Plexus Corp (PLXS) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Plexus Corp. call regarding its second-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 call over to Mr. Kristian Talvitie, Plexus Director of Investor Relations.

Thank you. 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 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.

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. As usual, with me here today is Gordon Bitter, our Chief Financial Officer.

Beginning with today's conference call, I will periodically invite an additional leadership team member to participate in the call. This will serve as both a way to increase investor visibility to management, as well as provide an excellent professional-development opportunity for our team members.

Joining us today is Paul Ehlers. Paul is Senior Vice President of Plexus and is President of our electronic assembly business unit, making him responsible for our global manufacturing material management organization. Just as a brief bio, Paul has a longer tenure with Plexus, longer than anyone I know; he has been with the Company since its inception in 1980 and has served in a number of leadership positions in both engineering and manufacturing organizations. Paul has been instrumental in driving the growth and globalization of the manufacturing company over the years. Welcome, Paul!

Thanks, Dean. Good morning.

Yesterday, we announced sales for the quarter of $254 million with Earnings Per Share of 8 cents. These results are at the top end of our previously announced revenue guidance of 245 to $255 million with Earnings Per Share of 7 to 9 cents. This is our fourth consecutive quarter of revenue growth and earnings improvement.

Based on our current outlook, we are expecting the momentum to continue throughout the balance of fiscal 2004. For the third quarter, we are projecting sales in the range of 255 to $265 million with EPS in the range of 8 to 10 cents. We are also increasing our full-year revenue growth target to 25 to 30 percent, up from our original target of 15 to 20 percent year-on-year growth.

Approximately 70 percent of the sequential revenue growth in the second quarter was the result of new customer and new program wins that we announced over the past couple of quarters, including Harmonic, AMX, Advanced Energy, LeCroy, Telular, GE, GMP and Respironics.

We continued to have considerable success with our deeper and wider sales strategy. This quarter, we had six significant new manufacturing customer and (indiscernible) wins, including Itron, GE Consumer Industrial Products, another new program at AMX and two other new medical customers and one networking customer that we cannot disclose. We also had a number of significant new engineering program wins with companies including Medtronic, Trek Diagnostics, (indiscernible) Communications and Unisys.

As we noted last quarter, this kind of rapid growth brings with it certain temporary operational inefficiencies. We are currently ramping more than 15 large programs across all of our regions. We've hired almost 1100 people around the world, and we continue to see considerable variability in customer forecasts. We had customers in our top 20 list who were up as much as 25 percent over their initial forecast for the quarter, and others that were off as much as 25 percent. It should be no surprise that this kind forecast variability, the program wins and transitions in progress, coupled with the hiring, results in labor and inventory inefficiencies impacting both gross margins and inventory turns. Gordon will provide more detail and outline our near-term opportunities for improvement on these points in his comments.

Looking at performance and outlook by sector, our Networking and Datacom sector was up 13 percent over the prior quarter, as we ramped new customers such as Harmonic and Tellior (ph). This sector also continues to see broad-based increased demand. We expect to see continued double-digit growth into the third quarter of this sector.

Medical is down 5 percent sequentially, as expected, but up 20 percent on a year-over-year basis. The relative sequential weakness is primarily due to seasonal strength in this sector in the December quarter. Overall, Medical was a steady performer and we currently expect modest expansion of this sector in the third quarter.

Industrial/Commercial was up 39 percent in the second quarter, largely the result of new customer wins we announced last quarter, many of which I mentioned earlier. As we look to the third quarter, we are expecting low double-digit expansion as we continue to ramp these and other programs.

Computing was down 3 percent in the second quarter. We are currently expecting this sector to decline significantly in the third quarter. The Other sector was down for the quarter, as we look -- for the third quarter, we're seeing strong double-digit growth as we ramp a couple of new programs for this sector.

Top customers for the quarter -- our top customers accounted for 55 percent of our revenue for the quarter, our top 20 customers making up 71 percent of total revenue. Our top customer concentration is down from last quarter, when our top 10 represented 60 percent of the revenues, while the top 20 was 73 percent. Juniper Networks was again our top customer during the quarter, representing 13 percent of our total sales.

As we approach the billion dollar mark for fiscal 2004, we're seeing double-digit growth in all of our geographic regions, compared to fiscal 2003. On a global basis, our (indiscernible) capacity utilization is approximately 75 percent, up from 70 percent last quarter. Obviously, this varies by site; we have some sites that are putting well full and others that still have room for growth.

One region that is experiencing particularly strong growth is Asia, where we're seeing revenues approaching our fiscal 2004 target of 10 percent of total revenue, or approximately $100 million. This is up from $41 million in fiscal 2003. At this rate, we will outgrow our current capacity in Asia by fiscal 2005.

As we announced in a separate press release last week, we are adding an additional 164,000 square-foot facility in Penang, Malaysia, which will nearly double our Asian capacity and allow for future growth in that region, as we work to balance our footprint to service the needs of our growing global customer base. We expect our capacity utilization to continue moving north at 77 percent in the third quarter, then dropping off a little in the fourth quarter as we ramp the new Asian facility.

With that, I'll turn it over to Gordon for a review of our financials.

Thank you, Dean, and good morning, everyone. The second quarter's financial performance was not as strong as we would've liked on revenues near the high end of our original guidance for the quarter. Gross margins increased by only 10 basis points to 8.3 percent of revenue. We were expecting an expansion more like 8.7 or 8.8 percent of revenues. So, we lost about 40 to 50 basis points -- that is, in dollar terms, we lost about 1 million to 1.3 million due to higher costs and manufacturing inefficiencies. These inefficiencies related primarily to new program ramps and execution issues that Dean mentioned.

As we look forward, we expect to see continued margin expansion for a number of reasons. First, we typically do not make any profit on programs during the first quarter in which we begin ramping them. As Dean noted, we had a record number of new program ramps in the second quarter. Second, there's a learning curve in every human endeavor and as our new employees become more productive and efficient over time, the inefficiencies we saw in the second quarter will disappear. Third, additional opportunities arise as we improve utilization at sites that are currently operating below the corporate average. However, it's important to note that these expected improvements which I just mentioned will be modestly offset by the start-up of expenses related to the new Malaysian facility. We expect that the startup costs will equate to about a penny per share in both the third and the fourth quarter.

Moving to SG&A, this expense was favorable to our expectations at the start of the quarter. SG&A was maintained at the prior quarter's level of 16.2 million. We had originally expected SG&A expenses to increase by about 1.2 million from the first quarter's level.

During the second quarter, we had cash receipts and new financing of two previously written-off accounts that allowed us to take a credit to bad debt expense. In addition, we slowed or deferred the use of some outside consultants that we had originally planned for.

Turning to the balance sheet, cash and short-term investments remained at the first-quarter level of about $59 million, but we did use approximately $15 million of our $100 million credit facility to finance higher working capital. Receivables Days of Sales Outstanding stretched from 45 to 49 days during the quarter. This does not reflect the worsening of (indiscernible) but rather slightly extended average terms, arising in part from a large account forgoing early payment discounts, which had been its usual practice.

Our inventories were up to $198 million, 22 percent over last quarter, which is another consequence of our rapid revenue growth. We will be able to drive inventory reductions as we complete a number of program transitions in the third quarter and begin to optimize the supply-chain models for some other large accounts. We also expect incremental inventory reduction through our lean manufacturing initiatives, which focus on achieving higher velocity on the manufacturing floor, which ultimately will reduce work-in-process inventory.

I will wrap up my prepared remarks with a few words about capital spending. Capital Expenditures in the second quarter were only $2.7 million, substantially below depreciation of about $6.4 million. Second-quarter capital spending was mainly for machinery and equipment, about 1.4 million, and for IT, another 1.1 million. So year-to-date, Capital Expenditures were only $6.4 million.

Looking forward, however, capital spending in the second half is expected to increase to about 18 to $20 million, as we acquire and equip the new facility in Penang, which is about $12 million, as well as for additional machinery and equipment of 4 to $6 million and additional hardware and software for about $2 million.

So total CapEx in fiscal 2004 is now forecast at about 24 to $26 million, and that's consistent with the high-end range I've given you in the past and it's actually in line or maybe a million or two less than our expected depreciation expense for the year.

With that, I'll turn the call back to Dean.

Thank you, Gordon. Wrapping up, this has been a solid quarter for us. We have a strong wind in our sails with four quarters of sequential revenue growth behind us and the outlook is for this trend to continue as we further fine-tune our sales and marketing efforts.

We currently have our work cut out for us in terms of getting our inventories and operating efficiencies in line. We are committed to continuous improvement on both of these fronts and we have a plan in place to get results over the next few quarters. We remain confident in our longer-term growth and operating margin targets of 10 to 12 percent and 5 to 7 percent respectively.

With that, I want to thank you for your support, and we will now open the call up for questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS). Patrick Parr, UBS.

Good morning, guys. In the past, you've talked a bit about your expectation to exit fiscal '04 with a gross margin around 10 percent. Given this new Penang facility and these issues you cited, Gordon, is this still a realistic goal for you guys?

No, it's probably not, Patrick.

Okay. Do you care to provide any better detail on that, or --?

I think it will have a 9 in front of it. I won't go beyond that.

Okay, that's better.

(LAUGHTER) -- (indiscernible) Patrick, I admit!

Okay. Then in terms of the issues that you encountered here, is there something about new business that you have won that's different that's giving you these execution challenges? Is it a different type of business, in terms of mix or volume, or is this just normal managing growth challenges?

I will answer that first. Part of it is just the sheer number of program wins. If you take a look, I mean, we did $190 million of business in this quarter last year and we did 255 million roughly in this quarter, so we have substantial uplift in revenues. , So just the sheer number of new program wins is certainly giving us some what I've been calling "operational indigestion."

Additionally, there are a handful of these programs that are extremely challenging programs. They are very sophisticated technologies that are very difficult to manufacture. As a consequence, we are seeing our profitability on those programs suffer a little bit longer than we would normally expect.

Okay, that's fair. Then, I guess a final question for Gordon. On the tax rate, you know, I would expect it's going to go up from 20 percent or so. How would I model that through the rest of the year and into next year, Gordon?

No, the year-to-date effective tax rate that you see on the interim report reflects our best estimate of what the effective tax rate will be for the year. So right now, the best assessment I can give you is to maintain it at 20 percent for the year.

Beyond this fiscal year, there will be pressures on the tax rate to increase and if I were modeling beyond fiscal '04, I would put an effective tax rate in the low 30 percent range.

Alex Blanton, Ingalls and Snyder.

Thank you. On that last point, what are those pressures on the tax rate?

The pressure is the good news is we will making more profits in the higher tax jurisdiction of the United States!

Okay, that leads to my next question. You've hired 1000 people. To what extent is that helping the administration's outlook in the election? In other words, where are those people being hired?

Many of those people are been hired in Asia. As you can imagine, as Dean mentioned, the growth in Asia has been especially strong and we're looking to add a lot of people for the new facility.

I think it's important, on the political side, to realize that those jobs would never been done in the United States, so it's really kind of false reasoning to say that an incremental job in Malaysia means negative job creation in the United States. That's just not the case.

Are you hiring it, though at all (sic), in the U.S.?

Absolutely. You know, somewhere in the neighborhood of 10 percent or of so of those hires have been in the United States.

Of course, if you're going to have a higher tax rate next year, you're saying that's going to really expand if you're going to have more production in higher tax regions. Is that correct or is it some other tax region you're talking about?

No, the forecast profits in the United States are roughly modest for fiscal 2004. As we look forward, I would expect we would be making more profits, relatively in the United States, so that tends to offset the no profit -- the no-tax earnings in places like Malaysia.

Is that more revenue also, or just more higher profitability -- (multiple speakers)?

Revenue and -- both, it's both higher revenue and better profits.

Is this to due more complex products you're talking about that have to be made here, or are you shifting the product mix?

It's a result of a couple of things. Part of it is that we're doing a much better job selling the services of our local footprint. So, in addition to the ramp up that we're seeing over in Asia, we're seeing some decent improvements in revenues and programs here in North America. Some of it is because of very sophisticated complex product where the supply-chain largely exists in the United States. The others, we still are finding that there are certain customers that still have quite a strong regional preference to have a product built near to their facilities. The others, we have a number of customers that have very what we call rapid order-to-fulfillment models, where they are trying to drive their finished-goods inventory to as near zero as possible and they rely on us to be able to quickly fulfill for them in two to three-week cycle times.

Okay, so really the higher tax rate isn't necessarily a negative; it's an indication of a profitable shift in mix here. That sort of leads into my last question. That is, your nontraditional markets seem to be growing. Computing is scheduled to decline in the third quarter, but you're getting, it seems like, very good traction in industrial and other nontraditional markets. Can you comment on that? I mean, do you see that continuing as a trend for you?

Computing, for us, has been a relatively small sector, both in terms of what I would say dollar terms and in terms of the customer mix there. We have not had a real robust list of customers in our Computing sector, so the revenues are largely won by the performance of a very short list of customers in that sector. We do believe that there are opportunities in that sector that make sense for Plexus in which we could participate, but you are absolutely right in that we are seeing great traction here in our industrial commercial sector. Medical continues to be strong for us; we have a dominant share there. We've got some very nice wins in our Networking and Datacom sector, largely driven by the need for very high levels of performance and rapid order-to-fulfillment on complex products.

It sounds very good. Thank you.

Brian White, Kaufman.

Good morning. I think you indicated, in one of your filings, that you were going to hire 1000 employees this year. It seems like you got it done in a quarter. Kind of discuss what changed that made you hire much more quickly than expected.

Well, Brian, I think you are compressing it a little bit to say it was done in a quarter. I think it really happened over the course of a couple of quarters here, but you're right in saying that we talked about roughly 1000 or so heads in the year and we are already at that number. What really drove it was a number of really nice program wins and some program transitions into our facilities in Mexico and in Asia where we had to quickly ramp up resources and where there was -- where they are fairly readily available and we can get them onboard. We wanted to get them on board and begin to get them trained at kind of ahead of the customer a little bit.

Okay, so that was really a goal for maybe the fiscal year?

It was really a goal for the fiscal year, and I would anticipate that our hiring here will slow down pretty substantially throughout the remainder of the year. We do have projected some headcount adds but it's maybe 10 percent of that number right now, or maybe a little bit more than that.

Okay. If you look at the Malaysian facility, how many lines do you plan on putting in there? How many people are going to be working there? Is this a new program you won? Are you going to transfer it from an existing -- (technical difficulty) -- that you have, or kind of give a little more color on that?

We've got our expert sitting right in the room here that's got responsibility for manufacturing, so let's toss that one over to Paul.

We plan on putting two lines in the new facility pretty much right out of the gate. Most of it, anticipated revenue, is really new program wins, and we will add lines as the demand comes with it but right now, our plan is to grow that by one Focus Factory or so, or two lines over the next year or so.

How many employees do you think will be there at first?

It will probably start out, over the period of the next 6 to 12 months, at a few hundred.

Okay. Some of those people will be -- those are all new hires? They won't be transferred from your other Malaysian facility?

It will be a mixture; we wouldn't want to start out the new facility with all new people, so we will do a mixture of integrating new people as well as taking some of the experienced people from the current building and then backfilling the current building with some of the newer people.

What type of end market are you going to be serving out of this operation? Is it medical or networking or industrial?

It's a mixture. The profile is along the lines of some of our more advanced manufacturing -- (technical difficulty).

Okay, thank you.

Please continue to hold. The Q&A session will resume momentarily. Okay, sir, we're going to resume the question-and-answer period. Standby. (OPERATOR INSTRUCTIONS). Our next question comes from John McManus, Needham & Company.

Yes, good morning. Could you give us some idea of the dollar value of new wins in the fiscal second quarter?

The dollar value of wins in the fiscal second quarter? Yes, it's somewhere in the neighborhood of about $55 million in annual run-rate, John.

Could you give us an update there on the Professional Services business as you see it, going forward? Have you seen -- continue to see increases there, both in utilization there and in wage rates?

I assume by wager, you mean selling rates. Our selling rates I think are reasonably back to what I would call normal, so we're not seeing a tremendous amount of pricing pressure there that's beyond what we would normally see for competitive bids. But we are certainly not to the point where we can consider the engineering services business to be going gangbusters yet. We still have a relatively short backlog; we still have to work hard to win programs. I think it's more a condition of our current selling strategy, quite frankly, than it is the market. So, we're looking at making some changes and tweaks to our selling strategy to do a better job.

We've been tremendously focused on trying to fill up our manufacturing sites here over the last two years to 18 months, and we have not had quite as much focus on selling engineering services, so I would look to see that begin to improve here as we start to shift our emphasis a little bit.

Could you again address the idea that the tax rate would go from 20 percent to over 30 percent at a time when you're bringing on -- doubling capacity there in Malaysia, which basically has either no tax or very little tax? I just can't see why the tax rate would kind of skyrocket there to that level.

John, I'm not sure it's going to skyrocket to 30 percent. All I'm trying to suggest is, over time, the tax rate is not going to remain at 20 percent. The pressures will be the increase to tax rates.

To be very candid, I've not done a tax analysis as to what our tax rate is going to be for next year, but I'm just suggesting to the analyst community that, if you model it, it's not going to stay at 20 percent. The trend is going to be upward.

Stephen Savas, Goldman Sachs.

Good morning. Dean, I guess you described, I guess, some pretty high volatility and forecast some customers being 20 percent above, some 20 percent below. I know, especially in the downturn, there's been some huge variability. Is this something that you expect to kind of continue -- (technical difficulty) -- is it kind of endemic of the particular programs that you're doing with these kinds of customers, or is it something that should settle down and was happening because they are new and new products for the customers?

Well, I think it's somewhat indicative of the customers' newer product launches, but it's also, I think, just a condition of the customers trying not to hold very much finished goods. They really are moving to a model, in many cases, where they are trying to rely on us to be extremely flexible to fulfill for them. So, you know, historically, the customers have had a bit of a buffer of products and they would tend to smooth out, at least attempt to smooth out, the forecast for us. We're just now seeing that kind of activity; they are really moving more towards this model of trying to minimize finished-goods inventory and have us be responsive. But I think volatility in forecast is something that we're going to continue to experience.

Okay. I guess, despite that volatility, you felt comfortable enough going out to give kind of full-year revenue growth, and it's certainly a lot of new stuff coming in, so that's great. Inherently, by giving us full-year revenue outlook, you've given us revenue for fourth quarter but you didn't feel comfortable enough giving bottom-line. Is there a reason for that? I mean, you seem to have your arms around what SG&A is going to be doing, what some of these start-up costs might be doing. It's just I think some investors are wondering why we didn't get the next quarter of guidance, since you gave us topline.

It really comes down to execution risk. We are still -- as you ramp these new programs, there is a fair amount of uncertainty, especially as you're extracting business from our customers on the manufacturing organizations, or our competitors' manufacturing organizations, and bringing them in and getting them ramped up and getting them profitable adds quite a bit of variability, of course, to our operating efficiencies.

Also, we are hedging a little bit on fourth-quarter bottom-line because although we have a nice plan for when we're going to bring up the new facility in Penang, we still do not have a definitive occupancy date on the facility due to some government approvals and things that have to take place over in Penang. So, we don't have a definitive start date that really allows us to queue up our plan and know precisely how that's going to impact our fiscal fourth quarter and our first quarter. So, there's some uncertainty here.

Reik Read, Robert Baird & Company.

Dean, you had mentioned, with the 1000 people that you had recently hired, that you had done that ahead of some of these transitions. Can you give us a sense for what the utilization is of those folks? Are you getting to a point where you are now utilizing them all?

I'll let Paul talk about it because the bulk of those people were bought into our manufacturing site, so let's give Paul a chance here.

Sure, so they are all actively working on programs. The efficiency issue is really one of learning curve. As we bring on these new transitions and move product from location to location, the very nature of them is that we build product in smaller build sizes than typical, so that builds (indiscernible) brings out some inefficiencies, as well as learning curve on just building a new product for the first time. So they are all very actively involved in building product, but the efficiencies just aren't there yet or weren't there in Q2 where we need them to be.

When would you think that they might be at kind of a normalized efficiency, if you will?

Well, we are going to be definitely making some improvements through Q3 and again by Q4, the products that we've transitioned should be stabilized.

Dean, did I hear correctly? It sounded like you would add another 10 percent headcount by the end of the year?

Yes. Again, I'm a little squishy on that number because of the same issues with the new facility in Penang and exactly when we're going to have to bring on people, so that's I would say somewhere (inaudible) that 10 to 12 percent number is probably not a bad number to look at for overall headcount growth.

Then, you had mentioned that you had a record number of new programs this quarter, and when you start in the first quarter, you typically don't see profitability. How many ramps do you have in the third and the fourth quarter relative to the second quarter? How does that profile change?

All of the programs mentioned, there's still, I would say probably 80 percent of them are still ramping; it's just that they're getting a little bit more mature and the people are getting a little more trained on them. So, we're going to see some of these ramps continue all the way into the first fiscal quarter of next year but certainly, we're getting a few of the bigger ones starting to get behind us here in the third quarter.

how many fewer, I guess, first-time ramp programs will we see third and fourth quarter versus the second?

About half, I would say. Again, depending upon if we won any new business here in the coming quarter, which we, of course, would hope to do.

Thomas Dinges, JP Morgan.

Good morning, guys. Just a couple of quick ones for you because you've answered a lot already. On the hiring front, all of the hiring that you've talked about has been on the manufacturing side. Have you done any hiring at all in the Engineering group? Then I have a follow-up question on that as well.

Yes, we did bring in a few people in Engineering. Do you know the number (indiscernible)? It hasn't been many, maybe 10 or 15 people.

Okay. Then you mentioned one of the reasons that some of the things that are going on in Engineering group, the selling strategy hadn't quite been as focused there. Could you expand on that a little bit and just talk about it there? Is there anything in the industry at all, as a lot of other EMS companies, both large and mid-sized companies like yourself, have been focusing a lot more on front end design, whether it's collaborative, whether it's ODM. They are actively going out and trying to solicit a lot more business on the design and the upfront engineering side. Has that impacted it at all there, or is this just simply, as you put it, you've been working so hard to ramp up the manufacturing and increase the wins that you have there that perhaps there's just been a little bit less focus on Engineering side?

Well, I think, if you look at the marketplace for Engineering services, all indications are we should begin to see that marketplace get pretty healthy. As we've come out of prior economic cycles, we've usually seen an increase in outsourced engineering and I would expect this one to be no different, as our customer base is reluctant to add as many fixed-cost kind of engineers into their organizations.

So, from a competitive standpoint, you know, there are competitors out there that are pushing in this direction but usually, we find that their capabilities are very -- are quite narrow, specific technologies that they have competencies in.

So, the net of it is that I don't think we are seeing a very material increase in competitiveness for engineering programs from our traditional EMS competitors or ODM competitors, for that matter. What we are seeing is customers looking to outsource engineering and they are more, I think, intelligent and strategic about the approach. It's just that we're not getting out there and getting in front of our existing customer base as well as we should to penetrate the services.

One follow-up, if I may, on that? In terms of the focus of engineering work that you're seeing from your customers as you go forward, has it changed at all to where you're seeing more focus on extending product life cycles of products and helping them get a couple of more years out of report or longer if they can, or are they starting to push even more of kind of the new more collaborative design work down to you? That's it.

I don't think it has changed a lot. I mean, we're much more active at with trying to work with our new customers to design in what we call refinements into their products, what we call value engineering, to try to make them run smoothly in manufacturing or perhaps handle component (indiscernible) and those of kinds of things. But the mix of that versus new product collaboration I would say is about the same as it has been historically.

Michael Walker, Credit Suisse First Boston.

Good morning, guys. Just kind of a theoretical question, if you will -- this isn't the first time we've heard an EMS company talk about the press margins due to new programs coming online and to kind of highlight a bit of a paradox about the business model, especially smaller companies, which is that, the faster you grow, the more programs you bring on, the worse it hurts your margins in a way because you have the new program ramps coming on. It's almost as though, if you would just stop winning new programs, your gross margin would go straight to 9 percent-plus. So I'm wandering what changes in the business model, going forward, such that you can still grow and add new programs and yet not really see an impact to your margin.

Well, let me just let Paul -- it might be helpful if he gave you a little bit of insight into the things that we have on our list here to improve gross margins, and then maybe I'll add a little to it. Go ahead, Paul.

I think what really impacted Q2 significantly was -- and I don't think, going forward, saying that we're not going to do any more new product transitions -- it was the volume of them and the total revenue percentage that was underway in either new product transitions or moving products from location to location. So, about 14 percent of our revenue in Q2 was product transitions, either inbound or from location to location. That's really what had put pressure on the gross margin. So, it was the percentage concentration that really impacted it.

You know, long-term, as Dean said, we're going to get through these transitions. We have still several operations that are well under capacity, so that will give us some good leverage. The pricing environment is definitely improving out there, so as we win new programs, we should see some incremental margin on the new programs. Then, we continue, through our lean manufacturing initiatives, to drive manufacturing efficiencies, so those will also help impact margins, long-term.

We've got a plan specific plan laid out here that gives us incremental improvements in each one of these kind of buckets that Paul is talking about. But just as a broader issues, I want to come right ad it because there's this thought process here that maybe we're going to (indiscernible) here in the (indiscernible) perhaps and that's the result of pricing and competitiveness in the industry. As I go through, you know, I've got access to look at all of our dirty laundry and I can look down into our individual site performance and I can see that in Q2, we had just a couple, really, I think four or five of our 12 manufacturing sites that were operating above the target gross margin range, and we had a number of others that were just underperforming with the revenues that they have that we know we can improve upon. Then we have got a couple of others that still don't have critical mass and revenues and are a significant drag on margins. So when I look at that, I'd say we improved the performance at a couple of our underperforming sites and we drive some additional revenue into a couple of others, and we are darn close, on top of the basic initiatives here that Paul has got outlined.

So off that last point, do you see any facility closures coming up then to deal with the underperforming, dragging sites, or are we done?

You know, we focused heavily on driving revenues into what we call some of our flagship sites, and then the ones that were extremely strategic to us to fill up, which was Asia; we wanted to make sure we had critical mass over there. We are beginning to drive revenues into some of these other underperforming sites, and we're finding that there still is a fairly strong regional bias or strong regional preference among certain customers or certain kinds of programs, so we're beginning to see some success at these underperforming site. Now, the jury is still out here on our ability to have 100 percent success but right now, the indications are that we should be able to drive revenue into these facilities and have customers that actually prefer to have their products manufactured in these facilities that are closer to them, or the facilities that have special capabilities.

The second question I had is, you touched a couple of times on the computing business; you did say it would be down significantly in Q3. I'm just wondering if you could give more color there? Is that a program departure? Is a product transition? What's going on in computing?

It's primarily driven by softness in an end market with a customer, so I don't really want to say much more than that because we have such a short list of customers there.

My last question is just -- how long do you expect the cash impacts and the inventory impacts from the inefficiency this quarter to last? Will they leak into next quarter as well on the balance sheet?

No, we don't expect them to weaken any further. In fact, we expect substantial improvements. We're targeting to have an inventory turnover at the end of the third quarter approximating six times per year, so we expect to see improvement in Q3 and then further improvement in Q4. I would not expect it to worsen.

Joseph Wolf, Banc of America.

A question maybe for Paul and for Gordon also. On the cash side, Gordon, you held cash flat during the quarter but you drew down a facility. As you look out at the potential program wins and the working capital requirements, what are your gives and takes in terms of what you want that cash balance to look like and how far you are willing to draw down that facility in the near-term?

Then, for Paul, I'm wondering, as you look at these product transitions and the ability to drive business into the underutilized sites, have we seen your business delivered towards the appropriate facility from the get-go on the new products, or should we be looking for more program transitions at the end of the year?

Let me take the cash balance. The bank revolver has a minimum domestic cash balance requirement of I think 44 or $45 million, and that influences the overall cash balance, as does the balance in the overseas subsidiaries.

I would expect that we would not be in the revolver in Q3 nor in Q4. Does that answer your question or is there more to it?

No, that's good. Thank you.

In terms of the underutilized facilities, all of those would be new wins that would move directly into those facilities.

Have you become more efficient at picking the spots for the new program wins over the last two quarters?

Yes, we have. As we've continued to refine our sales and marketing process, our ability to understand the opportunity much earlier on in the process and target the site has gotten much better.

Keith Dunne, RBC Capital Markets.

Thank you. A couple of things - first, I apologize for the first one but can you just repeat the manufacturing wins? How many? Then you threw out a bunch of names. Can you go over that again please, Dean?

Sure, let me go back and grab -- bring the script here. We had six overall wins, Keith, and we didn't give you all of the names; we gave you just a short summary of the overall names. Kristian, do you have them right in front of you there, that you can repeat them?

I think one of them was Itron; another one was GE Consumer and Industrial Products.

We said, then, the other one is AMS and then we had two Medical customers and a networking customer that we couldn't disclose yet, Keith.

Thank you. I am not asking you to say a lot more on Computing, but do you expect that market softness to persist for six months, or does it look like just a one quarter correction, or do you have any sense of that?

We're not certain yet at this point, Keith.

As far as some of the ramps that you're doing, how is Harmonic going these days?

Harmonic is one of those programs that was technically extremely challenging, but it's going quite well at this point.

On the other side, are you in a position that -- my channel checks tell that you won the Baxter business down in Florida for about 35 million PCBAs and hopefully, long-term, you get the box. Can you comment on where you might do that program?

I can't provide any commentary.

Okay, I just thought I'd try. Inventory -- obviously it boosted and you are talking about -- Gordon, you said six turns by the time we get to the end of the June quarter. Is there a way that you can break that out and give us any color? I'm sure some of the inventory you took over as part of manufacturing programs, that might have a put on it, say, over the next year -- can you give us any color of how much of the inventory ramp in the last six, nine months just reflects inventory transitions from OEMs that you've got to work through?

Paul has got his plan of attack here right in front of him, so why -- (technical difficulty) -- just break it down for you quick (sic), Keith?

Keith, my information here more depends on how we are going to get where our target is in Q3 rather than what has created it. So, the first one really, as we said, as we've got this buildup of inventory, as we work through these transitions, some of these require us to take on a pretty ugly supply-chain. That will probably give us between two and three days of improvements there.

Once we finish these transitions, we go through a supply-chain optimization where we push an amount of the inventory back onto our suppliers. That will, again, start between two and three days of improvement.

One of things that we did in Q2 was we turned on new ERP systems at two of our facilities. What we will typically do during those quarters is buffer our inventories to protect against any interruptions. That was about another two days of impact. We are expecting our lead initiatives to probably bring down our overall inventory work-in-process about a day.

Then we had a couple of kind of one-time, unusual things that drove up inventory in March that really should just take care of themselves really in the current quarter. One of them is a number of programs that are going end-of-life, the inventory will just burn itself off over the period of the quarter. Then we had one customer with kind of an unusual demand shape through the quarter, so typically their demand is more back-end loaded. The quarter we're heading into is much more front-end loaded, so that drove a lot more inventory into the end of the last quarter.

Then, as last time, one-time items, you've given days on all the others. What do they do for you?

Probably a couple of days.

Okay, great. CapEx is going to ramp in the second half; you said 18 to 20 million is what I think I heard Gordon mention in the second half. Do you have any sense what does '05 look like? Is it 10 million a quarter, kind of 40 million the kind of number, or does it come back down? Obviously, utilization is getting up towards 75 and more so in '05. There may be a need for more expenditures. What does it look like in '05?

It's premature for us to talk about '05, Keith, but I doubt that it would get this high at 10 million a quarter. That seems pretty extreme.

Lastly, can you give us any comments on SG&A? You say it's going to tweak up here. Should we be looking at something, you know, 17 million and less and then up 100,000 or two every quarter after that, or can you give us any color on how that ramp may go, given it's a little bit more of a controllable expense?

As I mentioned, there was a one-time credit in Q2 of about $1 million, so I would expect SG&A expense in Q3 to go up around high 17s, (indiscernible) 17.9 and then stay relatively stable, maybe up a couple hundred thousand for the quarter.

So, if 16.4 is adjusted up a million to 17.4, it's still going to go up another half a million in June. Is that what you're saying?

Maybe not that much, maybe 300,000 to 500,000 (indiscernible).

Okay, great. Thanks very much.

David Pescherine, Smith Barney.

Just to follow-up on the SG&A, you know, you mentioned, in the press release, that your -- the higher SG&A at the end of the year was going to reflect additional investments in sales and marketing to drive growth in 2005. I know we're still early on here in 2004, but given that some of your competitors have put out longer-term growth forecasts for the industry and what they expect for the next couple of years, maybe you'd like to discuss kind of what your internal goals are, given the increased level of spending on sales and marketing?

Well, again, it's a little premature here to have us start talking about '05 yet but clearly, we had a huge revenue growth this year, in fiscal '04, and I would say it was phenomenal, I think, in terms of our ability to grow organically at that rate. (indiscernible) it's been all organic growth.

I would think that we would look to moderate that growth from that rate in fiscal '05 and focus a little bit more on expanding share with our existing customer base, adding more value to our existing customer base so we can improve the stickiness of those customers to the Plexus model and improve our profitability metrics because, you know, we get, I think, better profitability over the long-run when we add more value to the existing customers and we get some economies of scale as we get more share with customers. So, I would not expect another 25 to 30 percent growth rate in '05.

Dave Miller, Tradition.

Good morning, guys. You guys just went through the inventory pretty nicely, but could you just talk about, over the last couple of quarters, if any pricing increases or leadtime increases on raw materials was part of the driving factor for it going up?

Well, we are seeing some pricing challenges now on materials. We are seeing the leadtimes stretch out. It probably is having some -- it certainly is having some effect on the value of inventory, certainly, but I think, for the most part, in terms of margin pressure, we pass those increases on as part of the program to customers in our final pricing of product.

Are customers asking you to build any buffer inventory on raw materials? I know you're saying, on the finished goods side, they are trying to avoid that, but how about on the front end?

No, we typically don't go out and drive large buffer stocks with customers. Occasionally, there is a specific component or two that we have to set aside, but I don't think it's all that material at this point. I'm looking at Paul; he is shaking his head no, it's not material at this point.

Todd Coupland, CIBC World Markets.

Good morning, everyone. I want to go back to this idea of growth is choking the margins here that was brought up a little while ago and basically put it in the context of lean manufacturing. Everyone's talking about it. If I could simplify, all of the EMS guys kind of want to move to a demand/pull model. That makes them have a more efficient manufacturing space.

I'm just wondering, until you get the supply chain educated, if you are, in fact, moving towards that demand/pull model and you see spiky customer forecasts, are you not going to have to dig into your gross margin in order to meet those expectations in a quarter? So, in fact, moving to lean in the short-term could suppress your margins. Maybe long-term, once everyone gets educated, it will work. But I'm just wondering if I'm looking at that right.

This is Paul. Not exactly. Actually, the lean initiatives that we've put in place, we have not seen a spike on the cost side. Actually, even as you go through the learning curve of putting it in place, because (indiscernible) continual margin improvement, so it really does not add cost really to any significant point in the implementation.

I would also say here that (indiscernible) is not a new initiative at Plexus. I think we've been in a leadership position here and lean in support of our Focus Factory model for our customers. So, we've been down this path for a few years now and we are incrementally rolling it out Focus Factory by Focus Factory, plant by plant.

The other unique part of our model here is our reliance on our partnership with certain distributors, which is more heavily emphasized at Plexus for our model than we see with the competition. So, they are working with a number of direct supply-chain OEMs; we are working with, in some cases, direct supply-chain OEMs and we're also working with distributors who are well educated on how to (indiscernible) the Plexus in terms of our supply change strategy.

I got it. Secondly, Juniper closed the NetScreen acquisition and it is a significant contributor to their revenue. Is there additional program opportunities for Plexus there? Could you just talk about that?

No comment.

Chris Lippincott of KeyBanc Capital Markets.

Good morning: Kind of a question -- you had mentioned that some of the new program wins are giving you some more challenges if they are a little more technically difficult. I wonder if you could add some commentary just on the rest of the program ramps. How are they ramping? Are you seeing any of them stretching out, or perhaps what's the rate of them stretching out or perhaps taking longer just to ramp up?

I think, by and large, we're doing a pretty good job here on the program ramps. They are going according to plan for the most part. Just as we said, just the sheer number of them and the handful of them that have been just extraordinarily challenging and we knew they were going to be challenging going into them (sic).

On that assumption, just going on the fact that they are typically six to nine months and you are indicating that - let's assume that you're going to hit the midpoint of your '04 goal. It looks like the second half would probably grow, you know, give or take, around 9 percent, whereas the first half had very strong growth. Are you seeing that the majority of the larger wins are behind you or -- I'm just trying to get a sense of perhaps had the larger wins already ramped, where are they versus some of the smaller ramps or perhaps you can add some color on that?

I think the way I would characterize it is some of the larger ones are along the way and to the point where the team is training and we're getting more efficient at building the product. I would say the same goes for some of these really technically complicated ones and we are kind of beyond the hump here in terms of the challenge associated with those. I'm looking at the ramps, the revenue ramps continue but it's not a question of setting up a new Focus Factory and learning how to build a product for the first time; it's just building more of it.

Just going back to the SG&A question before, in terms of the word 'modestly', what would you define it in modestly? You're talking about your increasing modestly in the second half of '04.

I'm talking about 200,000 to 300,000 per quarter.

Carter Shoop, Deutsche Bank.

I just want to quickly touch on what the geographical breakout was in the quarter, U.S., Mexico, etc.

I'm sorry, could you repeat the question? I missed the first part.

I'm sorry. Could we get the geographic breakout?

The geographical breakout in terms of revenues?

Yes, please.

Well, overall, our low-cost country revenue, which would include Mexico and Asia, was about 20 percent of revenue. So, if you look around the world, it looks like the UK is about 10 percent, Mexico is about 10 percent, and Asia is getting close to 10 percent of revenues.

Okay, great. Then can we talk about what's driving the incremental business to Asia? Are we seeing incremental pricing pressure for the high-cost assets here in the U.S. and in the UK, or are we seeing the capabilities of the Asian facilities really increase dramatically? Can we talk about what's driving that demand in Asia?

It is a collection of factors. In some cases, it's Asia as an end market for our customers and that wanted build in proximity to end markets. With other customers, it's the opportunity to build certain assemblies or subassemblies of their products in a lower-cost geography. And in part, it's our capabilities there, from a complexity standpoint, continue to improve.

For the most part, excluding business that's being manufactured for Asia, it's mostly subassemblies, i.e., PCBAs that are coming back to either the end OEM in the U.S. or the UK or to Plexus internally?

PCBAs or higher level product subassemblies.

Great. In Malaysia, why Malaysia? Everybody's going to China right now. You guys are kind of going down your own road here in really developing Malaysia and kind of moving away from the Chinese assets you guys have. What's going on there? What is the strategy there, longer-term?

I wouldn't characterize it as moving away from the Chinese assets. What we are seeing is that, for customers that require the sophisticated complex product, Penang is a preference for that, the availability of a very technically strong workforce there and our goal is to move the product in and out of the supply-chain model there is more supportive (sic) of our kind of manufacturing customer profiles.

Okay, great. Then just looking out maybe three to five years, how do you see the end market, geographical end market break out looking? Are we going to see Asia get up to 25, 30 percent of revenue, or do you think the current level is more realistic?

Well, the marketplace continues to evolve and the supply-chain models continue to evolve and the, of course, market continue to expand. So, part of this depends a little bit on what end market expansion looks like for our customers in that part of the world but certainly, I can see it growing to 15, perhaps 20 percent of revenue for our model.

Okay, that's the next three to five years? Okay. Great. That's all I have.

I guess we will take one more question here because we are beyond our timeslot here already.

Jim Savage, Wells Fargo.

I actually have a couple of things, if we can do them quickly? First, you have had three quarters of pretty good, substantial revenue growth and your guidance for the next quarter is for much slower revenue growth. Is that because we have seen the bulk of the volumes in the programs already having ramped, even though they may not be as efficient as they will be, going forward?

I think that's a fair way to characterize it, yes.

The other question has to do with -- some of your competitors have been talking about developing global engineering capabilities with significant product engineering in both Asia and in Europe, as well as in the United States. What are your plans, in terms of how you're moving forward in engineering? You're thinking it'll still be primarily U.S.-based in terms of your high level product engineers?

We're going to continue to globalize our engineering. Of course, we have a substantial presence here in the United States; we also have a developing presence in the UK and we have some engineers over in Malaysia today and as we acquire the new facility, we will move those people into that new facility and add some more headcount to our engineering capability in Malaysia. But we still see the mix of resources as being the right solution for our customers.

Do you think that your customers are not going to balk at the cost differential?

No. I think that they're going to take advantage of the cost differential in some cases but the reality is that the program cost in engineering is certainly competitive but getting the program done at a high-quality level on time and in a predictable way is ultimately the biggest value to the customers.

Thank you, Dean.

Thank you. With that, we're going to wrap it up. We would like to thank everybody for participating in the call and thanks again for your support of Plexus. Good morning, everyone.

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