Plexus Corp (PLXS) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Plexus Corporation conference call regarding its fourth quarter and full fiscal 2004 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 1 hour. I would now like to turn the call over to Mr. Kristian Talvitie, Plexus's Director of Investor Relations. Mr Talvitie, the floor is yours.

(Microphone on late) -- 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 provides non-GAAP supplemental information, more specifically, net income and EPS excluding restructuring costs, asset impairments and unusual tax adjustments. All comments concerning earnings on this call refer to pro forma earnings. For a full reconciliation of pro forma earnings to GAAP results, please refer to our press release and periodic SEC filings. Before we begin today, I would like to introduce 2 guest who are joining us on the call, Paul Ehlers, Senior Vice President and President of Plexus Electronic Assembly, our manufacturing operations, and Mike Verstegen, Vice President and President of Technology Group, our engineering operations. Because this is our year end call, we have altered the format a little bit and the prepared comments will be a little bit longer than usual. Today's call will begin with Dean making some brief comments about the fourth quarter followed by Gordon with details on the financials and then Dean will wrap up, summarizing the full 2004 fiscal year and provide some forward-looking comments about the first quarter and fiscal 2005. I will now turn the call over to Dean Foate.

Thank you, Kristian, and good morning, everyone. Last night we posted results for our fourth quarter. Our revenue for the quarter was $273 million, as expected, with pro forma EPS of 9 cents. Looking at our performance by sector, our networking and datacom sector was down 9% compared to the prior quarter, slightly more than expected. The quarter's results for this sector were mixed. We had a number of customers demonstrate improved demand, but ultimately the softness among others brought the sector down. Looking to the fourth quarter, however, we are expecting-- looking to our fiscal first quarter, however, we are currently expecting a fairly significant uptick through a combination of end market strength and new program additions. Medical is up 17% sequentially as expected. We expect this sector to be flat to slightly up in the December quarter, as normal seasonal strength with certain customers is offset by relative weakness with a couple of others. Industrial commercial was off 3% in the fourth quarter. We had expected it to be up about 3%. Decline was driven by softness with a handful of customers, as we look to the first quarter we are expecting Flash revenue as general softness persists in this end market. Computing was down 8% in the fourth quarter, less than expected. We are currently expecting modest improvement in our December quarter. Our other sector was up 1% for the quarter. Looking at new wins, during the quarter we had a healthy number of new customer and new program wins in manufacturing. The breakdown of the 12 wins by sector, 6 were in medical, three were in networking and datacom, and three were in our industrial sector. We also had a healthy 30 significant new engineering program wins, more than half of them in the medical sector. This drove a significant improvement in our engineering services booked backlog.

From a capacity standpoint our global as tooled, manufacturing utilization was approximately 73% this quarter with the highest utilization rates in Mexico and the UK. Next quarter we expect to the pass utilization to dip as a new facility in Panang, Malaysia began production in October. As Kristian outlined, before I review the year and our outlook for 2005, I will now turn the call over to Gordon who will get into more detail on fourth quarter results.

Thanks, Dean, and good morning, everyone. Excuse me. As Dean noted, revenues and pro forma earnings came in as expected at the low end of our earlier guidance for the September quarter. I'd like to review three topics this morning to provide some color on our fourth quarter results. Excuse me. First I'll review ongoing operations for the quarter. That is pro forma results without restructuring and impairment costs and at the prior 20% effective tax rate, which excludes valuation adjustments and other discrete adjustments. Secondly, I'll discuss briefly the restructuring costs and other non-recurring charges for the quarter and finally I'll review the year-end balance sheet and fourth quarter cash flows. Turning to the first issue, pro forma financial results, the fourth quarter was very much a replay of the third quarter. Revenues were essentially flat and gross margins remained at 8.4% of revenues. SG&A expense, however, was slightly lower than in the prior quarter and this lower SG&A and favorable miscellaneous expense are really what accounted for the incremental penny per share that we reported in the fourth quarter. Overall financial performance, however, was much better than in the fourth quarter of the prior fiscal year. Revenues were nearly 27% higher than the prior year period and gross margins as a percentage of revenue were 100 basis points better, that is 8.4% versus 7.4% in the prior year. SG&A increased by 2.4 million over the prior year, but growth was significantly lower than revenue growth and SG&A as a percentage of revenues declined from 7.1% to 6.5%. Clearly we have made progress in both revenue growth and profitability. Let me address the second topic I want to cover, that is restructuring and other unusual charges that we've excluded from the pro forma numbers. Restructuring costs in the fourth quarter were 3.8 million, of which nearly 2 million was for the impairment of fixed assets, principally capitalized software that we are no longer using. And 1.8 million of which was to recognize anticipated severance payments with the previously announced closure of the Seattle engineering and manufacturing facility.

We expect additional restructuring costs in Q1 and Q2 of fiscal '05, as various other actions required to close Seattle are completed. We currently anticipate the total cost in the Seattle closure to be about $8.1 million. The second unusually charge that we have excluded from the pro forma earnings is an approximately $36.8 million tax provision to establish evaluation allowance for the net deferred tax assets. This non-cash charge, which we had previously discussed, conceptually writes-off all the net domestic deferred tax assets. The only remaining deferred tax assets without an offsetting valuation allowance related to non-U.S. operations. The ongoing financial impact of the establishment of the valuation allowance is that we will have no tax effect on the financial performance in the United States for probably the next 2 years. This means that any losses would not reflect the tax benefit and any income would not require a tax provision. As a result of the valuation allowance and continued tax holidays in Asia, we anticipate the company's overall tax rate for fiscal '05 to be between 5% and 8% of pre-tax income. Let me turn to the balance sheet and fourth quarter cash flows. Receivables were 148.6 million and DSO at year-end was about 50. This is three to four days higher than we traditionally run and was caused primarily due to increased shipments later in the quarter than our prior experience. Inventories were 173 million. We had hoped to hold inventories at about the third quarter level so we missed by about $6.7 million. Higher than previously expected inventories were required to support higher than previously anticipated first quarter '05 production levels for a major customer. Inventory turnovers at year end were approximately 5.8 times or 62 days. Accounts payables, I'm happy to report, increased $25 million from the usually low third quarter level to just over $100 million and provided approximately 36 days of financing. Our overall cash cycle then was about 76 days.

Capital spending in the fourth quarter was $15.3 million as we caught up with many projects that were delayed from earlier quarters. I think our spending in the final quarter of the year was more than the combined spending for the prior three quarters. The largest capital project, of course, was the acquisition and initial outfitting of the new facility in Panang, Malaysia, but we also added manufacturing capacity in Chicago. Capital spending for the full year was $24.6 million, a couple of million dollars higher than previously anticipated. Depreciation for the fourth quarter and full year were $6.2 million and $25.4 million, respectively. Cash and equivalents were nearly $45 million and the only debit outstanding at year end was the $23 million capital lease obligations related to the San Diego and Kelso facilities. There were no amounts outstanding under the new $150 million revolving credit agreement that we announced last quarter. Finally, I am pleased to announce that cash flow from operations for the quarter was a positive $19.6 million. Now, let me turn the call back to Dean.

Thank you, Gordon. l will now take a few minutes to review some highlights from fiscal 2004 and then outline our priorities for fiscal 2005. To put things in perspective, we began the year on the back of a two-year revenue slide. Revenues had declined from our high point of just over $1 billion in fiscal 2001 to $808 million in fiscal 2003. Because of this revenue slide and the evolving preferences of our customer base, we embarked on a major realignment of our footprint. We closed four of our then 10 domestic facilities while we added 3 facilities including our first two facilities in Asia. We closed our consolidated number of smaller PCB design only engineering sites and realigned a number of corporate functions. More recently we announced the closure of our Seattle operations and the startup of a new facility in Panang, Malaysia to expand both manufacturing and engineering presence in this vibrant region of the world. Over the past three years we embarked on some substantial strategic initiatives. We managed through the leadership succession process with retirement of our founding executive. We leaned down our corporate structure, while adding some new leadership to our executive team. We continued to modernize our IT infrastructure while eliminating a number of despaired systems and we began to refocus our entire business development organization and processes toward end market sector oriented teams to drive intelligent growth. As we began fiscal 2004, we were in a position to begin to leverage the benefits from these progressing strategic initiatives, lower cost structure and developing global footprint. We adopted the mindset that all good things come from customers and set what seemed at the time to be an aggressive target for revenue growth at 15-20% for the year. Our primary objective was to halt the revenue slide and take advantage of our lower cost structure to return the company to profitability while never wavering on our commitment to customer service excellence.

Additionally, we wanted to strengthen our customer portfolio, which had suffered due to customer defections as a result of collapsing end market demand in 2002 and 2003. Early on in 2004, our focus on customers began to generate results. Through the combination of a number of significant new customer wins, existing customer share gain due to solid execution, and improving end market demand, we are able to achieve 29% revenue growth for the year, ending the year over the $1 billion mark, year all time revenue peak. Growth at Plexus was achieved organically, that is without acquisitions, which is a strategy that we remain committed to. Approximately half of this organic revenue increase came from new customers and new deals are structured to support our profitability and working capital goals. Additionally, organic growth rate in fiscal 2004 was the highest in the industry. We grew in all of our geographic markets. We grew manufacturing services and engineering services. We gained significant share with a number of key customers and we increased our revenue and profitability per customer metrics while trimming non-strategic relationships. We believe this is a clear confirmation that the value proposition of Plexus is alive and well. There is a strong market for our value-added global services offering, which is focused on helping customers achieve competitive advantage. While we focus mightily on improving the top line in 2004, we balanced our approach by making commitments to improve profitability and efficient use of capital. We are able to leverage our higher revenue on lower cost structure to earn a profit of 31 cents compared to a loss of 19 cents in the prior year. We drove a 64% increase in gross profit, improving our gross profit margins from 6.6% for fiscal 2003 to 8.3% in fiscal 2004. We had also set a goal to make significant relative improvement in return on capital employed. For the year, we delivered a return on capital employed of 5.4%, up 930 basis points from 2003. To get alignment throughout the organization we made return on capital employed a substantial element of our variable incentive compensation plan. We invested in educating our organization about the importance of this metric and the components that drive improvement.

We expect continuing improvement in the coming year as we progress toward our weighted average cost of capital, which is in the mid teens. All that said, there is no question that our current return metrics are a far cry from where they need to be. As we discussed on previous calls, growing pains strained our organization at times and had a dampening impact on profitability in 2004. And will effect the first couple of quarters of 2005. We've spoken about the negative impact to our financial performance due to a record number of customer transitions in the year. A few were very large and occurred at a blistering pace. At times we sacrificed our financial performance during these transitions to insure continuity of supply for our customers, regardless of the source of challenges. Even though we had great success growing revenues in many domestic locations this past year, not all sites have critical mass in revenues yet. Removing the capacity in Seattle will help, but this will have a near-term impact on profits as previously announced. We have spoken about the startup impact of our new facility in Panang as we expect our global manufacturing engineering services offering there, and last, most of 2004 was a difficult year for our Engineering Services Company, but we are encouraged with the recovery evidence late in the year. So as I begin to transition to talking about the future, our past is generating long-term shareholder value is clearly divided into two phases. I think that the first phase of our journey just completed can be summed up by an internal battle cry that we coined for the year, back to a billion. This first phase of our recovery was based in large part on top line growth, while making appropriate adjustments to our footprint, cost structure and working capital metrics.

The second phase has begun in fiscal 2005. Now our battle cry has changed to intelligent profitable growth, emphasizing an ever-increasing return on return on capital employed. Let me now walk through our five key priorities for the year that are designed to improve our overall returns. Number 1, drive intelligent top line growth across our key end market sectors. By this, I mean gain share with key customers, increase manufacturing value-add, target sticky, higher margin business and drive new business into sites that don't have critical mass. Number two, improve penetration of global engineering services. Technology group provides strong profit leverage and, importantly, as a key value-added service that increases customer stickiness. Number three, improve working capital metrics. Return on capital employed is now the key driver in pricing and establishing commercial terms. We must continue to leverage our long-standing lean sigma initiatives to increase velocity, reduce waste and reduce inventory. And we will increase the benefit from our supply chain relationships. Number four, flawless execution to improve productivity. Again, continue to invest in lean sigma initiatives to improve labor productivity and continue to improve material management processes and planning systems. And last number, five, moderate the growth in SG&A. Our new sales and marketing organization is largely built out, our organization is adopting a less is more approach to IT initiatives focusing on projects with higher returns, and we must continue to make progress controlling our healthcare costs. So while we aligning our organization around these five key operational excellence and profitable growth priorities through our performance management system, now I'd like to outline some specific guidelines for fiscal 2005. On the revenue front, we are targeting 15-18% revenue growth this year, somewhat ahead of the predicted industry growth rate. Each of our market sector teams has specific supporting objectives and are aligned by team incentives.

We are committed to making further progress on our return on capital employed metric, with our weighted average cost of capital in the mid teens, we have our work cut out for us. Key drivers include continued margin expansion and improved working capital efficiency. On the former, we remain committed to driving toward our 10-12% gross profit margin range. On the latter, we have targeted improving our cash cycle by a minimum of 10 days near-term. Return on capital employed will again by a determinant of bonus awards in fiscal 2005. Now, moving to talk specifically to the first quarter of fiscal 2005, we are initiating revenue guidance of 280 to $290 million and pro forma EPS in the range of 9-11 cents. I know our prepared comments have been lengthier than usual, so I'll keep the wrapup pretty brief. But I do think it is important to put the challenges that we have in front of us in perspective with the substantial progress we have made over the past 12 months. All the key indicators are moving in the right direction. Revenue is up 29%, gross margins are up 180 basis points. SG&A as a percentage of revenue is down 150 basis points. Return on capital employed is up 930 basis points. Our balance sheet is in great condition and our customer base is stronger than ever. I strongly believe in the value proposition of Plexus. We are unique in the industry and create competitive advantage for our customers and importantly, I hope that we have been able to illustrate that we have not exhausted the operating leverage in our business model. Now I would like to thank the more than 6,000 Plexus employees that really did an outstanding job this year by focusing on customers and delivering results. With that, I will open the call for questions. Operator?

Thank you. The floor is now open for questions. If you have a question, please press star, 1 on your touchtone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while posing your question to please pick up your handset to provide optimum sound quality. Your first question is coming from Patrick Parr of UBS.

Good morning, guys.

Good morning Patrick.

Seattle and Panang, I was wondering, Gordon, maybe if you could quantify the exact impact in the fourth quarter as well as the fiscal first quarter and then what the outlook is for those diminishing through the year as a driver of gross margins.

Yeah, I can be a little bit more precise on Panang than I can on Seattle. Seattle's going to depend on the transitions and the programs that get transitioned and the costs that are incurred. But, regarding Panang, Panang costs us about a penny a share in Q4 and that will probably expand about two cents a share in Q1 and Q2 of '05. I would expect by third quarter should be about breakeven.

Okay. How long is Seattle at least a drag, if not a quantifiable drag?

It's scheduled for closure by the end of the second fiscal quarter.

Okay. All right. So that, I guess, explains part of the outlook for gross margins improving. I mean, you laid out the number of things, lean six sigma, things like that. Pricing mix? I mean what other things can you work in that regard to drive margins up through the year?

Well there are a number of things. All the factors that you have cited, lean sigma, we also are working on renegotiating some contracts that we have to improve. As Dean said, we're really focusing on return on capital employed as we develop new business.

I would add to that, Pat, that there's no question that driving revenue into some of the other underutilized sites is going to have a very significant impact on improving gross margins. Additionally we see some recovery in our engineering services organization and of course revenues there, although, you know, four or five% of our overall revenues are certainly at a very accretive gross margin level.

Okay. And then as you look at your various end market, target end market segments, where do you see the strongest growth on a full year basis for '05? Maybe if you could rank them, please.

Well, certainly our networking data com market sector is, you know, 42% of overall revenues and we had just a tremendous growth in '05. I think that sector was up somewhere in the neighborhood of 58%. We're not quite expecting it to grow quite at that level, but we would expect, you know, that -- that sector for us to be up somewhere, you know, in the 30% range or more in the coming year.

Okay.

Medical, we have also set a very strong target. We grew it in '04 at about 22% and we would expect to try to be close to that number, again, in the coming year.

Okay.

So good, aggressive goal in medical. Industrial commercial was somewhere in the neighborhood of 28% or so in '04 and we would hope to achieve 28% or hopefully a little bit better in the coming year because we feel that there is some significant opportunity for us in that sector. So, those are the three biggest sectors and I think those are the sectors that are going to primarily drive revenue growth for us in the coming year.

Okay. Great.

You're welcome.

Thanks.

Thank you. Your next question is coming from Brian White from Kaufman Brothers.

Hi, good morning, gentlemen. When we look at the different end markets, you talked about some growth rates for different end markets. Where are you seeing the most opportunities, you know, for new outsourcing and, you know, where is this coming from? What size OEM's and also talk a little bit maybe about the defense market. I think you've spoken a little bit more about it, although it's a pretty small percentage of your revenue today.

Sure. Well, I think in terms of where we're seeing incremental-- also it's a question of how you define that. We really believe strongly in trying to expand share with our existing customer base as a very much a first priority. And, you know, I think most of you are aware of our top end customer list or perhaps even many as far as deep as our top 15. We have some good customer names in there that feel we can continue to add significant share of business in the coming year. And then we're being very targeted about going after additional opportunities that we think really kind of fit our business model, which is, you know, complex high technology, maybe very sophisticated fulfillment challenges and targeting those kinds of companies and, you know, we're certainly going to go after some of those in our -- in the networking datacom sector, but, you know, medical, of course, is an opportunity for us. Some of these companies are very big names, but they are total electronics outsourcing is not huge in terms of what many of our larger competitors get attracted to and of course the challenges to bring those programs up are significant. And industrial commercial sector, there is a lot of companies that have, you know, 40 to $50 million worth of outsourcing. They may have a very, kind of a bifurcated approach to it today where they have their business spread out all over the place and we're looking at some consolidation opportunities there. We're also looking at going after some that have not outsourced at all yet. And I would also say that Defense, we've been talking about Defense for sometime now, or what we call Homeland Security and Defense, that combination of business. Those-- we seem to be gathering momentum there with, over the past year, at least early in the year without a lot of effort of our part, more because many of these defense related companies have their outsourcing spread over a lot of smaller suppliers and they are not able to get the sort of cost profiles that they are looking at and they are concerned about the ability of some of these smaller companies to support what ultimately they see as a higher run rate for their programs. So, we've got some-- I'm reluctant to set, to layout a goal for you for the year related to defense related programs, but we have set a goal there. It's a rather new sector for us and we're not certain how successful we're going to be, but we understand all the regulatory issues there. We have a team working on this and we're going try to drive some penetration of outsourcing for some of these defense related programs, which I would say are, in some respects from a regulatory standpoint, analogous to what we see in medical.

Okay, and then when we look at your Malaysia plant, that began production in the month of October, is that correct?

Ollie, do want to take that?

Yeah, that's correct.

Okay, and, I mean, how many people do we employ? Do we have-- how many lines? Two lines up and running, one line? And kind of how should we think about that ramp into '05?

Yeah, we have one line up and running and shipping product now. And we have a plan to add lines as the revenue grows throughout the year.

Okay. Thanks a lot.

Thank you. Your next question is coming from David Pescherine from Salomon Smith Barney.

Thank you, good morning.. Dean, given the outlook that you have for the full year revenue, it looks like it's going to be a bit back-end loaded. So can you just give us a sense what the book of business looks like today that's already been booked and how far that gets you to achieving the goal and how much new business you need to win in the next quarter or two to actually hit those numbers?

Sure. I'll try to give you some sense of how we look at it and give you some -- some reasons for optimism here because as you point out, this is going to be a fairly back-end loaded year. The way we look at our projections for revenue in the coming year is, you know, as you're trying to do the arithmetic between the 15% and 18%, you are looking at somewhere between 160, say, to $190 million in additional top line. We would look at about 30% of that, or so, as being higher probability, what we call revenue because we already have it fairly well projected at the sites and really that 30% or so represents projected end market demand of existing programs. So business that we have had for a long time that are still growing or business that we have won in prior year that is growing. So, roughly 30% of that number is pretty well teed up already. I talked about some number of new wins today. Those new wins probably add somewhere in the neighborhood of $75 million or so to the overall number, but these are a little bit-- the probability goes down a little bit in terms of their impact in the coming year because we need to ramp these programs up, you know, according to plans and et cetera, et cetera. So there's a little more uncertainty. So if you look at those -- at that number, we would say we probably got another 25 or 30% of our incremental needed business pretty well identified, already won, but less predictability to the ramp. And so we're pretty well on our way already, the way we see it, but you also have to remember, as you look to the incremental number that we put on top, that you always need to plan for 3 to 4% business that erodes, either for end of life reasons or customers that go away or those sort of things. So you have to have a little bit of a netting factor there of business you need to replace. So hopefully gives you some sort of flavor as to how we're stacked up for the year.

Yeah, that's good. And then in terms of the March quarter, we should expect then pretty normal seasonality or do you think that you could actually see revenues grow sequentially every quarter in the next year?

Well, we're looking at Q1 here as being, you know, it gets driven up normally by -- by some strong medical customers now, so we would expect, you know, now we're not seeing tremendous growth. It's really -- it's being driven somewhat by that by our networking datacom strength in the coming quarter, but we will see some pullback then on those medical customers in Q2. So, you know, I'm reluctant to provide guidance there, but I wouldn't look at our second quarter as necessarily being, you know, an exciting kind of breakout revenue quarter for us.

Okay. Then one final question. I believe last quarter you had talked about having to really look at three sites that -- where you were re-assessing three sites and you announced, obviously the Seattle facility closure. So, you know, can you talk a little bit about the 2 sites that you didn't close and maybe any initiatives that you've put in place there and, you know, what we should expect in the next quarter or two if you don't see the types of improvements that you expected. Could we see additional closures over the next quarter or two?

Well, we're hoping not to do that, actually. I mean, we sat down and we analyzed, as we do on an ongoing basis, the performance of all of our locations and the trends of our business. And as we looked at Seattle in particular, we -- we had a couple of year of revenue slide in that location. We were just not able to sustain customers in that location for a variety of reasons and we came to the conclusion that it was one too many difficulties for us to try to solve in the coming year. So we -- and we felt that we had replicated those capabilities elsewhere. So we decided to eliminate Seattle because it had been on a two-year slide in revenues and we just did not see that we were going to be able to recover it. We have our facilities and so do a couple others that are still performing below what we would hope or what we would expect longer term, but both of those -- both of the other locations have had growth in the coming year. Some of it was fairly substantial, so we've had a number of new customer program come in there and we have a pipeline that's developing that should help those locations. So our plan right now is to make those sites work. I talked about that we grew in all of our geographies around the world last year and certainly the U.S. Revenues were up 32% in the United States last year. We expect the revenues to be up again in the United States in the coming year. So we're expecting to utilize that capacity.

Great. Thank you very much.

You're welcome. Thank you. Your next question is coming from Steven Fox of Merrill Lynch.

Couple questions regarding your -- the five targets you talked about for next year. First of all, when you talked about driving intelligent top line growth, how much of that would involve paring back the total number of customers? Have you done any of that yet and are you looking to do that in the next six months or so?

Well, some of it would. I'm reluctant to quantify it, but certainly, you know, we made a significant commitment to focus on strategic customers in two ways. In the past we took out a significant number of our PCB design only locations that in large part were focused on transactional business with customers that we didn't have a substantial higher level design relationship or manufacturing relationship. The prior strategy was to try to kind of feed relationships through that organization. So we backed away from a number of what we call, you know, transactional relationships there. We also went through a process of pruning some customers out of the organization through the past year, or, and if -- or if the revenues were not what they had originally predicted to support the pricing we had originally committed to, we went back and repriced a number of programs with customers so that we could make them -- make them profitable for us. So it's an institutionalized process. We look at it sector by sector. We analyze whether -- whether the opportunities that we have with these customers are going to meet our needs and whether they are succeeding the way they thought they would succeed and we would expect that there will be some trimming as the year goes on. But it's not -- not an exceptional wholesale reduction, I would say.

Okay, and then on the SG&A, you mentioned growing SG&A at a more moderate rate. Could you sort of quantify if you grew sales 15-18% this fiscal year, what type of level of SG&A growth would we look for in dollars?

Let me take another cut at it. I think, Steven, we're looking for really modest increases in SG&A. The-- I would expect SG&A in Q1 will be up a few $100,000 and that we'll try to just keep a very moderate growth on SG&A.

Thank you.

You're welcome.

Thank you. Your next questions coming from John McManus of Needham & Company.

Yes. Could you comment there on the ability to retain customers in Seattle, especially, as I remember, Seattle did a lot of class three, may have been the first plant who did a lot of class three medical work. Could you comment on your ability to retain these customers and your plans about where you're then going to put a lot of the class three medical work around the world?

Hi, John, this is Paul Ehlers. What we did when we looked at the Seattle closures, we went through the customer base and really sorted out which ones were the right fits for Plexus going forward. All the customers that we wanted to retain, we will be retaining. So in terms of where they are going to be going, as Dean said, we've replicated this capability in a couple of other locations and so they will be going to multiple locations, both in North America as well as Asia.

And how -- how quickly can you bring up class three certification there in places like Asia and other locations other than Chicago?

Yeah, we, we actually have that planned to be class three certified, so to speak, by our Q2.

In Asia we're talking about.

Yeah. It's important to remember that Asia was already class two and so we are building medical product there already, so this is just a matter of us building qual -- build of the product , having FDA certify the processes and we'll get through that in, you know, in the course of moving the product and building the products over there.

And just to clarify that, you know, what the hurdle really is there, it's important, I think, to understand that the system requires, the quality system requirements for class two and class three are not really any different. It's just that when it's a class three product, the FDA puts their levels of scrutiny to the equality system itself.

The other question I had is that, you know, you gave us some idea of the growth rates you anticipated in some of the major sectors. Those growth rates are substantially higher than the overall 15 - 18% revenue growth rate and I kind of wondered is there a disconnect here or is there something we're missing, or are you being conservative because the sectors indicate that the growth rate could actually be higher than the 18%.

Yeah, John, I guess that's the difficulty with trying to give you some relative guidance there on the sector growths. I think you got to put a range around those numbers that I used.

Okay. Thank you very much.

You're welcome.

Thank you. Your next question come is coming from Steve Savas of Goldman Sachs.

Thanks, good morning.

Good morning.

I guess first question, you know, with a bunch of business you've won in the last couple of quarters and I think you said that the manufacturing business that you booked this quarter would probably be in the 75 million range or so annually. A lot of your competitors, as new programs, particularly larger programs, start to ramp up, I don't know if I'll use the word excuse, but they use it as an excuse to say, well, it's going to take a hit to margins as we're ramping the new business because of the startup costs and many of us would look at that and say that's actually what your core business is, is to win new business and ramp it up and start producing. Do you think that -- is there a way that you plan on managing or looking forward at the gross margin lines and it's a place where you seek to improve it, are you worried about startup costs and then two quarters from now we're going to hear well, we're ramping a big program and that's why we're taking a hit to gross margins. Do you think you've got your arms around it as part of your core business?

Well, you know, that's been one of our favorite excuses this last year, too. There's no question that when you bring on new business that it does have an impact to margins early on in these programs. They are challenging and one of our difficulties last year is we brought in just so many of them at once and a number of them, like we've commented, were actually being moved out of competitors facilities and that -- that process sometimes can be-- you can sometimes lack control based on the level of cooperation that you get from the -- the other party there. So that did impact us in the prior year with some of these more complex programs. But we are also looking at as part of our intelligent profitable growth plan here is not to necessarily target another year of the blistering, you know, 29% revenue growth. We're trying to do this in a more targeted and controlled fashion. We're trying to, you know, go after specific pieces of business from specific sectors that can fill up specific plans and some-- to some extent try to do this in a more planful way. You can't control everything. I mean, certainly, you know, there is opportunities that come along that may -- may create a situation. We have multiple ramps going on in a single facility at the same time, but in some respects we're trying to stage these things and control it a little bit better and trying to plan that into our overall model because as you point out, that's our business, right? And so, you know, you can only tolerate the new program ramp excuse so much. Now, having all -- all that being said, if we were to win a, you know, extraordinarily significant program that essentially had to come in at some ridiculously fast pace, I can't commit that we wouldn't see some impact to profitability in a near term, but right now we don't see that on the horizon.

Okay, and just quickly, Gordon, I know, you know, this new business coming on you're saying you're focusing on return on capital employed. Historically Plexus probably had among the best, if not the best profile of return on invested capital kind of pre-bubble for several years in a row. Just wondering if you -- are there any structural differences in the business right now that would impede you from getting back to, you know, mid to upper teens kind of ROIC on a consistent basis?

Well, certainly a lot of those very high return on capital employed statistics were during the height of the dot com bubble. I don't think that's coming back. But, once again we know that we've got to make substantial progress to improve our return on capital employed and start closing in and then exceeding our weighted average cost to capital. And we're going attack both the numerator and the denominator. I think Dean's outlined many of the programs that we've engaged to do that.

Okay. Thank you.

Thank you.

Thank you. Your next question is coming from James Savage of Wells Fargo Securities.

Good morning, gentlemen.

Hi, Jim.

The first quarter guidance, does that-- is that at the lower tax rate, the 5-8% tax rate, the EPS guidance?

Yes, Jim, it is.

Okay, and when we look at your top five customers, what percentage were they in the last quarter and can you say who they were?

I don't have the top 5%. I can tell you the top 10 or 55% of revenues overall, and they are the usual cast of characters there, you know, Juniper, GE, Siemens, Motorola, Harmonic.

Okay, the usuals. Okay. And do you anticipate that as you go through fiscal '05 that that percentage for the top 10 is going to increase?

As we project through the whole year, you're asking?

Yeah.

At this point, as I look at it, I think that the whole year, I think it's going to be right in that neighborhood.

It's going to stay pretty much in the same neighborhood.

Yeah.

And in the first quarter, specifically, it sounds like there is a major new program ramp with possibly your major, largest customer. Would we anticipate that there would be a greater concentration at the leading customers as a result during first fiscal quarter?

That's-- you're on it.

Okay. Now, in terms of your margin structure, it sounds like you begin to see gross margin improvement at the same time that you really start to see the revenue growth in the second half of the year. Is that because of the negative impact from the restructurings over the -- and of the Panay plant over the first two quarters, is that correct?

That's right, Jim.

So we're looking at revenue growth accelerating and margins improving simultaneously in the back half of the year?

Exactly.

Okay, thanks very much.

Thank you.

Thank you. Your next question is coming from Todd Coupland from CIBC World Markets.

Yeah, good morning, everyone.

Hi, Todd.

The inventory increase in the quarter, what segment is that building for?

Well--

I don't think we want to get into that, Todd. I'm sorry.

Okay.

I think Jim was on to us.

Okay. Secondly, when you talk about your networking growth for 2005, the 30%, would you categorize that as mostly with existing customers?

Well, first let's make sure I made the mistake of not giving a range. But assume some sort of range there with that, but certainly some of it will come from existing customers, but we've also had a number of wins that happened later in the year that are starting to ramp fairly significantly in fiscal '05. So it's not -- it's not all -- not all existing customers, or at least the programs that we have of existing customers we've also gained some share with another major customer that's going to help us.

Okay. Sorry, just going back to the Q1 comments by segment, what did you say you thought the networking segment would grow in the first quarter?

Hang on, Chris is going to dig out that number. Yeah, I don't think we did. We didn't give you a number. We just said it was going to be up fairly strong.

Okay.

Modest double-digit expansion, Todd.

Okay, that's great. Thanks a lot.

You're welcome, Todd.

Thank you. Your next question is coming from Thomas Dinges from J.P. Morgan Chase.

Good morning, guys. Very quickly, just a couple of things on the engineering business. What was the total headcount in that business at the end of the year here and then, Dean, I believe you gave out a revenue contribution. Can you just-- I missed it in one. You tell me, that was just in this quarter and do you have it on a year-on-year -- a full year basis and then what was the growth in that business? And then I have a followup.

Sure. I'm going let Mike take some of this. But, just what I did say is that we improved our back log substantially. And I said that typically the revenues are somewhere 4 - 5% overall of our total. That was about the extent of what I said other than to say that gross margins are accretive to overall gross margins. With that, I'll let Mike address the headcount issue, which is-- he needs to profile a little bit for you because of the Seattle facility coming out..

Yeah, at the end of the year the headcount stood at roughly 400 engineers and technologists.

Okay, and how much will come out because of Seattle?

As the Seattle closure commences, we are aggressively expanding in our Carolina facility, our Colorado facility, as well as Malaysia. So as we see kind of the negative impact of the Seattle closure, it will be counteracted by growth at our other design centers.

Okay, and then finally, Dean, you had talked about, you know, 15 or so or better than half of the wins in the engineering group coming in the medical side there. How many of those are you guys looking to possibly transition into manufacturing mandates, say, over the next 12 months or so?

Well, again, this is Mike. All of the medical product wins will transition into manufacturing. Not all will transition in '05. A few of them are quite large programs and by the time the customer finishes their clinicals, they will have an impact in '06.

Okay, and then maybe just one last one on the design wins again. How many of the total design wins you guys booked in the quarter actually came through the engineering group?

I guess I don't understand your question. They are all-- the design wins are all engineering design wins.

No, no, no. The manufacturing wins you talked about.

Oh, the manufacturing wins.

Yeah, of the manufacturing wins you talked about, how many of those were originated through design -- through the design group originally?

Oh, all of those wins were-- were new program wins that were not programs that were in transition. We typically don't include new program wins in manufacturing as they transition from engineering. Maybe we should, but we typically haven't counted those as when we talk about new wins. Those just-- those are transition as they move out of the design phase into manufacturing.

Okay. Thank you.

You're welcome.

Thank you. Your next question is coming from David Miller from Tradition Asiel.

Good morning, guys.

Good morning.

Could you just talk a little bit about any forecast volatility you're seeing, either just in general or any specific segments because some of your competitors are talking about that happening in the September quarter and maybe a little bit into the December quarter.

Well, actually I tried to talk about that even as I talked about the fourth quarter because we did see quite a bit of movement up and down. But overall I think this is just the environment that we're living in. We're-- I think the reality is from now on we're going see -- you have much shorter visibility. Customers are going to have -- you know, they are going to expect faster order to fulfillment cycles, which is what we're trying to achieve and we're just -- this is just the world that we're going to live in. I don't know that the forecast volatility there necessarily was any more exaggerated in the last quarter or we would expect to be any more exaggerated in the coming quarters. I don't know how to quantify it for you any better than that honestly.

Okay. That's fine. And then just kind of next to that, just your lean six sigma initiatives, if we're seeing this kind of, you know, velocity of changes in a quarter, how far are you along with your lean six sigma program, if you could provide percentage of lines or percentage of sites, anything like that?

Well, I'll ask Paul who runs all manufacturing to quantify it for you a little bit. But I would just make this point that we've seen a lot of discussion recently about lean sigma, or lean initiatives. We call ours lean sigma because we have a combined approach here to six sigma and lean. But this has been something that's been at Plexus for a long, long time. And in fact, we had partnered with GE Medical Systems many, many years ago to go down this journey. And I would like to emphasize it is a journey, this is not something that you instantaneously do and so there is a-- there are certain structural things that you do, but there's also cultural things that you need to do differently. So we're quite far along in terms of our journey. And, you know, I won't say that it's implemented everywhere and I'll let Paul talk a little bit to give you some sense of progress of implementation.

So we, you know, we're probably, you know, halfway along if you want to try to attempt to quantify it in terms of our rollout. We've got a pretty aggressive plan here during the next fiscal year to cover probably 75 to maybe 85% of our revenue by the end of the fiscal year in some level of maturity. Again, as Dean says, it's never -- you're never really done. It's really more of a journey and there's certain-- obviously varying levels of maturity there in those numbers.

What do you think, going from 50% to maybe just 75, what kind of impact did that have on at least inventory turns or cash cycle days? Is that a lot of what you're expecting?

Yeah. I think that will certainly be part of the -- part of the improvement program, if you will. We are looking for better inventory turnovers and we are looking for better, longer accounts payable days.

I'll just make this comment as well. We're not taking this approach and doing a peanut butter approach to putting it out there. It's one of the benefits of the way we're structured and to focus factors within individual facilities. We're doing this in sort of an intelligent, what I call, you know, rifle shot approach as opposed to carpet bombing and we're attacking where we have opportunities for the biggest benefit first.

Okay. Thanks a lot.

You're welcome.

Thank you. Your next question is coming from Carter Shoop of Deutsche Bank.

Good morning, guys. Congratulations on the new program wins there. Looks like 12 is the most you guys had in over a year. Looking at that, how much revenue contribution do you guys think the new program wins this quarter are going to have in fiscal '05 and when do you think kind of -- when do you think the programs are going to ramp and if we look at maybe 3Q, how much annualized revenue contribution will we have from those 12 wins?

I don't have this thing broken down quarter by quarter for you. I talked about it as being -- it's certainly more than $75 million worth of annualized revenue for us. And we have talked again about the -- the year being a little bit more back-end loaded.

We've also talked that it typically takes, you know, 1 to 2 quarters to ramp new programs.

Okay, to get to that full ramp there, one on two quarters, that's it? Okay. So when we look at the full year revenue guidance, looks like we're expecting new program wins maybe to slow down a little bit or looks like you guys are being relatively conservative, in your 15-18% growth there with only $40-60 million in new program wins coming from business you have not already won. Is that safe to assume you guys are forecasting a pretty conservative ramp there in new program wins?

Well, I think we do, like I said earlier, there's probably 30% of our growth that's higher probability because we basically have won it in the past year or late in the past year and we have a pretty good handle on how that's going to ramp because we've got some experience now with those programs and experience with forecasting of those customers. The newer programs always add more uncertainty because of the, you know, the getting them ramped up and customers developing demand for those products.

Okay, great. And a question on the Panang facility, sounds like you guys have one line up and going right now. With that in the quarter, do you think that will be up materially or is it still going to be roughly one?

Panang, the new facility at Panang? One line is in production. The second line will probably come on in the second quarter.

Okay, and what's the total capacity there in regards to S&T lines

It depends on the part content, but probably 60-100 million. Paul is shaking his head. Let me give -- he'll give you an accurate answer.

Easier question is of the lager of the building?

No, no, the 2

Again, Gordon's number is a good one. And, again, it depends upon the parts content.

So, again, I'm not sure that answered the exact question you have, but they are saying based on those two lines, the revenue capacity is certainly more than 100 million.

Okay, and then what would be the capacity utilization of maybe of actual plant itself, not necessarily the equipment in there already, but the actual physical plant? Is that still pretty low?

The actual total capacity from a physical square footage standpoint, again, with some squashiness around the type of business that you're building there. Paul, do you have a sense of total revenue that we could do there?

Yeah, in the 150 - $200 million range, probably. Again, it varies widely depending upon the kind of product we're building there, but those are reasonable numbers to use.

Okay. One last question here. On the gross margin guidance, would the 10-12%, is that a target longer term or is that by the end of this fiscal year?

Carter, I was out on a limb last year. I'm not going do that again. It's not guidance. It's what we think is doable within the Plexus model.

Okay. So it's a longer term, maybe two to three year forecast?

Well--

Great.

I play it doesn't take up that long.

I'm biting my tongue, I'm not saying anymore.

All right. Thanks a lot, guys.

You're welcome.

Thank you. Your next question is a followup question from Brian White from Kaufman Brothers.

Yeah, when we look at, you know, the number of class three medical sites Plexus currently has, you know, extracting the Washington site and adding in the one in Asia that's going to be class three and I think Chicago's going class three, how many do we-- how many would we have in total right now if we make all of those adjustments?

Well, that would be -- that would be the class -- those would be the three sites. And that should be sufficient for the demand that we see in front of us.

With the addition that we're doing class three medical design in North Carolina as well as Neenah, Wisconsin.

Okay, and then, you know, the two underperforming sites is this similar in mix than Washington site focused on medical?

Could you ask the question one more time?

The two underperforming sites, is the serve market mix in those two operations similar to what we see in Washington in that it's focused on medical or is it focused on other markets?

No, they are more diversified than that.

Okay. Is there a particular market they are focused on, networking or industrial?

Well, every site tends to have a bias towards one thing or another just based on customer mix, but I wouldn't say that they are specificly focused on one particular market versus another.

Okay. Thank you.

You're welcome.

Thank you. Your next question is coming from Re Gree from Robert W Baird.

Good morning. Dean, can you give us an update on sales. You've employed this team approach and can you talk about how that's progressing? Is it on plan or are you seeing any disruptions in the near term as a result that?

Actually it's progressing quite well. As you can see the results from last year were quite phenomenal as we began to turn the organization in that direction during the course of last year. So we're fairly along in this process. You now, the targeting and information and metrics that we have to manage sales growth now are, you know, on order of magnitude more -- better than they were a year ago. So there is just a lot of excitement and a lot of energy around this approach and I think that we're passed the cultural shift issues and we're really now starting to fine tune execution of that organization.

And can you characterize the effectiveness of focusing and driving the business towards those underutilized facilities you were talking about before?

Well, it just allows us to do, as I tried to outline a little bit earlier, is try to be more planful in terms of how we target specific types of business for specific locations, how we drive diversification into those facilities and so this just allows these teams, you know, to set -- we can set specific objectives time based with specific customers, and drive toward those sort of-- toward that level of accountability to fill up specific locations and try to control this process a little bit -- much better.

But is there any way that you can kind of, you know, impart to us how effective that-- you have the plan to be able to do that and the execution to be able to do that, but how effective is it occurring at this particular point in time?

I'm sure how we could possibly quantify what you're asking. I think if there were a period of high risk in this transition, it's behind us. We're starting to see positive results from this new approach.

And then just last question from me, you've talked about restructuring some of the deals or structuring deals to look better in terms of profitability and working capital. You talked about maybe renegotiating some of the existing contracts. How receptive are customers to that and then is there a negative impact on near-term business opportunity as you're going through that process?

Well, I think most of our successful customers are -- our agreements with our most successful customers are certainly done to help us achieve the profitability and working capital goals that we've laid out. The ones I'm referring to are the customers that maybe are a little bit earlier in their developing and growth and may not have achieved the kinds of levels of sales that they had expected when we originally struck those deals. So those customers by and large -- you know, it's not a pleasant conversation to have, but when you walk through the -- what homes are originally priced versus what they originally said versus reality, most, you know, most of them understand and have supported us.

Great. Thank you very much.

Thank you.

Thank you. Your next question is coming from Mark Hassenberg from Rockingham Capital.

Operator, if I could just say, this is going to be one of the last two questions that we'll be able to take today.

Sir this, is the last question we have in queue.

Okay, thank you.

You're welcome.

Thank you. Good morning.

Good morning.

Trying to get a little better understanding of the challenges that you have in Seattle. You know, how many customers are we talking about and how difficult do you see this process being and was the revenue in those facilities, you know, winding down any way, last of end of contract work in there so that it might not be as big a challenge as it would have been otherwise?

Yeah, this is Paul. Again, the Seattle customer base is a handful of customers and actually for most of them it's one or two products per customer. So I would say compared to some of our other facilities, this may be in some ways less of a challenge.

And the reason it's going to take six months is just to have a smooth transition into the new facilities and prepare everything not because there is, you know, manufacturing challenges or something new that, you know, that-- before you-- there were other problems in the past where it was a challenging new product and you were trying to speed to satisfy the customer. That's not the type of projects we have here.

Well, this is Mike Verstegen. I wanted to comment that because their medical programs, we want to be very sensitive to the regulatory requirements.

Right.

As well as at this point we're not going to transition any active projects within engineering. We're going to complete them, those active projects, and then those customers will be transitioned to one of our other design centers. So we're going to complete what we had signed up for.

Sorry, I didn't understand that. And then just one more quick question. On Malaysia, the customers and the revenues that you have planned there at this time, are these primarily customers that are in your top 10 or 15 list now?

Yes.

Do you see that as an opportunity to get new business from domestic customers or, I mean, do you see this as an opportunity pick up local business or do you see this mostly your existing customers moving their business to more advantageous areas?

Yeah, right now most of it is out of North American customers and it's a mix between existing customers and targeted new wins.

But it would not be fair to characterize this as all business that's moving from our other locations to there. Some of it is, but some of it is new revenue with new program wins.

Hopefully programs where you now have a stronger competitive position and are able to take some business away from your competition.

Precisely.

Great. Well, thank you very much.

Thank you.

Nice quarter.

All right. With that, we're going -- I wanted to wrap up the call. I want to thank all of you for listen in and supporting Plexus and have a great day. Thank you.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.