle you with another question on Juniper, but could you give an idea how long the commitment from them is, is it a year, two-year, three-year type contract.

Their commitment to us doesn't differ from the commitments we have with any of our other customers. And the length of the agreement is very typical, which is roughly -- you know, about a year.

Okay. And in the $20 million in annualized savings, can you give us an idea how much of that is actually reductions in fixed costs, versus kind of variable might be associated with the loss of the revenue. I'm trying to understand how much of this leverage you'll be able to keep as revenue in other parts of the business picks up.

Hi, Shawn, it's Gordon. Yeah, most of it will come from manufacturing fixed costs. A little bit of manufacturing variable costs and some in SG&A. But those will be manufacturing fixed costs.

Will there be a change in your depreciation run rate once you've fully implemented your restructuring?

Sure.

Can you give us an idea of how much that will be in depreciation.

I can't right now, Shawn.

Fair enough. In any way one time IT costs associated with your rollout that we would expect to come back -- I assume most of that's flowing into SG&A expenses right now.

Yes. However, some costs are being capitalized in planned equipment. And those will be amortized as the systems are completed and become operational.

So we shouldn't expect SG&A to drop once this implement is complete?

No, that's not entirely true, because as Tom talked about, we expect to get some administrative expense reductions from having one platform as opposed to multiple platforms and that will be partially offset, you're correct by the amortization previously deferred costs. By the way, I misspoke, I grabbed the wrong number when I said quarterly depreciation was $7 1/2 million, it's closer to $9 million.

Thanks again, everyone for joining us this morning, and your continued support of plexus. If you were unable to get your question answered during the call, please call Kristian his contact information is on the press release and available on our website.