Plexus Corp (PLXS) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Plexus conference Call regarding the third quarter earnings announcement. At this time all participants are in a listen only mode. After a brief discussion of management we will open the conference call for questions. The call is scheduled to last approximately one hour. I would now like to call the -- turn it over to Mr. Kristian Talvitie Plexus director of Investor Relations. Kristian?

Hello and thank you for joining us today. Before we begin I, I would like to establish statements made during this conference call are forward looking statements. Forward looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of major factors that could cause actual results to differ materially from those projected please refer to the company's periodic SEC filings.

The company also provides non-GAAP supplemental detail of its results such as EPS excluding good will amortization merger related costs and restructuring costs. As it uses supplemental non-GAAP operating results as a performance measure. The non-GAAP supplemental operating results are provided to investors to allow for meaningful period to period comparisons. Please refer to the financial tables at the end of the release for reconciliation of the gap results to the non-GAAP supplemental data. I will now turn the call over to Dean Foate President and CEO for some brief comments.

Thank you Kristian for handling that preamble. Good afternoon, everyone. With me here today is Gordon Bitter our CFO and Tom Sabol COO.

This afternoon, we announce sales for the quarter of $196 million with an EPS loss of 35 cent or loss of 6 cent excluding restructuring charges. Our top line results are in line with our expectations with revenues up on sequential basis. The EPS results are slightly better than our guidance of a 10 cent to 7 cent loss and demonstrated significant improvement from our EPS loss of 12 cents last quarter. This is a function of higher revenue and the effect implementation of previously announced cost reduction action. Tom will get into more detail on the restructuring activities during his comments.

Based on our current outlook for end market demand in fiscal 2-4 we are issuing revenue guidance from 200 to $210 million. Assuming this level of revenue, we expect EPS ranging from loss of 4 cents to break even for the quarter excluding restructuring charges.

Looking at performance and outlook by sector, the networking sector was up 14% over the prior quarter. I think it is worth noting that Juniper Networks became more than a 10% customer. As we look forward to next quarter we expect growth for this sector as a result of end market demand in combination of continuing ramp the previously announced new customer wins. Although down one point as a percentage of total sales, medical terms are flat. We expect this effort to be flat again in 2-4 as we continue to implement VMI solution for a leading customer. GE medical systems remain our largest customers.

Industrial commercial was down approximately 6% in the third quarter. We expect it to recover next quarter. Computing was up approximately 12% in the third quarter. However, we do not expect this to be the beginning of a trend as our current outlook indicates this sector will give back part of the gain next quarter. Our other sector was down almost $4 million, however, we currently expect the sector to be up again by approximately the same amount next quarter. Looking at our results on a regional basis, there are a couple of points I would like to highlight.

First U.K. operations saw significant up-tick over the prior two quarters. Importantly, this is a trend we expect to continue with double digit growth in the U.K. in the fourth quarter. Also, we have steadily -- we have seen steady sequential growth in our Asian operations for the last five quarters. We expect this trend to continue in the fourth quarter as a result of new programs in Malaysia and China along with program transfers from other Plexus sites . Turning to business development, we are continuing to refine our marketing sales approach to focus on a list of strategic customers at each of our industry sectors. We target accounts that value the flexibility responsiveness and breadth of service that we offer on the manufacturing side as well as the engineering side of the business. This quarter we want four new significant engineer programs three of which are current customers. Over half of our engineering wins continues to be in the medical space.

We also want three new significant manufacturing programs, one with a current customer. These ones were in a computing medical and industrial end markets.

Summing up our overall outlook, we are increasingly optimistic that our end markets have at a minimum stabilized and perhaps demonstrated pockets of strength. We are all encouraged that marketing and sales team continues to build a pipeline of products that fit the Plexus model. With that I will turn the call over to Tom Sabol.

Thank you Dean. Good afternoon, everyone. Today I'll begin with a quick update on our restructuring activities. During the quarter, our San Diego facility closed on schedule at the end of May. In addition the refocusing of our PCB design group and related engineering and corporate head count productions were also completed during the quarter. While difficult decisions, we believe that we are better positioned as we move forward.

In addition, certain customers from our Kentucky facility have already successfully transferred to other sites in the U.S. and Mexico. We have not lost any significant customers as a result of this closure and remain on track to close the site by the end of our fiscal fourth quarter. As of the end of the third quarter, our global head count was approximately 4700 employees with 34% of them now being located in low-cost countries. This is down from a peak of approximately 6,500 employees as of the second quarter of fiscal 2002.

As of June 30th our manufacturing square footage now stands at approximately 1.5 million square feet. And with the completion of the Kentucky closure, we will have approximately 1.4 million square feet. Having reduced total square footage by 24% from its peak of over 1.8 million square feet. At that time we will have 28% of our manufacturing footprint located in low-cost countries. Our manufacturing capacity utilization for the third quarter remained in the low 50% range. Based on current guidance for Q4, along with the closing of our Kentucky facility, we expect this utilization to approach 60% going forward.

On the engineering front with over 300 product development engineers, capacity utilization for the third quarter was up sequentially at over 70%. We are pleased to note that we saw an improving trend during the quarter that showed marked improvement over recent historical levels. We are beginning to see positive results from our enhanced sales strategy. However the engineering back log is still not as strong as we would like it to be. In addition, during the quarter, we brought building five our largest manufacturing facility in [Neenah] up on JD Edwards.

Our next key milestone is to provide enhancements to the current package that includes the rollout of our MES or shop floor control system over the next two to three quarters. We continue to believe that this integrated platform, along with our unique focus factory manufacturing model, global materials strategy and engineering capabilities continue to attract new opportunities to Plexus. With that I will turn the call over to Gordon.

Thanks, Tom. Good afternoon. I'd like to quickly summarize financial performance and then provide update on the recent restructurings. As noted revenues for the third quarter were 195.6 million and we reported a net loss equivalent to 35 cent per share if we exclude the 19.6 million restructuring charge taken in the quarter, the EPS loss was only 6 cents.

Gross margin force the quarter were 6%. This is 100 basis points better than last quarter, but still substantially below the 9.8% gross margin in the third quarter of last year. The sequential improvement reflects the partial benefit of the closure of San Diego in May of this year as well as lower costs outline a number of earlier risks, partially offset by higher cost to transition programs from Kentucky to other Plexus sites. Against last year's third quarter, gross margins in the current quarter reflect lower capacity utilization and a more difficult pricing environment. Selling and administrative expenses excluding restructuring charges were $16.3 million for the third quarter. Our SG&A spending this quarter was $600,000, or 4% lower than in the second quarter of this year, and approximately $1 million lower in the third quarter of last year due to cost reduction programs including lower spending for IT.

I should note the effective tax rate for the third quarter year to date increased by three percentage points over the year to date. That is from 28% to 31%. This year to date adjustment results in a third quarter effective tax rate of 38.8%. Taking a look at the balance sheet, cash and short term investments declined $12 million from the second quarter as we financed an operating loss funded prior accruals for restructuring charges and increased inventories as we transitioned an important account to a vendor managed inventory model and built them in anticipation of higher growth and subsequent periods.

Inventories were 15.4 million higher than the second quarter. As a result of increased inventories our inventory turnover declined from the prior quarter 6.9 turns to 6.5 turns this quarter. However higher accounts payable of nearly $14 million essentially financed the increase in inventories. DSO in receivables, however, remain constant at the prior quarter's levels of about 45 days after adding back the $17.3 million in accounts receivable which were sold under the company's ABS facilities.

Capital spending for the third quarter was only $2.2 million and below depreciation expense of $6.2 million. We expect the current year's capital spending to be about $25 million. This is lower than last quarter's guidance of 28 to $32 million as we slow capital spending for IT initiatives.

A word about future financing, if I may. Although we continue to maintain strong cash balances, we are in negotiations with a number of banks to provide additional external financing of up to about $100 million. Most likely in the form of a secured credit facility. This addition would support future growth. Let me turn to restructuring for a moment.

As Tom mentioned San Diego was closed during the month of May and the full benefit of this closure will be available to us in the fourth quarter. We announced in the second quarter earnings, our intention to close the Kentucky facility, to sharply focus the PCB design group and expect further reductions in force. At that time, we estimated a total restructuring charge of about $12 million. The third quarter restructuring charge for these actions includes $9.5 million, $6.8 million for the closure of Kentucky and $2.7 million for the other actions of the PCB design and other reductions in force, for a total of $9.5 million.

I should add that there's approximately $1 million of additional severance for the closure of Kentucky which will be booked in the fourth quarter. In addition to the previously announced restructurings, we reviewed long lived assets at each of the company sites and recorded an impairment charge of an addition $10 million. These additional impairments reflect utter utilizations for fixed assets and were made pursuant to FAS 144. These asset impairments will reduce future depreciation expense by about $2 million per year. We also reviewed for additional impairment the goodwill balances that relate to the company sites in the U.K. and Mexico pursuant to FAS 142. And we determined that there had been no further impairment since our original assessment in the first quarter. Let me turn the phone back to Dean.

Thank you, Gordon and Tom. Quickly wrapping up, todays results indicate that we are make steady progress on our commitment to return to profitability. We appreciate your continued support and we will now open the call up for questions. Operator?

At this time, If you would like to register for a question, please press star and 1 on your touch tone phone. To withdraw the question, please press the pound key. Once again to ask for a question press star and 1 on your touch tone phone. We will take our first question from the site of Scott Craig with Morgan Stanley.

Thanks good afternoon. Can you discuss a little bit about the break even levels now. It was my understanding that it was going occur somewhere around 200m, but the forecast in the EPS line next quarter indicates that might not be the case. Can you just discuss that further? Thanks.

Well, there's some uncertainties in the quarter. There's some uncertainty as to the exact cost to effect those transfers. So that causes us some uncertainty. There's also a question of mix. A lot of it depends on what are the components of the revenues. I think I tried to hedge it, Scott. I said 200 to 205. And that's, I think, consistent with the guidance we've given for the fourth quarter.

Gordon can you quantify how much the shifts from KENTUCKY are costing you in efficiencies just roughly?

about two cents a share, Scott.

Okay. Thank you.

We will now take our next question from is the site of Thomas Hopkins with Bear Stearns. Please go ahead.

I joined the call a little late. Can you discuss so. Key customers in the Kentucky site that are being impacted by the transition?

Sorry, Tom. We typically don't give out specific customer information related to specific sites.

Okay. Can you talk about -- you talked about the increase in inventory transitioning one customer I guess in particular to VMI. Can you talk about precisely how inventories are increasing because the customer is being transitioned to vendor management inventory?

Yes. The vendor management inventory is that we are going to be more aligned with our customer from a finished goods standpoint from their products. It is a board level box built product that we do for one of our larger medical customers. And in order for there to be better efficiencies on their part, they were looking for us to take over managing the finished goods aspects of their inventory.

Okay. What are the terms of that in terms of how the risk is shared? Do they own all that ininventory? Can you put it back to them or are you holding that and that's your risk?

Tom, the risk profile doesn't change. What changes is the financing. The good news is it gets us closer to the customer and more deeply involved in his overall process. The downside is, of course there was a short temporary hiatus in our revenue recognition as our holding certain inventories under the prior system we would have invoiced in the third quarter.

Okay. All right. Great. That sounds better. And just a final question. Update on the Juniper relationship? Last quarter you were silidifying that, growing that.

right. It was a very strong customer for thus quarter and continues to be strong looking forward.

Okay. Did you cite them as one of your top end customers or any customers over 10%?

We did cite them at a customer that was over 10%.

Okay, great. Thank you.

you're welcome.

We will now take our next question from the site of Michael Morris with Smith Barney city group.

Good afternoon, everyone. There's an obvious up-swell to move manufacturing off shore and particularly to the far east. You've given us updates on your efforts in that regard. I want to switch gears a little bit and ask about your engineering and design effort and one of your competitors has announced the opening of a software development center in India today. I wonder what your views are with regard to your engineering and design effort, whether you see any of that worth migrating off shore overtime, if you have any plans in that regard that you could share with us? Thank you.

Sure I’ll add clarity to Plexus model for engineering. We already have domestic engineering here in the United States. We have engineering center in the U.K. We have a PCB design center in Israel. And we also have PCB design center and tech development center in [inaudible] Malaysia. So from a low cost standpoint which is what I think is the focus of your questioning, we already have a start for [inaudible] the development of low cost engineering although it's not what we consider to be higher level production at this point. This is our first effort to put in some lower level services that allow us to give up not only cost benefit to the customer, but also allow us accelerate the design of test equipment and accelerate the PCB process within design and development for our customers on more of an around the clock basis. We are, as part of our strategic planning process, taking a good hard look at what we're going do next from a low-cost country stand point engineering. China certainly on our target list, look at that, as is India.

Okay. Great. You mentioned feel g things are a little more stable, you have some increasing optimism, pockets of strength. I guess I had a couple of questions. One is, would you be willing to characterize any of your end markets as being one of those pockets or not one of those pockets? And the second is, are you seeing stabilization of component pricing as part of your observation of stability?

Sure. The market side of it, we are seeing some what we consider to be I guess we'll call it strength really in telecom network sector for us. We saw some end market demand that has caused some strength in that sector. 50% of the upside has been market demand. Another 50% of it is a result of new product ramps. Within that 50% we were also seeing some end market demand, although smaller but with some of our merging technology customers. There's a little activity and trials going on within the emerging technology customer. Some interesting activity there. Too early to say that it's a trend, but it's an exciting activity.

From a component side of things, the components, we are seeing some tightening of supply although we're far away from what we would consider the allocated situation. We're also seeing some extending of fulfillment cycles on the higher count board FAB, particularly the domestic board FAB in the complex situation. Tom, if you want to add to the component piece, feel free.

Yeah. As Dean indicated we're seeing lengthening and pricing is still favorable and but that price -- but even there, that pricing is appearing to stabilize or maybe getting closer to stabilizing specifically on the board level and some other key components.

Okay great. Thank you very much.

thank you.

Our next question comes from the site of Todd Coupland with CIBC World Markets Please go ahead.

Just following on the end market strength. Do you feel you have enough visibility to suggest whether or not we'll see a seasonal upturn in telecom in the December quarter?

Well, we're not at the point where we would call ate seasonable upturn. We're see growth in that quarter for us. I'm not going call it guidance. I'll call it directional. We are still seeing growth in that quarter for us. And we are also, as we look at the medical world, some seasonal growth in that quarter as well.

In the December quarter?

Correct.

Okay. And how is your confidence in your customers' forecasting ability shifted either positive or negative? Can you sort of quantify how they hit their forecast or didn't hit their forecast in the June quarter?

This is interesting. Well, you know, this is We had some debate about how to characterize my comments that were either stable or pockets of strength. We were talking about customers' forecast. And I think what we are gaining is more confidence in our customers' forecast, although the forecasts are more stable and predictable. The order pattern still is such that they will -- rather than give you an aggressive forecast, they are likely to under forecast in dropping orders on top of that forecast and they expect you to respond quickly.

Okay. So you basically saw a strong month of June and the first couple months were weaker?

I think that's a fair characterization, Todd.

Right. Okay. And then digging in to the telecom business a little bit can you just talk about specific end markets, you know whether it's wireless infrastructure in North America or metro optical or wire line? Can you just dig into that a little bit? We've had some conflicting news from some of the equipment guys over the last couple of days.

Well, I didn't -- we don't -- I haven't characterized the forecast relative to each one of those market sectors. We break it down in Plexus within three pockets. We break it down into what we call networking in the infrastructure part, enterprise and then what we call access or sometime referred to as edge. For us, most -- I would say the strength of some of our customers in the current quarter I think the two bigger strength areas for us has really been split between almost equally of those buckets, now that I’m staring at the breakdown here. I wouldn't say that it’s highly tilted toward any one of these. We've got one-third in the network infrastructure, about 50% of what we call access and the remaining 20% or so in enterprise.

Okay. Is it fair to assume that that strength across the telecom business is in the United States?

I'd say it is. Looking at the customer stats, yes. Mostly North American.

Great. Thank you very much. You're welcome.

Once again to register for a question, please press star and 1 on your touch tone phone. To withdraw the queue please press the pound key. To register press star and 1 on your touch tone phone. It appears we have no other participants registered for questions.

It wasn't that dull a quarter. Jeez. Last chance for questions. All right. If we've covered all your questions, we want to thank you for listening in on the call today and thank you very much for your support of Plexus.--- 0