Plexus Corp (PLXS) 2004 Q1 法說會逐字稿

Good morning and thank you for standing by and welcome to the Plexus first-quarter earnings announcement. At this time all participants are in a listen-only mode. After a brief discussion by management we will open the conference call for questions. The conference call is scheduled to last approximately one hour. I would now like to turn the conference over to Mr. Kristian Talvitie, Plexus' Director of Investor Relations.

Hello and thanks for joining us this morning. 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 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 information, more specifically net income and EPS excluding restructuring costs and the partial write-off of goodwill. Please refer to the press release for reconciliations of the GAAP net income and EPS to the non-GAAP supplemental data.

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

Thank you, Kristian, and good morning, everyone. Also with me here today is Gordon Bitter, our Chief Financial Officer. Yesterday we announced sales for the quarter of $238 million with earnings-per-share of six cents. These results were at the top end of our previously announced revenue guidance of 230 to $240 million, with EPS of 4 to 6 cents.

This is our third consecutive quarter of revenue growth and earnings improvements. Based on our current outlook, we are expecting the momentum to continue into Q2 with sales in the range of 245 to $255 million and EPS in the range of 7 to 9 cents.

It is worth noting that the second-quarter earnings will be moderated by higher SG&A expense to support the ERP system installation in our Chicago facility and by other outside professional services. Gordon will touch on this further in his comments.

Revenue growth in our first fiscal quarter resulted from distinct factors. First we experienced strengthening end market demand particularly in our Networking/Datacom and medical sectors. And perhaps more importantly from a strategic perspective, we're making clear progress on our commitment to develop our sales and marketing into a world-class organization.

We continue to refine our business development engine as well as to add new talent into the organization. The net result of both of these factors was a 10 percent sequential growth in Q1. During the quarter we won eight significant new manufacturing programs of OEMs including Advanced Energy, AMX, Respironics, Telular, and ViVOtech. We also began major engineering projects with 15 OEMs including Chrysalis, GNP companies, and Vioptics (ph).

As we looked Q2, we're expecting 3 to 7 percent sequential revenue growth which is a significant improvement over our expectations when we began the first-quarter. At that time we were expecting revenue earnings to be flat to down in the second quarter.

Looking at the full year we are now increasingly comfortable with our 15 to 20 percent revenue growth target, however, given the successes we have had with new customer wins over the past couple of quarters, I think it is also important to make sure that everyone understands that bringing up new programs impact both gross margins and inventory turns.

Transitioning customers to the Plexus manufacturing and materials management model often results in temporary labor and inventory inefficiencies.

Looking at performance and outlook by sector. Our Networking/Datacom sector was up 60 (ph) percent over the prior quarter. Juniper Networks was our top customer overall during the quarter, representing 13 percent our total sales.

As we look forward to next quarter we expect continued growth in this sector as a result of broad-based demand in combination with the continuing ramp of new programs; including Harmonic (ph) and Telular, offset by the loss of Extreme Networks as they transition their production.

Medical was up 18 percent sequentially, as expected. This is primarily due to seasonal strength of this sector in the December quarter. Looking forward we expect a modest sequential decline in revenue into the March quarter.

Industrial commercial was down 9 percent in the first quarter due to lower demand across the sector. However we are currently projecting a significant pickup in this sector as we begin to see the ramp of new programs including Advanced Energy, AMX, Lacroix (ph), and GE Power Systems.

Computing was down 4 percent in the fourth quarter. We are currently expecting it to remain flattish into the second-quarter. Our other sector, although a smaller sector was up 14 percent, we are currently expecting this growth trend to continue into the March quarter.

Our top 10 customers accounted for 60 percent of our revenue for the quarter, with our top 20 customers making up 73 percent of total revenues. Our top customer concentration was up slightly from last quarter, but our top customers made up 57 percent of revenues while top 20 remained at 73 percent.

Looking at our results on a regional basis, there are a couple of points I would like to highlight. First, revenues from our UK operations were up almost 20 percent sequentially in Q1 after an almost 60 percent sequential increase last quarter. The continued near-term growth in the UK is primarily due to the strength in the medical sector; while coming quarters will be driven by our growing defense-related business.

As we continue to have strong growth in Asia with revenues in that region up 30 percent this quarter, the expansion of an increasingly global customer base into China and Malaysia, as Gordon will discuss further, has an impact on our tax rate due to tax holidays we enjoy in Asia.

With that I will turn it over to Gordon for a more detailed review of the numbers.

Thanks Dean, and good morning, everyone. I'd like to review financial performance for the first quarter of fiscal 2004. Let me say at the outset that my comments will be directed to the non-GAAP income and earnings-per-share, as there were no restructuring costs or goodwill impairments in the current quarter.

As we go through the income statement you are going to hears recurring themes; namely improved profitability arising from higher revenues, and last year's cost reduction efforts, partially offset by higher costs, primarily for compensation and health care benefits.

Gross margins for the first quarter were 8.2 percent or about 80 basis points better than the fourth quarter of '03 and 60 basis points better than the first quarter a year ago. The sequential improvement is primarily related to higher revenues and better capacity utilization. We were at about 70 percent capacity utilization for 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 second-quarter, we should see overall capacity utilization approaching the low to mid 70 percent range.

The year-over-year comparisons are a little more complicated to explain for there were both favorable and unfavorable factors affecting gross margin comparisons. On the positive side, there is first the benefit of higher volume and enhanced capacity utilization. In addition we had lower fixed manufacturing costs as a result of last year's restructuring efforts. These benefits were partly eroded by lower pricing and manufacturing inefficiencies related to the ramping of several new programs, as well as additional expense for compensation and health care benefits.

The net of all these factors on a year-over-year basis was, as noted, a modest 60 basis point expansion of gross margins as a percentage of revenue.

Similarly SG&A expense for the quarter was up sequentially from the fourth quarter of '03 by $1.4 million as a result of higher compensations and health care costs. The slightly favorable variance against the comparable prior year period reflects SG&A expense reductions once again as a result of last year's restructurings; partially offset by higher spending on compensation and health care benefits.

As noted in the press release, the tax rate for the quarter was 20 percent as a result of the tax holidays we enjoyed primarily in Malaysia. As the year develops we will re-estimate the effective tax rate for the year and adjust year-to-date financials to reflect our then current estimate.

Turning to the balance sheet, cash and short-term investments declined by $19 million to help finance higher receivables and in particular higher inventories. Keep in mind there was no usage of the new $100 million credit facility during the first quarter.

Receivables increased approximately $7 million during the quarter but remained in excellent shape. Day Sales Outstanding was reduced from the prior year-end level of 47 days down to about 45 days. I should mention that we no longer have any off-balance sheet financing programs to complicate the DSO calculation.

Inventories increased by just over $26 million during the quarter and inventory turnover declined from the prior year-end level of 6.2 turns to 5.8 turns at the end of the first quarter. Most of the increased inventories, about $22 million to be more precise, is in raw materials and reflects the acquisition of inventory to support new programs and new customers.

Inventory turnover is negatively influenced at the invention by the number of new programs that began to less than optimal supply chains.

Capital spending for the first quarter was only $3.6 million and substantially below depreciation expense for the quarter of $6.4 million. Most of the capital expenditures were for hardware and software to support our new IP platforms.

We still anticipate capital expenditures between 20 to $25 million for the year. Obviously that will be backloaded into the second half of the year.

I want to conclude with a few words about our ERP rollout. The J.D. Edwards package is expected to go live at our Chicago site on February 2nd; at which time all the companies Legacy MacPack sites will be on J.D. Edwards. After the Chicago rollout, approximately 60 percent of the company's revenues will be on the J.D. Edwards software, which is the platform for all the other value-added and customer facing enhancements such as beta sweeper shop for execution, agile for customer documentation management and Ariba for automating and expediting purchase orders. I will now turn the call back to Dean for closing comments.

Wrapping up, I would like to say thank you to all of our stakeholders. Plexus is unique in the EMS industry with their engineering and design expertise, our specialized and highly flexible manufacturing model, our commitment to customer service and execution, and our vision to be the leader in our chosen niche.

Over the past three quarters we have seen steady incremental improvement in both our financial and operational performance. Revenues are growing in all geographies. Capacity utilization around the globe is increasing. Our SG&A is at a two-year low as a percentage of sales and we have begun generating profits again.

We still have a long way to go, but this quarter's results are a strong indication the actions we have taken to align our global footprint and our manufacturing capacity with customer needs, to reduce costs and to build an industry-leading business development engine are beginning to pay off.

Thank you for your support. We will now open the call up for questions.

Thank you. (OPERATOR INSTRUCTIONS) Brian White (ph) of Kauffman Brothers.

The outlook here is quite amazing for a seasonally soft quarter. Could you maybe discussed what percent of the sequential revenue growth is from new programs and about what percent is coming from end markets?

Sure, Brian. I will give it to you in maybe a ratio is the way I will do it. But as we look at our sales strength, let me back up and go to Q1 first and say our sales strength in Q1 was actually split about 30/70 with 30 percent coming from new ramps; 70 percent coming from end market strength.

Q2, the story is little bit different. It is the reason we've cautioned a little bit on the guidance in terms of the margins and some of those issues related to a potential execution risk. Because as we look at Q2 we're seeing the revenue uptick in Q2, about 70 to 75 percent of that is going to be driven by new program ramps. The other 20 or so or 25 percent of it is going to be from end market improvement.

Okay, and could you maybe give us a little bit of color on your engineering services, what type of demand you're seeing, capacity utilization and maybe some of the pricing trends there?

Engineering has been a nice success story for us here. We have seen -- just finished another very, very profitable quarter in engineering. The backlog has improved. I think utilization probably runs in the mid 70 percent range. We always say about 80 percent billable is full. So we have seen some nice improvement there and I think also what I see is even though our current program mix is heavily tilted toward medical; as I look at the backlog in engineering or the pipeline of new program wins that we have in front of us, I'm seeing a much better mix across industry sectors.

So I think substantially improved buildup in pipeline of programs for our engineering. Pricing, I would say has just about returned to what we consider normalized pricing for our services.

Thank you very much.

Joseph Wolf of Bank of America Ssecurities.

Just a question on -- as you spend to grow, could you comment on that you have added a lot of new customers. Where are you in terms of bringing that first round of customers in terms of the inventory and the expenditure growth? How many quarters d you see that going on? Is there some kind of limit in the back of your minds -- I know this may sound like a high-class problem, but how many customers do you comfortable bringing on to meet the kind of financial metrics you want to be able to deliver?

I will start off with this one and Gordon may wish to add to it. I think we did announce a pretty good set of customer wins last quarter. I think the total count for manufacturing was around 11 and I would say that the inventory buildup of course took place significantly in the first quarter to support those customers and the ramps are actually beginning to occur more significantly in the coming quarter.

As I talked about with the revenue uptick being highly tilted toward new program ramps.

I think it is also a function, Joe, whether a new program is transitioning from an existing EMS or coming from an OEM, but it probably takes at least two quarters to effectively transition a program.

So are there any structural changes in what your customers are asking you to hold in terms of inventory, in terms of managing materials that are going to impact the metrics all the time? Or are you going to wind through them all over that two quarter period as you roll in all the programs?

I would comment that we have commented on prior quarters that we have a small subset of top customers that have asked us to support them with VMI related programs, and that really has not significantly changed. I think a little bit of the current inventory bubble is caused by programs that have transitioned to us from competitors; and those programs came with a pretty good slug of materials due to their material management systems. So we need to work through those issues.

The customer does of course retain liability for that material, but it does sit on our balance sheet. So I think is not necessarily a structural change. It is more an indication of some of the difficulties that some of our competitors had managing some of these more complex high mix kind of programs.

Thank you.

Patrick Parr with UBS.

I noted that I guess you now have one 10 percent customer in the most recent quarter and it is not in the medical area, were you traditionally had had one. Is that more a product mix or is it a product transition issue at that customer? Or is there some kind of ramp down going on?

Patrick, I guess there's a couple of things to clarify. We did say that of course Juniper was over 10 percent of revenues and historically we had talked about GE Medical and Siemens as being very close to that number. It is important to remember in relation to the Siemens business that Siemens actually spun out a piece of their business to Dragar (ph) .

So that businesses is now separated and is no longer part of the Siemens business. Although Dragar now is a top 10 customer in addition to Siemens. The combined revenue would certainly be close or over that 10 percent number.

GE still is a top customer for us. They just are not at that 10 percent level at the moment.

That Siemens issue explains it. Secondly, your tax rate was clearly significantly lower. Gordon, what would be a good number to use in the future to model for the fiscal year?

As I said in my comments, 20 percent is our best estimate right now. We take a look at it at least every quarter and we will adjust the year-to-date numbers based on our best estimates at that time. Right now 20 percent is a good number and that's the number we would see for the full year.

Okay and I guess similarly what would one expect in terms of gross margins and SG&A, given some of the qualitative comments that were made about staffing and IT spending, as well as project ramps?

We really don't give guidance out beyond the second quarter, and we have given you a top line and the bottom line. We said before that on the margins are incremental revenues typically have an 18 to 20 percent contribution margin. So I think you can run the model pretty easily and come up with a higher SG&A number for Q2. What the SG&A number will do going forward is difficult to say.

Okay, thanks.

Shawn Severson of Raymond James.

I just wondered if you had any plans to expand the engineering group. I know you're not quite at what you consider fully utilized yet, but just as you look at your pipeline in the next six months, are you actively hiring again?

We have done a little bit of hiring. We have some planned hiring in coming quarters to support growth within specific facilities. We do have some facilities in engineering that are very full and are challenged to keep up their current customer demand.

We are also making some significant progress with our expansion over into Penang, Malaysia, where we have developed a printed circuit board design organization and we have also developed a incircuit test organization, so we're trying to get some balance to the engineering organization in the various geographies around the world.

Not quite ready to get back to where we were hiring as many engineers as we could get like we were back in the later part of the '90s and 2000, but it is encouraging that we are able to start to see growth there again.

And are you finding that there is a good talent pool a available so you can easily ramp up the engineering services group as you please, or is it still pretty tough like it was in the past?

There's certainly is a broad talent pool available in the marketplace, but we have always competed at the very high-end of the talent pool and have always looked for the very best people, and for those people it is still a competitive marketplace.

And then out of the pipeline in engineering, what is a rough percentage today that you think you're taking to manufacture, that you know you are going to take manufacturing?

I would say that of the current programs in development and in engineering it is somewhere in the neighborhood of probably 75 to 85 percent of the programs will eventually transition to manufacturing.

Lastly, what are the types of programs that you are bringing over to your Asian facilities just to give us a sense of which customers and product categories seem to be most appealing in Asia right now?

Well, it's less about end market sector and more about the type of technology, so we are seeing programs that there is two drivers there. One is programs that are built in somewhat higher volumes that don't quite have the mix issues that some of the stuff is in our other higher cost geographies; some subassemblies that we build over there.

What we do have, we have programs going over there in medical, fairly heavily. Some of those are targeted as eventual programs that will service those end marketplaces, the Asian marketplaces. We also have telecom networking related equipment and we also have some industrial commercial business, all ramping up in Asia.

Great, thank you.

Thomas Hopkins of Bear Stearns.

Sorry if you already answered this question. I got on a little late. It looked like the Juniper business was up about 30 percent or so quarter-to-quarter. Can you explain the components of that?

Juniper asked us not comment on the specifics of their business with us other than the permission to disclose it as of course higher than 10 percent of revenues. We said 13 percent, and also we'd just like to make clear that we do build more than one product line for Juniper.

John McManus of Needham & Co.

Could you elaborate there on your guidance for 15 to 20 percent revenue growth for the year, when the midpoint of your fiscal second-quarter guidance there is about a billion annual run rate? What does that really say about your thinking about the second half of the year relative to what you have given us for the fiscal second quarter?

John, I think we're trying to be cautious. We have gone through a tough couple of years here. Clearly we're trending toward the high-end of that guidance range. And we're just trying to be careful here because the success of our growth here in the coming quarter and the quarter beyond that right now is heavily tilted toward new program ramps being successful. And of course those programs have to not only ramp successfully at Plexus in terms of execution but also have to have success in the end markets.

Now I would also say that our customers have been -- our existing customers particularly in the technology sectors have been under-forecasting demand in the quarter, so as we come in to a quarter we're getting better visibility. Forecasts are stable at least in terms of downside but we're seeing significant upside drop in the orders inside of lead times that we need to react to very fast. So there is some upside opportunity on the projections as we go forward. We're just trying to be cautious here about expectations for the year.

And was there in effect from Extreme in the quarter and would that be fully over in the fiscal second quarter?

If my recollection is correct, we do have a bit of business with Extreme yet in the second quarter and it trails off pretty significantly after that. So we do see some effect, although obviously we're still seeing improvement in the Networking/Datacom sector even in spite of that.

It seems to be pretty much gone by the end of the second quarter.

And could you give a some idea of the annual revenue run rate there for the new business -- the new manufacturing business you talked about in the quarter?

IA talked about eight new manufacturing wins. A couple of them were reasonably significant programs. Others were really kind of gain share programs on top of existing business, and I would put the annualized run rate somewhere in the neighborhood of probably 60 to $75 million. But I also want to caution you not to just lob that on top of the forecasts. That is an annualized run rate and we need to ramp those programs up.

Thank you very much.

Mike Morris with Salomon Smith Barney.

I was interested in your comment on Malaysia, Dean. I wondered if you could comment a little more on the levels of capability of your engineering group in Malaysia relative to the States and the other more industrialized countries. If those programs relate generally to builds that are scheduled in Asia? And I will start with that, thank you.

At this point our engineering services in Malaysia is limited to printed circuit board design layouts and incircuit tests development. So the programs they are working on, some of which are going to be launched in Asia, but others are also North American and European programs. So we really look at that as not just a cost play also an acceleration play.

It permits us to design printed circuit board, new printed circuit board design layouts 24 by 7 to accelerate the design cycle. So it is very common for our various geographies to actually pass designs from one location to the other to accelerate design process.

And there is an awful lot of press treatment about India, Dean. I wondered has Plexus examined India? Are you planning to look at India as a potential of place to expand engineering into that geography?

We just had a contingent of folks over -- take a trip over to Asia, primarily concentrated on China and Malaysia at this point. We have got a future plan to go over and examine India, but we are not at the point of making a commitment yet to do full product design yet in Asia.

It is primarily more like I said the printed circuit board design and end circuit test development and we will look at higher level design capabilities as we move into the later part of the year and next year.

More of a housekeeping question. You have talked about the SG&A probably bumping up a little bit in the March quarter and we know that there are some moving parts. Longer-term, what do you think about the Plexus model and the type of engineering and design services that you provide; is there an objective or a target for SG&A as a percentage of sales or where it ought to be normalized?

You've got a couple of things confused, Mike. Most of the engineering costs are up in cost of sales. The key driver in SG&A is not engineering costs. Over time we would expect SG&A as a percentage of revenue to continue to trend down.

Is there a number in mind, Gordon? Do you have a target?

We said 5 to 7 percent.

Thank you very much.

Rick Reed (ph) of Robert W. Baird & Co.

Gordon, could you talk a little more about the J.D. Edwards, what the expense was in the second quarter and what it might be for '04 and if you could maybe go over what the future rollout plans would be and when that will actually be completed?

Rick, we haven't specifically broken out the IT costs, but let me talk to it a little bit. If you look at our 10-K and read the footnotes really carefully, you will see that we've got on the balance sheet about 26 or $27 million of capitalized costs related to the J.D. Edwards program.

We began amortizing some of those costs late last fiscal year. With the completion of Chicago, we will be substantially have completed that project and it is appropriate then to continue to fully start amortizing those previously deferred costs. So there is going to be a step function increase in SG&A as we start the full amortization of those costs.

There are a lot of benefits to these programs and you'll see them in improved manufacturing, lower manufacturing costs, improved efficiency and better inventory turnover.

And how long will that amortization period be?

Different elements of it are from three to five years.

And are there other projects that could be bumping up SG&A here in the next couple of quarters?

Yes, Sarbanes-Oxley.

And so just given those bump ups and you had mentioned during the analyst day that exiting the year with a 10 percent gross margin is a possibility, is that something you're still sticking to, or has that changed at all?

As I said before, I would be disappointed if we did not exit at 10 percent or pretty damn close.

Thank you.

Dave Miller (ph) of Tradition and Asial (ph) .

Given your earlier comments about transitioning new program ramps and inventory from other customers, how long is it going to take for inventory turns to get back to the seven range here? They've dropped several quarters in a row and I just wanted a little more details on that.

Well, it is perverse, David. The more successful we are in winning new programs, the longer that metric is going to stay depressed. It presently is expected to stay relatively flat, maybe even down a little bit in Q2 before hopefully beginning to turn up.

And even with J.D. Edwards coming online, would that mitigate some of the downside?

That should mitigate but once again these are new systems that take time to be fully worked out and get you all the operational benefit that are promised.

What is the long-term goal for turns again?

Well, it is an ever improving goal, but I sure would like to get it back to seven.

Okay, and then at the analyst meeting you talked little about maybe expanding your capacity in China. Could you give us an update on that?

We did talk about the capacity issues. As we looked capacity utilization overall I believe Gordon mentioned it was about 70 percent or better and is going to go to probably the mid-70s here. If you look at utilization at this point in time, the highest utilization is in facilities in the United States, but we expect significant growth here as we look to our Asian facilities as we globalize our customer base, which is of course very healthy for us.

We would expect our facilities both in Malaysia and China to be running at or near full capacity here as we start to exit the year. So we can get a little capacity help there by adding additional service fault lines and doing some expansions that way to improve capacity. But we will need to look at additional square footage here if the trends continue the way they are now.

Okay, thank you.

Stephen Savas of Goldman Sachs.

I guess one quick question for you, Gordon, on the tax benefits that you are enjoying right now. What duration would you expect on not? In other words, when we move into fiscal '05 or calendar '05, is there a jump back up to 28, 29 percent tax rate or something like that?

Once again there are a couple of issues. The tax holiday in Malaysia will continue for several more years and the tax holiday in China does not actually begin until we are profitable there. We're just on the cusp for profitability in China. So the tax holiday hasn't even begun in China.

Beyond that as we look forward as we generate more profit in the United States, that will tend to bring up our effective tax rate, so I would not expect a 20 percent tax rate to continue into the next fiscal year and beyond. Over time the tax rate will tend to trend upward. If I had a model I would say 27-28 percent for fiscal 2005.

That is helpful. And then one other question for Dean or Gordon. Just follow up the last one, given where you are on capacity illustration I think you said next quarter companywide you're expecting to make mid-70s or so. And if that was for the whole company and not just Asia.

I think full capacity utilization is roughly 80 percent or so. How do you think about that in terms of leverage as you move into fiscal '05 for SG&A leverage, gross margin leverage, etc.?

First of all there are a lot of different ways to compute capacity utilization and we compute it on an as tool basis, so if we want to push out capacity utilization depending on what facility we're talking about, we may not need to make major brick and mortar type of investments. As Dean said, it might be a matter of bringing on line some additional SMT and AOI type of equipment.

So I would not see it as a major disruption on SG&A or manufacturing fixed costs. It would clearly be capital expenditures though.

All right, thank you.

Michael Walker of Credit Suisse First Boston.

All my questions have been answered, thanks.

Jim Savage (ph) of Wells Fargo.

First you had negative cash from ops in the first quarter. What are your expectations regarding cash flow from operations in the second quarter?

I expect it to be flat to slightly positive.

And I guess going to your revenue guidance, your revenue guidance even toward the high-end of that would be the second half would be flattened revenue from the first half. You seem to have a tremendous amount of customer momentum. Is there a big falloff that is anticipated in existing programs other than the Extreme, or is this just pure Midwest conservatism on your part?

I think it is more of the latter, Jim. Seriously we tried to raise the issue that the big risk going forward is an execution risk. Someone raised the question earlier about are we concerned about the number of new accounts, and this is a factor that we're concerned with.

You do have a lot of customer momentum. Can you talk a little bit about how what this is developing and what the pipeline looks like now and the size of most of the programs as you go forward? What you are anticipating? Are you looking at generally 3 to 5 percent customers, 30 to $50 million type customers? Are you looking at some being larger?

And are there others in the pipeline that you think that you'll be announcing over the next couple of quarters?

As we look at the pipeline I think it is gotten healthy. We have talked at length and I did at the investor day at length about our efforts to build our business development organization into a world-class organization. We have put a tremendous amount of effort into that organization. We've got great leadership on board and we have got some great teamwork going on between the sales organization and our operating units. And it certainly is starting to pay off for us.

We look at the pipeline and I know I have confused people on this from time to time as I talk about pipeline, so I want to be cautious. But the total pipeline, really the funnel tends to hover at about $1 billion and really doesn't change all that much quarter-to-quarter in terms of the revenue total. But it has improved relative to the quality of the leads in the funnel.

If I look at the funnel today, there are about four programs that are greater than the $50 million, so there are $50 million up to $100 million dollar plus programs concentration and our 20 to $50 million bucket is seven programs. And we see a pretty heavy concentration of 32 programs in the funnel that are in the 10 to $20 million bucket, just to give you some sense. With pretty good distribution across our target sectors.

Okay, these are programs that are in addition to the normal follow-on programs that you be getting with your existing customer base?

Right, we typically don't announce a follow-on purchase order as a new program if we are already building that productline. What we do talk about is new programs and new customers, a new customer win is very clear, but if we also win or gain share with a new product line that we had not built previously, we announce that as a new program.

Great, thank you.

Keith Dunne with RBC Capital Markets.

Good morning. I want to attack the one question one more different way. In the second quarter surge, is there a lot of restocking their? Are you comfortable that there is no double ordering from that standpoint?

We're very comfortable that is not the case, Keith. It is a ramp of a number of new programs with some improvement or strength across some of our other sectors, but we've also because of the execution risks that we keep talking about in new programs, we have actually moderated the forecast in the second quarter.

I would not call it a second quarter bubble because we do continue to grow, expect to grow in the following quarters of the year.

And if you look at (technical difficulty) do you expect your mix by end market to change significantly? I know you gave us a little guidance for the second quarter that your Networking/Datacom probably better, medical was seasonally a little softer, but when you get to the full year, is it going to be much different than we saw in this quarter?

Let me take a peak here at how it ends up for the year. I think we expect to see a little higher concentration in the Networking/Datacom sector and a little higher concentration in commercial industrial as we win the number of new programs into that sector.

Since they all have to add up to 100 percent, what would be down? Would that be medical or is it computing?

Medical drops off a couple hundred basis points but we still expect the growth in medical to be near 20 percent for the year.

I think our softest sector for us really is the computing sector. We really don't have a broad base of customers there.

And if we look at just the incremental costs, Gordon, on the IP for the Chicago ramp and throw in if you will the increased depreciation expense from the capitalized assets, are we talking $0.5 million, $1 million upticks or we should be looking at 17.5 and a portion of that will fall off in the third quarter as the Chicago is ramped?

Keith, as I mentioned, we gave you pretty specific numbers on the top and bottom line and as I said, the incremental revenue has generated about 18 to 20 percent incremental margins. I think you can run the numbers and figure out what the SG&A expense is going to be for the second quarter.

So I did and I came up with 600,000. If I'm way off I assume you'd let me go let me know.

I think you're a little bit light.

As far as you only give who your top five customers are. Could you talk to them please?

We can talk about our customers. Let's run down the top five. In no particular order here we've got Juniper, Motorola, GE, Siemens, and Unices (ph) in the top five list.

And could you talk a little bit about order trends? Can I infer because the inventories and the comments that you've seen some up side as a quarter has progressed that the order trends continue to strengthen as the quarter progressed from October to November to December?

Particularly like I said in our technology sectors, technology customers they tends to be conservative on their forecasting and have over the past couple of quarters had a significant number of drop in orders as we have gone through the quarter, which of course is a benefit because of our model. We were able to respond quickly to those orders and help our customers capture market share. And whether we can anticipate that sort of activity going forward is difficult to predict.

My last question would be in January and I know we've only got a couple weeks, but does it appear that we're starting out in the same kind of fashion? They may have ramped up as the fourth quarter ended and then they started out lower again in January, or has the strength in December continued into January as we go forward?

We certainly haven't seen any pullback in the base forecast that we're getting for customers, so we are just into the quarter here a few weeks. Like I said, whether we're going to see drop in the order activity is just difficult to say.

Good job, great outlook. Thanks a lot.

Chris Lippincott of McDonald Investments.

Just had a quick question. You I think talked last quarter about your long-term goals or gross margins getting back up in the 10 to 12 percent levels for the next couple of years. Since you are already at 8.2 percent and we are starting to see engineering costs go up somewhat in utilizations are near your target right now and the pricing pressures are still out there with some competition; I was wondering if you could review back how you get there. And are you are trying to talk about some of your incremental margins etc., but given what we're seeing out there, is it still realistic to look to the 10 to 12 percent?

I never said 12 percent this year, Chris.

Not this year but long-term.

I think for the reasons you cited that as engineering becomes more profitable and a greater percentage of the pie, that will certainly tend to raise our gross margins. I think Dean probably wants to comment about pricing because I'm not sure pricing is the negative that you assume.

I'd like to make two comments here in that you used the language engineering costs have gone up and I would like to make the point that engineering utilization is going up. We are hiring more engineers. Of course we sell that as a professional service so the gross margins on engineering are substantially better than they are in manufacturing, so that it is a manner of course of an overall gross margins.

And as I stated earlier, engineering pricing has come very close to normalizing to what we had seen a couple of years back. Manufacturing margins of course we keep talking about that we probably lost a couple hundred basis points on manufacturing gross margins, but at this point the pricing environment has stabilized. We are not seeing the predatory pricing practices that we're seeing a while back.

I think customers know which companies are good at building which kinds of products, and I think we're starting to see a little bit more of the competition focus on what they are good at. So certainly it's a competitive marketplace. We run into all of our competitors from time to time on differed programs, but I think from a competitive marketplace and a pricing marketplace we are at a point now where we can walk from programs if we can't price them appropriately to make money.

Also looking at your wins over the last four quarters, it looks like you've had give or take around 30 manufacturing wins with annualized revenues of about $350 million if you total them all up. First of all, are those members somewhat on target?

Secondly, of the annualized revenues that are out there for the last four quarters, how much more do we expect to actually hit volume or perhaps look at the other way, how much has already hit volume?

As I said a lot of them are ramping in the coming quarter; a lot of the recent wins that we brought in in the prior quarter and some of them in the later part of the quarter before that. So they will not be at volume until we start to get into the third-fourth fiscal quarter of our year.

So it is safe to assume that perhaps the last two quarters are really the primary wins we ought to be looking at in terms of starting to ramp up?

Yes, well when you look at fourth quarter of fiscal '03 and the first quarter of fiscal '04, those program wins are the ones that we're starting to see ramp here in this quarter and into next quarter.

Great, thanks.

(OPERATOR INSTRUCTIONS) Carter Shoop of Deutsche Bank.

I just wanted to briefly touch on some of the gross margins and operating profit contribution numbers here. If I recall you got a little bit of a benefit from having the Kentucky facility closed for a full quarter and doing some quick calculations, it looks like gross profit contributions are at 16 percent and operating profit contributions are at 12 percent.

So if you strip out that cost savings from having a facility closed; I'm trying to get better understanding of the manufacturing inefficiencies for the new program ramps. How much of that is really a drag? Is it safe to assume that you guys would have been closer to 18 to 20 percent stripping out the cost savings from having the facility closed for a full quarter?

I think your numbers are correct, Carter, and your assumptions. As I said, 18 to 20 percent is what we normally expect incremental contribution margin. If your calculations are coming up with 16 percent, I think it is fair to ascribe that to inefficiencies.

Okay, so when you strip out the facility being closed for the full quarter, it's roughly about 1 to $2 million?

About $1.2 million for the benefit of Kentucky in Q1 over Q4.

Okay, great. Another question I have here is looking at China, it sounds like the elevation is a little bit lower than the company average. Is it safe to assume around 50 to 60 percent?

Yes. China is the Newark facility over in Asia. And l I would have to go differed sheet to take a look at what China was. We've got China in there as tooled utilization in Q1 at about 45 percent, 43 to 45 percent and we expect that to come up to about 50 percent as we move into Q2. As we exit the year, however, it will be very close to add capacity.

Great. I believe you mentioned earlier on the call that the China facility was actually not profitable. Is that correct?

The China facility is just marginally profitable.

It is marginally profitable, okay, great. And then in the industrial end market, it looks like that was a disappointing there. Were you seeing that some of the industrial wins were pushed out a quarter, or is that more end market erosion from some of your existing program wins?

Industrial sector has been a little bit perplexing to us actually. We had expected it to be down just a little bit in the quarter and we have seen probably for the last couple years now where industrial has come down from expectations in the first quarter. So we are seeing a bit of a perplexing seasonality to that sector that in past years we had blamed on some of the geopolitical events going on the world.

But once again it disappointed a little bit in the current quarter, so I think just as we begin to better build our marketing organization, get a better, deeper understanding of what happens in our customer's end markets there, we will get a better understanding of why that's tends to trail off.

We went into the quarter expecting it to be down maybe about 1 percent. It was in fact down about 9 percent and we really have not had any difficulties or erosion with customers. It was really just a dial back in forecast. Now we're looking at the Q2 and we are expecting it to be up significantly greater than 30 percent. Part of that will be driven by forecast recovery from the existing customer base, but the other will be from a ramp ups of new programs.

One last question. I was double checking my notes there, I thought that Extreme was supposed to be exiting the quarter in December and was to be completely out in the December quarter. I know Extreme announced issues in the quarter, they're having some operational issues. Is that related to the delayed production shift there at Extreme with you?

If we lead you to believe it would be done in Q1, I think we misled you. I think we have been saying that we would be done in Q2, which is the plan. None of their difficulties was associated with manufacturing at Plexus I can assure you.

Thanks a lot.

Gentlemen, I'm not showing any further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

All rights. With that, I would like to thank everyone for joining us today. Thank you for your support of Plexus. I'd like to wish you all a very good day. Thank you.

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