Plexus Corp (PLXS) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Plexus Corp call regarding fourth quarter earnings announcement. At this time all participants are in a listen-only mode. After a brief discussion by management we'll open the conference call for questions. The call is being recorded Friday October 24th, 2003. The conference call is scheduled to last approximately one hour.

I would now like to turn the conference over to Mr. Kristian Talvitie, Plexus Director of Investor of Relations. Please go ahead.

Kristian Talvitie Hello and thank you for joining us today. Before we begin, I would like to establish that statements made during this conference call, that are not historical in nature, are forward-looking statements.

Forward-looking statements are not guarantees, since there are inherent difficulties in predicting the 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 provides non-GAAP supplemental information.

More specifically, net income and EPS excluding restructuring costs and the impairment of goodwill. This non-GAAP financial data is provided to facilitate meaningful period-to-period comparisons of underlying operational performance, by eliminating infrequent or unusual charges. Similar non-GAAP measures are used internally by management in assessing performance of its business, because such measures provide additional insight into ongoing financial performance.

Please refer to the data provided in our press release, reconciling GAAP, the GAAP net loss and EPS to the non-GAAP supplemental data. I would also like to quickly remind everyone about our upcoming investor day on November 6 in Chicago. Please contact me if you require further detail.

Now I will turn the call over to Dean Foate, President and CEO for some prepared comments and then we'll open up the call for questions.

Dean Foate, Thank you, Kristian, and good morning everyone. With me today is Gordon Bitter, our Chief Financial Officer. Yesterday we announced sales for the quarter of $216 million, with an EPS loss of 9 cents. Excluding restructuring charges, we achieved EPS of one penny. These results exceeded our previously announced revenue guidance of 200 to $210 million, with an EPS loss of 4 cents to break even.

Given our current outlook, we are initiating revenue guidance for the first quarter of fiscal 2004 of 230 to $240 million, and would expect EPS in the range of 4 to 6 cents at these revenue levels.

Looking out past the first quarter, we are targeting revenue growth of 15 to 20% for the full fiscal year. However, we do expect the second quarter of fiscal '04 to be down from Q1, reflecting seasonal trends and program-specific reductions.

The 10% sequential revenue increase in the fourth quarter was primarily a result of strength and demand from a number of existing customers, as well as the continuing ramp of previously announced new programs. Our guided 6% to 11% revenue increase in the coming quarter is driven by a combination of seasonal strength in medical, share gain with existing customers, and continuing program ramps.

Along with the start of production for new program wins this quarter, including Harmonic, Lakroi (ph), AMX, Kodak Healthcare Imaging, GE Medical Systems. GE Power Systems, along with five others that we cannot disclose. The pace of engineering program wins was equally gratifying. We added 15 significant projects this quarter across all sectors, with two-thirds of them coming in the medical sector.

Our success at winning new business provides confirmation that our investment in building our sales and marketing infrastructure and processes is beginning to build and sustain momentum. Our plan is straightforward. Set goals specific to each market sector built on a strong foundation of market research, target strategic customers that have needs that fit our value proposition, press for penetration of all of our value-added services, build a talented time and provide strong incentives to perform. We are not world class yet, but we are on our way.

Looking at performance and outlook by sector. Our networking and data-com sector was up 12% over the prior quarter. Juniper networks was our top customer during the quarter with over 10% of our sales, as we look forward to the next quarter, we expect continued growth for this sector as a result of stronger end market demand, and combination with a continuing ramp of previously announced customers and program wins such as Harmonic, Motorola Next Level, and M and S Communications. Medical was up 8% sequentially. This was largely driven by the strong performance of a couple of key accounts during the quarter.

Looking forward, we expect continued growth in this sector in a seasonally strong December quarter. Broad based strength in the industrial commercial sector was up approximately 5% in the fourth quarter. While we expect the sector to be slashed in the near term, we expect growth to come throughout the year as we ramp a number of programs including AMX, Lakroi and GE Power Systems (inaudible) was up 70% in the third quarter. We are currently expecting continued double-digit growth in this sector in the first quarter.

The other sector, although a smaller sector was up 13% or approximately $ 1 million. We currently expect this sector to be up a little as we move into the December quarter. Looking at our results on a regional basis, there are a couple of points I would like to highlight. First, our UK operations were up over 58% sequentially, with a particularly strong performance across the medical, industrial and other sectors, while we're not forecasting this growth rate to continue, we do expect to see UK revenues grow modestly from this new plateau.

In Asia, this is the sixth consecutive quarter of growth and the second quarter in a row with 20% plus growth. We expect the trend to continue into the first quarter as we transition new-- as we win and transition new programs into Malaysia and China.

Turning to some key operating metrics. With the completion of our restructuring actions, we currently have 4800 employees and approximately 1.4 million square feet of manufacturing space worldwide. Of this, approximately 30% of our employees and 28% of our manufacturing capacity is in low cost countries. We ran about 60% batch utilization in the quarter, with our U.S. and UK operations marginally higher than Asia and Mexico.

However, given the current trends in Asia, this will not be the case indefinitely. Assuming we meet our current guidance for the quarter, we should see capacity utilization in the 65 to 70% range overall.

One of our key goals for the year was a return to profitability, through a combination of cost structure realignment and top line growth. We've made solid and steady progress toward this goal since our trough in the March quarter.

Before I pass the call to Gordon for a detailed review of the numbers, I would like to say thank you for your support during the challenging past year.

Gordon?

Thanks, Dean, and good morning. I'd like to briefly cover four topics this morning. First I'll summarize financial performance for the final quarter of fiscal 2003, and provide an update on the recent restructuring, next I'll touch briefly on the progress with the rollout of the JD Edwards ERP system and finally review the new $100 million credit facility we signed earlier this week.

Turning first to financial performance. Revenues for the fourth quarter were $216.1 million, and we reported a net loss equivalent to 9 cents per share. Excluding the $7.9 million restructuring charge taken in the quarter, the pro forma EPS was a penny per share. Gross margins for the quarter were 7.4%. This is 140 basis points better than last quarter.

The sequential improvement reflects higher revenues, with full benefit of the San Diego closure, which occurred late in the third quarter, partially offset by higher transition costs related to the closure of Kentucky, as well as lower margins typically associated with start-up of new programs. Against last year's fourth quarter, lower gross margins in the current quarter reflected transition and start-up costs that I just mentioned, as well as a more difficult pricing environment.

Selling and administrative expenses excluding restructuring charges, were $15.3 million for the fourth quarter. Our SG&A spending this quarter was up about $1 million lower than in the prior quarter of this year, and approximately $4 million lower than the fourth quarter of last year. These reductions reflect the impact of various cost reduction programs, as well as much lower spending for IT during the prior year's fourth quarter. The effective tax rate for the year was 32%. This was 1 percentage point higher than the 31% we had estimated and applied to the June year-to-date numbers. So the cumulative judgment, which is evidenced in the fourth quarter, result in a 45% effective tax rate in the final fiscal quarter.

Taking a look at the balance sheet, cash and short-term investments declined approximately $23 million from the third quarter level of $101 million. Approximately, $17 million was used essentially to repurchase accounts receivables that had previously been sold without recourse under the company's ABS or Asset Securitization Facility. that facility was terminated on September 30, because of administrative complexity, relatively high cost and limited availability. DSO and receivables at year-end were about 47. This represents a one-day deterioration from the end of the third quarter. The slight decline was caused by some administrative difficulties, with two large well-financed accounts. Inventories increased $15.8 million during the fourth quarter. As a result, inventory turnover declined from the prior quarter 6.5 turns to 6.2 turns this quarter.

Accounts payable however increased over $16 million during the quarter, and essentially financed the increase in inventories. Inventories increased mainly in raw materials to support forecasted higher revenues in the next quarter. Capital spending for the fourth quarter was approximately $4 million, and below depreciation expense of $6.5 million. Capital expenditures for the full year were $22.4 million, once again substantially below depreciation expense of $27.1 million.

Overall net cash flow from operations was a negative $21.8 million, driven mainly by the termination of the asset securitization facility, but I talked about.

Let me talk next summarize the restructuring efforts that we completed in the fiscal fourth quarter. As we mentioned in the press release the Richmond Kentucky facility was closed as scheduled at the end of September. There was very little breakage. Virtually all programs at Kentucky were successfully transitioned to other Plexus sites in the United States and Mexico.

We recorded a total charge of $7.9 million, of which $2.6 million were cash charges mainly to provide severance for terminated employees, both in the United States and overseas. The non-cash charges of $5.2 million were primarily to record the impairment of fixed assets for a number of sites. The impairments were caused by under utilization, abandonment or technical obsolescence.

Moving to the ERP rollout. As we mentioned in last year's conference call building number 5, which is our largest facility in Mena (ph) was recently converted to the new JD Edwards ERP platform. We have slowed subsequent deployment of this software to other sites in order to provide IT resources to enhance the capabilities of those sites at which the JD Edwards Software is currently employed. These enhancements include data sweep for shop floor execution, ad journal for customer documentation management and bar coding for data collection. It is these enhancements that really make the business case for the new ERP software.

Looking ahead, we will implement the JD Edwards package at the Chicago site during the second fiscal quarter at which time all of the companies, legacy (inaudible) sites will be on AG Edwards. After the Chicago rollout approximately 60% of the company's revenues will be on JD Edwards, which is the platform for all the other value-added and customer facing enhancement.

Finally let me discuss the new credit facility. As we noted in last night's press release, the new financing is a three-year $100 million facility arranged by Harris Nesbitt of Chicago with four other banks participating in the facility. It is a secure facility, backed by domestic working capital and shares of the foreign subsidiaries. Interest rates under the facility varies with usage and there are pricing options. But essentially pricing begins at LIBOR plus 1.5%. There is an annual commitment fee of one half of one percent which is equivalent of course to the $500,000 per year. If we were to borrow under the facility today, the rate would be about 2.62%.

Let me turn the phone now back to Dean.

Thank you, Gordon. Indifference to our strong position medical and to borrow some imagery from that sector, I believe that our results and trends indicate that we are out of the OR after about two years of surgery. We are now in the recovery room. Our vital signs need some work as we have this year, but I expect a strong recovery. With that we'd be happy to take your questions.

Ladies and gentlemen, if you would like to ask a question, please press the "one followed by the "four" on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the "one" followed by the "three". If you're using speakerphone, please pick up the handset before entering your request.

One moment, please, for the first question.

Our first question comes from the line of Shawn Severson with Raymond James, please go ahead.

Good morning, gentlemen.

Good morning, Shawn.

Could you give me an idea of how you plan to use the engineering going forward? I know you've made some changes in how you're approaching the sales strategy and obviously making some good progress in getting new business as well, but where does engineering fit into the greater scheme at Plexus going forward over the next couple of years?

I don't think the strategy for engineering services organization has really changed all that significantly from what it has been over the years. I think that the one -- I would say alteration we made to the service model was relative to printed circuit board design only services, where we were going out and utilizing those services in kind of a broad-based attack to the market and attracting a lot of transactional business.

So I think our engineering services organization is still focused as it has been primarily on going after our existing customers and penetrating our existing customers with a strategy we call deeper and wider penetration, trying to add more value to our customers.

So today, as it has been, we frequently team up with our customers to help them design new products. We design and build almost all of the test equipment for our customers' product as they move into manufacturing. And we frequently, with some customers, depending upon market end sector, design complete products for our customers. So you know we're not heading down a path of ODM. We're heading down a path of continuing to partner with the customers and help them bring products to the marketplace quickly to try to add as much value as we can.

So, we got to approach a new customer today, do you lead with engineering or how does that strategy work, especially as you are trying to garner new business, new customers?

As we try to garner new businesses and new customers, we try to sell a complete set of services the product realization services that we have for customers. So, we present them with a full, complete set of services, and many times the engagements, they may fall in either category. Manufacturing or engineering, out of the gate. But typically, it's a combination of the two as time goes by. So I think the difference in our strategy today versus prior is just a stronger emphasis on continuing to sell a complete set of services to our customers as we continue the engagement over the years. If you look at our business, 60% of the programs that we have in engineering at this point were with existing customers. The customers that we have in manufacturing.

Great. Thank you.

You're welcome.

Our next question comes from the line of John McManus from Needham and Company. Please go ahead.

Yes good morning. Could you comment on any shortages that you may anticipate either in the component sector or in the printed circuit board sector to achieve your estimated revenues over the next several quarters?

Well, John, at this point you're alluding to what appears to be some tightening of demand in the materials marketplace. Third, at this point we're not anticipating any shortages. Although, we are aware that lead times have started to push to what we call manufacturing lead times, and that the stock positions with many other companies has been pretty well depleted.

So we're starting to see some stretch out of lead times, semiconductors is still below the book -- the book-to-bill is still below parity but the capacity utilization has jumped up recently to about 88% up from about 68%. PCBs have gone for four consecutive quarters now at the book-to-bill greater than parity.

Pricing is still pretty stable, but we are being very mindful that production lead times are starting to stretch somewhat here as we're moving into these quarters here. We're starting to see a little more demand. So we're not concerned yet, but we are very mindful of the changing marketplace for materials.

Could you give us some idea of the value of the new wins, say compared to the previous quarter and if any of these new wins there are, what you might consider kind of a major win?

Well, I think a number of them are a major win for us. The size for us is what can be a good win for us is a little bit different than some of our competitors in the industry. I think (inaudible) be reluctant to start to itemize which ones or what size and what revenues. But there certainly are a number of them in that group that I mentioned that are significant programs for us. . And we are starting to see the effect of those in the guidance here that we gave for the upcoming quarter.

Certainly much stronger than last quarter this time, John.

So the cumulative annual value of these wins are substantially higher than what you have in the last quarter?

The individual wins we had in the last quarter? I would say some of them are, certainly. Just to give you a little flavor, if I'm looking at our revenues in the fourth quarter and we compare what was in market demand versus what was a result what was the result of new wins I would say it was about a 60/40 mix. 60% was ramps of new programs and about 40% was about end market demand improvement with existing customers.

If you look into Q1, and you look at the revenue up that we're guiding there, which is anywhere from 6.5 to 11%, depending on how we come out in the quarter, it's about a fifty/fifty impact of new programs and improving end market demand with existing customers.

Could you give us some idea of the revenue degradation in the fiscal second quarter compared to the first?

Yes, we said we'd be sequentially down, how far depends on the strength of the Q1, which is of course going to be the reference point. If we look at the lower end of that guidance, we have a shot at making it flattish.

And last question, could you give us the tax rate you anticipate for fiscal '04?

John it's a complicated calculation we're still refining it for modeling purposes, it is somewhere in the low 20%, it probably is as good as we have right now. The low rate reflects more business going into zero tax jurisdictions like China and Malaysia.

Thank you very much.

You're welcome.

Our next question comes from the line of Rick Reid (ph) with Robert W. Baird. Go ahead.

Good morning. Gordon, you talked about the transition costs that affected you this quarter. Can you quantify how much those would be?

It's a little hard to quantify them. I know last quarter we had submitted probably about two cents a share. It's probably one cent a share.

OK. And those will not occur going forward?

Yes, and we'll have the full benefit of the Kentucky closure in Q1. You may recall we estimated savings from complete closure of Kentucky, about a million dollars per quarter and we see that coming through in Q1.

OK and then Dean, going back to the previous question on the guidance for the fiscal second quarter, can you give us a little bit of detail in terms of what some of the program-specific reductions might be?

Let me kind of walk down on what I can see in the sectors and I'll come back to see if that gets you there. In networking and data-com sector, we're seeing softness of quite a list of customers and we continue to see our business with Extreme Networks go down. Medical is down seasonal. So it's sort of a broad-based list of customers in the medical sector.

Computer is down, seasonal. I think most of you are aware of the couple of--, it's a smaller sector for us. I think most of you are aware of the customers we have in that sector. Industrial commercial is up a little bit, and its general strength across the sector and some of the effect of some of the new program wins that I walked through in my earlier remarks.

But you listed a bunch of things that are seasonal there. It sounds like networking data com is the one area where there might be some programs that soften up specifically?

Correct.

OK. Last question from me is engineering services, can you just talk a little bit about what you guys are seeing from a demand viewpoint, what the utilization rate is there, and looking forward what is going to be the contribution margin for those engineering services.

Well, engineering services is kind of an improving story here. We still have an organization with somewhere in the neighborhood of 400 engineers and technologists. Capacity utilization is running in the low 70s, and I keep reminding everybody that we consider it to be full at about 80%. That's the billable kind of efficiency that we expect there. We've had five consecutive months now of profitability. So that's some good news. I would also say that the final is still somewhat weak but the market conditions are better, so the decision process has shortened up to the 6 to 12 week time frame as opposed to the lagging decision process that we had before.

So it's in part because we're doing a better job with our sales organization and presenting our services and driving the penetration of those services into our customer base. But it's also part of it is because of improved market. We're also seeing some improvement in pricing power, starting to get our rates back up to where they were before.

So we're seeing some pretty decent improvement there. I don't think we've typically broken out contribution margins or gross margins simply for engineering other than to say that we expect of course gross margins to be substantially better than we would in manufacturing.

Great. Thank you very much.

Next question comes from Tom Dinges (ph) with JP Morgan. Please go ahead.

Good morning. Just a couple of quick ones on new business wins and what you're guys are seeing in the environment out there right now. When you guys are out there quoting new business in a lot other sectors where you've got to very strong, you know, presence already, are you seeing much more activity from some of the bigger guys who are starting to really look to these sectors and what is that doing for the pricing? There was over the course of the last 12 months where there were some issues. I'm sure where some of these guys were coming down market and pricing a little bit aggressively. Is that stopping as now a lot of them are starting to see business firm up in some of their traditional end markets? And then I have a follow-up?

Yes, I think the market, competitive pricing in the marketplace was driven a little bit by survival instincts, as the industry went through the kind of reductions in square footage. So you had individual sites and organizations out there trying to compete very hard for businesses, with some irrational pricing. I would say the irrational pricing is out. The pricing is pretty well stable. And there's some anecdotal evidence that we're starting to get some pricing power back.

We run in -- have historically run into all of the other participants in the industry when we compete for business. I think it's certainly over the last two years has been more competitive on the kind of pieces of business that historically have been right for us. They're still there participating but I think we're competing very well obviously as you can see from the numbers here for business. So I think the attention is turned back a little bit toward things that fit each one of our business models.

And then following up on that, considering that we did have an acquisition recently of a middle-tier EMS provider by a larger EMS provider, are you hearing from customers where there may be some overlap or areas where you guys have been quoting and so forth? Is there concern across the customer base that when the middle-tier supplier like this gets absorbed by the larger supplier, that they possibly won't get the attention that they thought they'd always get with the middle-tier supplier and as a result is that, do you guys view that as a benefit for yourself?

Well, I think any time that there's a change in the ownership structure of a company it creates a potential opportunity for us. And of course we'll pursue the customers, particularly customer that overlap with our -- today with our business. So I think if anything it might be that positive for us in the meantime.

OK. Thank you.

Our next question comes from the line of Mike Morris with Salomon Smith Barney. Please go ahead.

Thanks. Good morning, everyone. It appears you have a pretty healthy growth year ahead of you and your inventories are ticking up which is consistent with that kind of outlook. I wondered if you could update us on your vendor managed inventory initiative and whether the changed dynamics in the materials marketplace are affecting that initiative at all?

Well, let me make sure I clarify what we mean by vendor-managed inventory. When we talk about vendor-managed inventory, we're typically talking about the delivery side of it to our customers. So there's that part of it. And of course that's not necessarily changed at all by the materials side of it. So we have made progress putting in place vendor managed inventory programs for some of our customers where we're supplying them finished goods out of completed goods warehouse.

On the other side of it is what we call suppliers managed inventory to try help to clarify. And we have a road map for implementing in-plant stores and point of use programs in a number of our factories here with some of our logistics partners and distribution partners. We try to take some of the pressure off the inventory position on the raw side.

BMI inventories at the end of the year were only about $3 million.

When you look at the new programs and the revenue growth, you'll be ramping this year, could you talk a little bit about just the nature of them? Are they more system-level integration type programs or PCBA and will that affect your inventory positions and I guess if you could, would you tell us, do you think your turns will be higher or lower about the same, a year from now?

I'll let Gordon give you numbers if he'd like, but we're certainly not happy with the turns where they are. You pointed out some of the things that put pressure on us in terms of the material side of it. But we have some things that we can try to do to improve that number. We would certainly expect it to be better by the end of the year.

Getting back to the nature of the programs there's certainly the trends for our customers to move more toward PCBA and then higher-level assembly and direct ship and fulfillment. In fact we have one customer where actually doing installation of product into hospitals for them. So the maturing of the supply model is certainly heading in the direction of the EMS providing more service and that's what we're seeing.

My last question is just on your geographic mix, dean, you gave us some good information about number of employees and square footage (inaudible) 30% of the square footage low cost geographies, I mean, giving your model and the kind of business that you do for your customers, is that about optimal for Plexus's model, 30%, 70% high cost, 30% low cost, can we see that continue to shift over the next year too.

I think we are going to see some shifting as we move over the next couple of years. I think Asia is an important part of our overall fulfillment strategy and an important part of the low cost element of the portfolio of products that our customers bring to us.

So Asia continues to develop as an end market. I have spent last week over in Malaysia and China and the growth and changes in China are significant. And it's going to be a significant end market for many of our customers for products. So it's important for us to be able to manufacture provide like services in that marketplace like we do in the United States. So we would expect to see that grow and shift as we mature out the model out there for Plexus.

Thanks very much.

You're welcome.

Next question comes from the line of Keith Dunne with RBC Capital Markets. Please go ahead.

Hi guys, how are you doing?

Yes.

Couple of follow-up questions. Dean, could you give us a sense of the magnitude of all the wins? I assume first of all the ones you spoke about were all manufacturing wins where you named the names for five others you couldn't. Are we talking in the hundred 100-150 range in total in that kind of figure? My understanding is harmonic is new potentially 30 to 40 based on contacts in Harmonic, could you clarify those two things.

Keith, I think you're dialing in pretty close to the numbers. Obviously there's a program wins, the definition size varies but I think on an annual run rate the tally is pretty close to those numbers.

Two follow-up questions. Top customer, I didn't hear you name -- you often name who the top ten are and if you could do, you know, maybe at least name the guys who are 5% or more in that kind of range and tell us what the percent is for the top 10.

Let me -- I don't have the top ten handy. But ten comprised 58% for the quarter, Keith. Siemens and Juniper were the only two accounts for the quarter representing more than 10% of sales.

Can you just name like the other sizable ones, maybe even if from memory if not in front of you?

Some of them we've been talking about, Motorola is a top customer for us. GE continues to be a top customer. Unisys continues to be a top customer.

NMS is growing obviously?

Yes.

As far as gauging, I guess looking at the tax rate, I guess I ought to move there, did you say low 20s, and if so is that sustainable? Are you looking at 22% or something going forward long-term? That would be better than I had anticipated.

I'm not sure about long-term. A lot of the low tax rate as I mentioned earlier reflects profits being made in China and Malaysia. The U.S. currently from the tax perspective is essentially a break-even. I would expect over time U.S. operations would become more profitable and looking out 2005 and 2006, the tax rate would increase.

So something in the low 20, 22ish is conservative, come back to the 30 range or something, or 20, 29 30 range?

I think that's reasonable, yes.

As far as looking at I want to come back to the inventory goal. Sorry, I'll put you a little bit pressure side just Dean answering that, your goals used to be 7 to 8 times that we used to hear. And you know what's a realistic goal if we were to look, you know, 4 to 6 quarters out and can you give a little bit of insight on what types of things you could do to improve it.

Well, I think 7 is a near term goal we look to get to at least 8 on a longer-term basis. Some of the programs we put in that add junkets to the AG Edwards program should help us to improve the inventory turnover ratios. As Dean mentioned when you bring in new programs you don't have optimized supply chain, and insofar as there's a lot of new programs coming on board that will tend to drag down the inventory turn over. So if we were in a steady state situation we should be doing 7 At least 7 with a goal of 8. I hope that's helpful.

Great Thanks so much. Good job, guys.

Thank you Keith.

Our next question comes from the line of Joseph Woods (ph) with Banc of America Securities. Please go ahead.

Thanks Quick follow-up to that last question. As you build these programs and look out over the next fiscal year, Gordon, do you think it's a two-quarter period where you have to expend on cash too on the inventory side? Does it kind of level off towards the end of the year or does it last a while given the magnitude of the new wins. ?

It depends on the magnitude of the new wins, in so far as we win some large accounts we have to start ramping them up that we have continued pressure on the inventory.

Thanks. If you look at the guidance for the first quarter and then the sequential or seasonal decline in March and then you kind of project out the 15% to 20% guidance for the year, it seems that the full year guidance is fairly flat to conservative off of the top of the range for the December quarter. Dean, could you comment on that? Is that a conservative outlook in terms of how revenues can get given the book of business right now?

I'm glad you asked. We're trying to be cautious here not to provide guidance for the whole year and give you interactional information I mean it is then just a heck of a lot of uncertainty and of course all of us done we went through, furniture knock out here over the last couple of years. It's been really difficult. So what you know I think we're pretty comfortable with that range. You know, exactly as you point out, coming off a pretty strong first quarter.

OK. And just last question. Of the 15 new wins or so, could you describe geographically where they fit into the facilities?

Sure. I think a number of them are actually kind of a mix with a single customer that's going to be part of it built in North America and part built in Asia. So, and then let's see if I look down the list, looks like three or so of them are directly into our facilities in Asia A pretty significant opportunity into the UK So pretty geographical. We're having some success in all of our geographies here.

Right Thanks you very much.

You are welcome

Our next question comes from the line of Patrick Park (ph) with UBS Warburg please go ahead.

Good morning, guys two quick questions. Number one, the ramp down of the project in the March quarter, is that more of a product transition issue with a customer or is it kind of a distancing yourself from a specific customer?

Well, again, I think the first quarter is affected by strong seasonal effects in medical and in computer and in network and data com. And I said I mentioned Extreme Networks. Extreme Networks continues to be less significant to us as a customer, with the product lines that we were manufacturing. And Extreme Networks is heading toward a plan of consolidating with a single supplier and that's not going to be us. So it's kind of a slow fade year here with stream.

That's very helpful. And then secondly, sounds like you're slowing a little bit the rollout of the JD Edward system, enterprise wide. Financially, what would be the impact of that if I'm interpreting that correctly.

Well, we haven't broken out the precise costs for the JD Edwards rollout. I did mention that the lower SG&A in this fourth quarter is substantially lower because we had a lot of outside consultant work in the fourth quarter of last year. The real question is what do we do with the resource the IT and other resources that currently rolling out of JD Edward. I think we're going to roll it out to Chicago and then we'll pause and see what makes the most sense. We haven't really formalized our plans for the post-Chicago IT plan.

Okay. But Gordon, if you were opt to be more aggressive in that rollout, would that be something that's material to your SG&A costs for the rest of the fiscal year?

No We were going to terminate, slow down or stop, it would be material. But that's not our current thinking.

OK. And then finally, you guys have always had a premium margin structure relative to many of the other companies in the industry. Obviously everybody is struggling a bit right now. Do you feel two years out that you'll still have the ability something resembling your pre-double era returns, in terms of returns on capital and operating margins?

I think margins peaked around 14.3 or 14.7% and we don't see getting back to that in the next few years. I think we can get back to certainly 10 and hopefully 12%. But I don't think we'll get it back to 14.

And do you view that as more of kind of a margin compression within the industry that's permanent view or is it more Plexus-specific.

No, I think it's industrywide we've said before there's probably 200 basis points of pricing that's gone and not likely to come back soon.

Great. Thanks.

Our next question, comes from the line of Justin Mitchell (ph) with US Piper Jaffray, please go ahead.

Could you comment on your market share of the out-sourced medical systems business and how you see that changing? In particular, I noticed one tier one and another tier two and another private company won some medical systems business from your existing customers. If you could comment on that, I'd appreciate it.

Well I think I'm not a beg off, I've given you a precise number on market share I think it's a little bit of a squishy number. We know our position relative to others. We have not loss any share or any programs in our medical sector to competition of any significance at all.

Is the GE win on the medical side.

We've had a number of wins with GE on the medical side as well as other parts of GE's business.

Al right and Lakroi, is that la kroi medical or EMS?

This is a la kroi instrument.

And of the ten medical engineering wins, could you break out class three implantables versus systems?

Well, I don't have that sort of resolution with me right now.

Do you think it makes sense to increase your penetration in medical by getting into more of the implantables, maybe some of the acquiring possibly a tooling shop?

Well I think it's all Of course it makes sense for us to continue to increase our share and further penetration of medical. We have some pretty aggressive plans here in the coming year to do exactly that, pursuing implantables in some of the class three devices is part of the road map we have for penetration of medical. However, I don't see us going in the direction of us becoming vertical there.

So nothing non-electronic in the medical sector?

I would see that as unlikely for us.

Great. Thank you.

You're welcome.

Our next question comes from the line of Steven Savas with Goldman Sachs. Please go ahead

Thanks. Good morning I guess a simple question because a lot that are being asked are pretty good in the past you used to have relatively high exposure to earlier stage developing customers, particularly in the networking segment and communications. I'd wager just pretty naturally that's gone down quite rapidly. But I was just wondering about what percent that stands at now, order of magnitude, less than 10%,less than 5% now?

We were at almost 15% exposure in what we call merging technology companies that we have one time and were, we were ha veering in the 3% to 5% range closer to 3 most of the time here. Although there are some there's a short list of companies there that have a pretty good chance here for some home runs. So we're still pretty excited about that short list that we are participating with.

OK. That's great. Thank you.

Welcome

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

Yes, good morning every one. Just going back to the data networking. So I understand Extreme is going to another EMS supplier but I thought you also indicated a number of programs are weak there. Did you just mean seasonality in data networking or did you mean softness in other programs besides Extreme.

Well, what we're seeing is softness in demand. So we're not talking about any other breakage here. We're just talking about the forecasts they're giving us in that quarter are soft. And if we want to call it seasonal effect, I guess we can. I'm not sure that it is necessarily seasonal or whether it's just they're being a little bit careful or cautious about their forward forecasts.

And this is obviously a change from the last couple of quarters. So does that sort of fundamentally concern you for the first half or so of 2004 on data networking.

I'm not real concerned. I mean we still have a Q1 outlook where we're up pretty decent, and we still expect to continue to accumulate customers. We have strong positions with customers there. So I think it's you know, that sector in particular has been through a really difficult couple of years here. So I think there's just some very cautious forecasting going on from our customers. And I think we're conservative. We're more likely to ratchet down our customers' expectations than we are to, move them up. And we're going off the best information we can give more (inaudible) for that sector.

I don't know if you can comment on this. But can you comment on the types of products within data networking that are showing this weakness beyond Extreme?

We're seeing it pretty broad based and we take and sub sector ourselves into access and add infrastructure and enterprise. And I don't want to break it down into the point where we're going to be giving guidance for our customers.

OK. Fair enough. I think you sort of commented on this before but let me just ask it a little different way. There's obviously going to be some consolidation in the EMS sector whether it's tier one or tier two. At this point in time, does in terms of what you see, do you feel in a year or two Plexus is a stand-alone or could you see yourself merging with someone?

Well, here, I think people try to generalize what's going to happen in the industry based off specific things that occur relative to our competitors. I think that when I look at what just occurred with MSL, I think they pursued the right strategy for MSL given a lack of differentiation and given the limitations on liquidity they had for growth. I don't think that necessarily has anything to do with Plexus and Plexus's strategy. I think we're well differentiated. I think we provide a lot of value to our customers and I think we continue to grow and provide return to our shareholders. And we're quite happy with the direction that we're headed.

Great. Thanks a lot.

You're welcome.

Our next question comes from the line of Dave Miller (ph) with Kim and Company (ph). Please go ahead.

Good morning guys. How are you?

Fine, Dave.

I just take may be a little bit of a step back, how are your conversations going with customers, I mean in terms of the sales cycle? If we're looking at maybe end market starting to improve, are customers looking to accelerate their move to outsource? Have you seen the time frame shorten at all?

We've definitely seen the selling cycle shorten up a bit. It's very rigorous. I think if you look at it today compared to two years ago, I think the teams and the level of diligence that customers are reflecting with out sourcing partners has, the bar has been raised quite a bit. But I think we are starting to see customers looking forward a little bit more, working more on growth strategy and how to improve their business rather than just reacting to a market decline and kind of scrambling. So we're seeing improved business conditions, certainly.

Could you John, just put it in general terms maybe a time on it, maybe six months ago it was, conversations were 18 months long or a year long and may be come in three or six months, anything like that?

The ranges are broad. I mean the customers are looking to out source (inaudible) level of PCBS assemblies, the discussions can be pretty quick and they have shortened up but ones that are looking to shut down facilities and move entire lines and higher level assemblies, those discussions are still can be significantly as long as a year or so. All I can say is anecdotal. It's anecdotal that business seems to be accelerating and the decision processes seem to be speeding up. And it's evidence I think in some of the new program wins that we've had of recent.

Thank you.

You're welcome.

Next question comes from the line of Chris Kincaid (ph) with SG Cowen Securities. Go ahead.

I am just wondering if you can comment on what sort of utilization levels you'll be running at through the year to meet your revenue guidance.

Certainly. I think our utilization today, we've given it somewhere at the about 60% rate overall. We see that increasing to the 68 to 70% rate with the guidance that we've given in Q1. We're seeing a little bit heavier utilization in the U.S. and the UK than we currently are in Asia but as we move further into the year, I would expect our utilization rates in Asia to increase quite a bit. Full utilization for us is targeted at about 80%. And if we continue to drive toward that 15 to 20% growth for the year, we'll be starting to move up into the mid-'70s, starting to approach 80% as we get toward the end of the year.

Great and can you comment on what your CAPEX budget is for the year.

Now we expect the capital spending right now, to be the same as was in 2003, around $22 to $25 million.

Great. Thanks a lot.

Our next question comes from the line of Alex Blanton with Ingalls and Snyder. Please go ahead.

Hi, Good morning. I want to ask about the incremental margins that you might see in 2004, based on the sales gain you're expecting. Incremental margin from the third quarter to the fourth quarter was almost exactly 20% on the gross profit line.

Yes.

Would you expect to achieve that kind of increase in 2004 over 2003 in total for the year? And if not, which direction would it be? And is there a product mix factor that might affect you in 2004 on that calculation?

Well, to answer your second question first. Yes, in so far as the engineering does better and better, because they typically of higher gross margins in manufacturing. That would have a positive effect on our overall gross margins. I think it's not unreasonable to project forward the kind of continuation of the incremental improvement that we saw in Q4 over Q3. That may be moderated because we'll probably have to start adding a little bit of fixed cost toward the second half of the year but certainly 18 to 20% on the margins is not a bad assumption.

That's very helpful and we've covered the tax rate. What about S and A?. That was down a million dollars quarter over quarter. Is that going to keep falling or is it going to stabilize at this quarterly rate?

I think it's going to stabilize and there will be pressures to push it up. We recently put in across the board salary increase. There's been really no salary or wage increases at this company for two or three years. And that can't continue. So we've put in a modest salary increase, which will kick in really in the first quarter. We're also continuing to make additional investments in sales and marketing and that will put some upward pressure on the SG&A. So I would think it's going to stabilize and will tend to move up a little bit.

Finally, you mentioned earlier the gross margin can get back to 10 to 12%. Is that correct?

That's correct.

In what kind of time frame are we talking here? Because 20% incremental margin on, let's say, mid-range sales increase of 17.5% would get you about 9% gross margin in 2004. Could you get to the higher range the following year? Is this the same process?

I think it's possible we could be exiting this year at a 10% gross margin.

OK. So you'd be in that range in the following year; in terms of you're thinking is?

It certainly would be in the following year, not this fiscal year.

Thank you very much.

Ladies and gentlemen, as a reminder if you would like to ask a question, please press the "one" followed by the "four".

Your next question comes from the line of Carter Shoop (ph) with Deutsche Bank.

Good morning. I had a couple of questions in regards to the sales strategy. Since you hired Michael Maguire in December, seems like sales surely taken off and you have been winning just a proportion of the (inaudible) new business wins, I was curious if you could talk about how the sales strategy has changed over the past three months or so.

Certainly Carter, I think as you pointed, Mike has been just done a good job with leading the organization. He has done quite a bit of retooling in terms of the caliber of people putting in some great training programs to help train the individuals that we have in sales. And it's really been part Mike and part the operating units teaming up to really have tried to fine tune and develop a strong sales process to make sure that we're driving and penetrating our customer base.

The other element of it is that we're just getting much more intelligent about where the opportunities are in each one of our market sectors and setting specific goals in those market sectors. So our depth of knowledge is much better. Our understanding of our market position, understanding of where we can provide value, understanding where the opportunities might be within customers or as competitors that might make more sense for Plexus. We're doing a better job of targeting and selling strategically and selling at sea level. .

Has the way you have incentifies (ph) the sales force changed at all? Are we still going on a return basis, are we referring like more sales, are we trying to give little more aggressive on the pricing front, anything like that going on?

Well, we're trying to keep the sales organization out of the pricing element of it, because they really -- these are complex deals and the pricing is really a very complicated element of it. So our sales organization is primarily incentifies on the revenue side.

OK. And that has not changed?

That's correct.

One of the changes we have done, Carter, for all of management, is to change the criteria under which variable incentive compensation is paid. And there's a very substantial return on capital employed component to that variable incentive compensation.

OK. Great. And of the new programs that you guys won recently or at least the new manufacturing programs, roughly what percentage of new programs are for PCBA versus more box build or engineering, et cetera.

I'd give it 40% piece higher level of assembly to box build, 60% PCBA for the split.

How does that compare to the existing mix right now?

It's pretty consistent with what we've been seeing.

OK. And then for the 15 to 20% revenue growth in '04, I'm not sure if you had talked about this before, but roughly what percent organic revenue growth we are talking about here?

When we talk about organic growth we talk about growth with existing and new customers into existing facilities. So the entire growth model in the coming year is what we call organic growth.

OK. Great. Thanks.

I think we have time for about one more question.

Once again, ladies and gentlemen, if you would like to ask a question please press the "one" followed by the "four".

Gentlemen, there are no further questions at this time. Please continue.

All right. Well, thank you all for joining us this morning. We appreciate the support that you give to Plexus and please enjoy the rest of your day.

Ladies and gentlemen that does conclude the conference call today. We thank you for your participation and ask that you please disconnect your lines.