Plexus Corp (PLXS) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Plexus Corp. conference call regarding its fiscal first-quarter earnings announcement. At this time, all participants are in a listen-only mode. After a brief discussion by management, we'll open up 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. Kristian?

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.

The Company provides non-GAAP supplemental information, more specifically net income and EPS excluding restructuring and impairment costs. 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.

Here today are Dean Foate, President and Chief Executive Officer, Gordon Bitter, Vice President and Chief Financial Officer, and I would also like to introduce a guest who is joining us on the call today, Paul Ehlers, Senior Vice President and President of Electronic Assembly, our manufacturing operations.

I will now turn the call over to Dean Foate.

Good morning, everyone. Last night, we reported results for our fiscal first quarter. Our revenue for the quarter was a record $287 million with Pro Forma EPS of 9 cents. We have initiated guidance for the second quarter of $280 million to $290 million with EPS remaining in the range of 9 to 11 cents, excluding any restructuring or impairment charges, basically a repeat of the first quarter. Gordon will get into more detail on the financial results in a few minutes.

Looking out a little further, we are increasingly confident about achieving the high end of our previously announced revenue growth target of 15 to 18 percent for the full fiscal year and find an increasingly back-end loaded year on both the top and the bottom line.

Looking first at the top line, assuming the high end of the revenue range would put our full-year revenues around $1.25 billion, up approximately $185 million from fiscal 2004. During the first fiscal quarter, we won 15 significant manufacturing programs that, in combination with a number of smaller wins, will add approximately $60 million in incremental revenue as these programs ramp in fiscal 2005. The dollar value of these programs is considerably more on an annualized basis.

Providing a few names, we have won new business with Packeteer, AMX (ph), NMF and Intermec. Of course, we will see most of the impact from these programs as they ramp in the second half of the year. We also added over $7 million in new engineering business as anticipated in our forecast.

This incremental revenue, along with the new business we announced last quarter, as well as stabilizing forecasts from current customers, gives us improved visibility toward our revenue target for the year. We have a healthy pipeline of new business and have identified programs worth over $1 billion of annualized revenue, so I'm fairly comfortable guiding to the high end of our full-year target revenue range.

Taking a couple of minutes to look at how this incremental revenue will impact our financial performance, I would like to emphasize that more than half of the new revenue we are adding is going into our currently underutilized sites, which confirms two things. First, the investment in our sector-based business development strategy is paying off; we are successfully targeting business that matches the value proposition of our various sites. I would like to point out that the incremental investment in our business develop organization is pretty much complete, supporting our commitment to moderate growth and SG&A. We now expect SG&A to fall below 6 percent of sales by year-end. Our SG&A as a percent of sales has not been this low since fiscal 2001.

Secondly, we should see improvement in our gross margins toward the end of the year, as these challenged sites achieve critical mass and acceptable utilization rates. Without getting into site-by-site detail, our current global astool (ph) manufacturing capacity utilization was approximately 74 percent for this quarter.

In addition to increasing revenues to improve the absorption of fixed costs, our manufacturing teams are working on further initiatives to improve productivity and our working capital metrics, notably inventories and Accounts Payable. This quarter, you began to see the early effects of our new supply chain strategy with the increase in payable days. In addition, as part of our changing relationships with suppliers, we've secured commitments to increase the use of in-plant stores and line site stocking programs to reduce our raw material inventory. The positive effects of these programs will become evident in coming quarters.

To reduce work in process inventory, our teams are intently focused on shortening work order cycle times by leveraging our long-standing glean (ph) sigma initiatives. The resulting improved manufacturing responsiveness will ultimately facilitate a reduction in finished-goods inventory that we manage in our customer VMI programs.

Equally as important, our market sector business development teams are focused on leveraging our engineering organization. Improved penetration of engineering services is not only a potent way for Plexus to deepen relationships with customers, but it also offers the potential for margin enhancement. I think most of you know that engineering work is almost exclusively value add and hence comes with higher margin potential than manufacturing programs.

Before I get into our performance and outlook by sector, I just want to say that I'm very encouraged by our top-line performance to date and by the initiatives underway to improve our profits and cash flow in the back half of fiscal 2005. In many ways, this is a critical year for Plexus, and I believe that our model will look very different from today as we exit the fiscal year.

As you probably notice from our press release, we are modifying the breakout of our sector reporting. We felt that the new sector breakout better reflects the sales and marketing focus of Plexus as we move forward. The primary differences are -- we've broken out our networking and Datacom business into wireline networking and wireless infrastructure; we've eliminated computing as a stand-alone sector -- most of this business has been folded into the Wireline and networking sector; we have renamed Transportation/Other as defense/security/aerospace; the business that was in transportation/other has been divided into the industrial/commercial and defense/security/aerospace sectors.

I will talk about our performance and outlook by the new sector breakout for a 3-year historical comparison of quarterly revenue by industry. According to the new sector breakout and the previous sector breakout, please refer to the investor section of our Web site.

Our Wireline Networking sector revenues were up 25 percent in the first quarter. Our large customers in this space include Juniper Networks, Harmonic, Motorola and Unisys. The increase was driven by double-digit growth with a number of accounts in this sector. As you look to the second quarter, we are currently expecting revenues in this sector to remain flat.

Our Wireless Infrastructure sector revenue was stable compared to the last quarter. Our larger customers in this space include Telular, NMS communications, Motorola, Arabana (ph) and Starent. Looking at the second quarter, we expect this sector to be flat to moderately down.

Our Medical sector was stable in the first quarter, as expected. The composition of this sector hasn't changed and our larger customers in this sector include GE, Siemens, Patientline, and Dregher (ph) Medical. Looking to the second quarter, we are expecting this sector to be flat to down slightly.

Our industrial/commercial sector was off 10 percent, driven primarily by softness with a short list of accounts. We are expecting a strong, double-digit pickup in the second quarter for this sector. Significant accounts in this sector include GE, Pelster (ph), Lacroix, KLA Tencorp (ph) AMX and Intermec. Our defense/security and aerospace sector was off by 18 percent this quarter, driven by softness with a short list of customers. Key accounts in this sector include Honeywell and General Dynamics. We are expecting this sector to remain flat in the second quarter.

Revenue from our top 10 customers increased to 60 percent of total revenues this quarter, driven by a strong, double-digit growth with the majority of our top 10 customers. Juniper with 20 percent revenues and GE with 11 percent of revenues are our only customers over 10 percent of revenue.

During the quarter, we had been busy upgrading our quality systems at a number of facilities. We added AF 9100 certification, which is for aerospace programs in Penang, Malaysia. We continued to expand our medical capabilities and expect to have Class 3 medical certification in both Chicago and Penang and Class 2 certification in the UK in 2005.

This year, we are also adding TL 9000 certification, which is for telecom products, to an additional site in our Nina (ph) area campus and in Penang. We are also expecting to be ITAR compliant in Boston within the coming months. This is a requirement for defense-related work.

I will now turn the call over to Gordon, who will get into more details on the first-quarter results. Gordon?

Thanks, Dean, and good morning, everyone. I'd like to make a few comments about the first-quarter income statement, then address the balance sheet and cash flows and finally return to restructuring costs.

Revenues for the quarter were, as being noted, a record 287.5 million. Gross margins were 7.8 percent of revenues but lower than the prior quarter's 8.4 percent. As noted, there are 3 factors that have depressed gross margins in the current quarter. First, higher transition expense and inefficiencies (indiscernible) phase out of our Bothell, Washington manufacturing and engineering facilities that was announced last quarter. Second, the startup costs associated with the new facility in Penang, and finally, and the losses in Mexico related to the $900,000 inventory adjustment which we took in the first quarter. Together, these three factors reduced gross margins by approximately $1.7 million or about 4 cents per share.

Let me digress for a moment to discuss the situation in Mexico in a bit more detail. The situation in that country is quite complex. There were indications of inventory issues at this site and we ultimately determined that a number of high-value parts had been systematically stolen from the Juarez facility. Unfortunately, the thefts occurred at a site that had other inventory control problems and it's difficult to isolate and identify the actual amount of the theft. A number of employees have been terminated and a few have been arrested by the police. Other actions have been taken to improve security and strengthen control of parts that have a high street value. High-value parts, for instance, are now sequestered in a very secure area of the building, and significant elements of the physical layout of the Juarez site are being changed to enhance security. I should mention that all of the $900,000 inventory adjustment was taken to cost of sales.

Returning now to the first quarter's income statement, let me pickup with SG&A expense. SG&A was higher than last year's first quarter due to increased spending for Information Technology, sales and marketing, and Sarbanes-Oxley compliance. SG&A expense grew modestly from the prior quarter and was up only 334,000, or 1.9 percent, and declined as a percentage of revenue from the prior quarter's 6.5 percent to 6.3 percent in the first quarter.

Interest expense was slightly unfavorable to last year as a result of borrowings against the credit facility during the quarter. This, however, was offset by favorable miscellaneous income due to foreign exchange gains on sterling transactions.

The effective tax rate, as expected, was only 8 percent for the first quarter. The low rate reflects the tax holidays we enjoy in Malaysia and China, as well as NOLs in the United States and the benefit from the establishment last year of a valuation allowance for deferred taxes. I should mention that we were recently advised by the Malaysian government that our application for a 10-year extension of the tax holiday in that country has been approved. Our tax holiday in Malaysia runs from the start of this calendar year through December 31, 2014. This is really good news and suggests the continuation of relatively low effective tax rates in the future.

Turning to the balance sheet, the cash cycle improved only very modestly in the first quarter. The low Accounts Payable were extended from 37 to 42 days, but this was offset by a worsening of inventory turn-over. Days Sales and inventory increased from 63 to 68 days, primarily because of holding additional finished-goods inventory for one of our larger customers. Accounts Receivable improved by 1 day from 50 to 49 Days of Sales Outstanding, and this represented the net one-day improvement in our overall cash cycle.

Cash flow from operations was a negative $4.5 million, and capital expenditures for the quarter were $4.1 million, so free cash flow was a negative $8.6 million. This was financed by a modest reduction in our cash balances and a drawdown of $7 million from the bank revolving-credit agreement. I should note that depreciation expense for the quarter was about $6.4 million.

Let me turn to the restructuring costs for a moment. The $884,000 of restructuring costs in the quarter was to recognize additional severance costs for the closure of the Bothell, Washington engineering and manufacturing site that was announced last quarter. This additional severance was in the form of stay-on bonuses to ensure an orderly transition of programs to other sites. In addition, we trued-up the accruals for lease termination costs for previously announced closures of facilities in Seattle and San Diego. You may recall that we had to make certain assumptions about our ability to sublease these facilities, when the initial restructuring costs for Seattle and San Diego were recognized. The good news is that we were, in fact, able to sublease both facilities in very difficult commercial real estate markets and the adjustments required through the restructuring accrual are really quite minor, considering the number of facilities and the time remaining on the master lease contracts. The San Diego sublease is the most significant for expense through the year 2016 and is co-terminus with a master lease agreement. Under the terms of the subleases, Plexus will recover approximately 70 percent of the projected lease payments under the master agreements or nearly $23 million for all of the San Diego sublease properties.

I'd now like to turn the call back to Dean for some closing comments.

Thank you, Gordon.

As an organization, we're focused on driving improvement in our return on capital employed, or what we refer to as ROCI. This is reinforced throughout the organization with ROCI making up a significant portion of our variable incentive compensation plans. While we only achieved a modest 20 basis point improvement this quarter, it was our fifth consecutive quarter of improvement. More importantly, we continue to expect substantial improvement in this important metric as we exit the year.

Just to recap what we have tried to communicate to you today, our approach to driving ROCI is to attack both sides of the ratios, the numerator and the denominator as Gordon would say. On the numerator side, our approach is, number one, growth top line in an intelligent fashion, leveraging our market-sector business development organization with an immediate emphasis on those sites that need it most and an intense focus on penetrating with engineering services. Number two, at the same time, our operations folks are focused on optimizing our manufacturing solutions to drive operating efficiencies. This includes lean sigma initiatives to reduce waste and to speed up work-order cycle time, production planning and supply-chain optimization initiatives. Number three, we're moderating our SG&A spend with the incremental investment in our sector-based business development engine largely complete.

Looking at the denominator side of the ratio, we've identified and begun to implement specific actions and programs to address the major offenders, inventories and Accounts Payable. We've implemented programs designed to drive a minimum -- an absolute minimum -- of a 10-day improvement in our cash cycle this fiscal year, setting the stage for further improvement in fiscal 2006. A key element of this improvement will come from better strategies for inventory management.

I believe we're on the right path to adapting the Plexus model to the realities of a changed marketplace. Our goal is to create a model that can deliver sustainable growth for our shareholders without compromising our reputation for customer service excellence.

With that, I would like to open the call up for questions. Operator?

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Brian white with Kaufman Brothers.

Good morning, guys. Could you talk a little bit about the reason for the 15 percent uptick in inventory sequentially?

Certainly. We have Paul here, and I think Paul has got an amazing amount of detail here in the plan for inventory improvement. So let me address -- let me let him address that issue.

I will talk about it really in three pieces. The raw inventory was up about 3 days quarter over quarter. The big impacts there were new customer ramps, as well as buffers for new supply-chain programs that we are in the process of putting in place. We made good progress on our work in-process. That was down about 4 days quarter over quarter as a result of some of the lean initiatives that we've got going on. As Dean and Gordon mentioned, the finished goods inventory was up fairly significantly as a result of some new customer programs that required finished goods inventory, some late in the quarter model changes where we had finished goods on a particular product. (indiscernible) customer wanted a different flavor of product, as well as some customer demand changing over the quarter.

Just to give you the specific amounts, raw materials were up $14.3 million from the fiscal year ended in September. Work in-process was down 8.8 and finished goods were up 19.8, so that just makes Paul's point.

When we look out into the March quarter, how do we expect inventories to trend?

We expect inventories to trend down about $20 million.

Okay. Finally, when you look at -- finished goods were up significantly this quarter. That means that probably benefited your gross margins this quarter. Does it negatively impact the March quarter?

We've factored that into our forecast. There's been some modest effect (indiscernible) just speaking of, Brian, but we have factored that in.

Thomas Hopkins with Bear Stearns.

Good morning. Would you guys talk about being more comfortable with the high end of the range here for the year of 15 to 18 percent? I just want to get a sense how much of it is coming from the current book of business, customers versus some of the new outsourcing that you expect to ramp in June and September.

Sure. As I went -- last quarter, I tried to put the year into some buckets for you folks. Let me just kind of give you a sense of how this is working out. If you look at the high end of the range, it means we need approximately 187, call it $190 million of new business over fiscal 2004. As we look forward in our year, we had forecasted, with the existing customer base, given the end-market demand projections and programs that were won prior to the start of fiscal year, we figured we had about a third or so of that $190 million already projected in our forecast, the remaining two-thirds of the business we needed to win. We won a substantial portion of that through the first quarter, and we are seeing a substantial portion of the business ramping that we had won previous to the year-end. So as we look at -- we've got a pretty good piece of this now forecasted, and two-thirds of that business, that new business is essentially that; it's additional business that we won from additional customers as well as new customers that we've been announcing each quarter, making up the difference here for the fiscal year.

That's the 15 programs, or part of it anyway, where you talk about 60 million in incremental revenue in 2005?

That's right. Last quarter, I think we announced 12 manufacturing -- significant manufacturing program wins. That would add approximately $50 million or so in fiscal 2005.

Just finally, can you talk about your inventory relationship or agreement with Juniper? With the finished goods being up about 20 percent, -- well, maybe you can just back up and tell us how much of your business with Juniper is built to order or direct order fulfillment, versus building volume production? Is there any difference in the inventory covenants? I mean, are you guys at greater risk than traditional EMS contracts where even if you had some finished goods, the customer was still basically on the hook for it?

No, I think here -- you know, we hate to get into specific details of our individual customer relationships, but just let me generalize here in that we have no -- no difference, essentially, in our business risk related to our relationships among customers. So, from that standpoint, it's very much a typical relationship.

Paul could categorize or give you a little sense of maybe the percentage of business that is direct order fulfillment versus production of subassemblies. Go ahead, Paul.

Yes, actually virtually all of the business is finished goods assembly and (indiscernible).

Okay, so there really isn't any BTL (ph) business?

It's a very significant percentage built to order.

Built to order, configured to order, and direct-ship.

Patrick Parr with UBS.

You had mentioned that you've got programs in place to work down your working capital. I guess, as I look at your cash cycle metrics, they are significantly above the rest of your peers. I know your business model is a bit different, but is there any sort of medium-term objective that we could look to in terms of inventory turns, cash-cycle days or the improvement therein?

Sure. You are on it in that our business model is different, and I certainly don't think we're going to get to a number that the leader in our industry is running at with their high-volume consumer-based business. It's one of the difficulties of being in the kind of medium/low-volume very high-mix environment is that we have a lot of different part numbers that we have to manage and it makes the challenge of it much more significant.

I think Paul could probably give you a few buckets of opportunity that we're working on, ranges of opportunities specific to inventories, but related to the cash cycle, we've been saying that we see a minimum of a 10-day improvement over where we're at now when we exit the year. I would be very disappointed if we didn't beat that number, because I think, as I've looked at the detailed plans that our teams have put together, that we're well on our way. And as I said in the beginning narrative here, that you started to see the impact of our renegotiated relationships with our supply chain partners in the payable days, as they've begun to stretch out.

So let Paul talk about maybe the near-term impact of the changing strategy and then some of the buckets of opportunity. Go ahead, Paul.

Sure, so I think as Dean said, we've got an end-of-the-year objective to really take about 10 days, year-over-year, out of our cash cycle. We will see a buildup a little bit in the AR side or a leveling of it as we get a little bit more back-end loaded. There has been a significant amount of work in the last quarter on restructuring, a lot of our agreements with our suppliers to expand days in AP. Back end of the year, again, a lot of work on trying to push more of our materials back to our supply chain to increase our flexibility, about a 4 or 5-day improvement in work in-process, so we're hoping to get that into single digits by the end of the year as a result of some of our lean initiatives, and probably a leveling to a slight decrease in the finished goods. More and more of our model is going to be a finished-goods model, so we see a modest decrease in that by the end of the year.

Okay, very helpful. A quick follow-up question on a related matter -- you mentioned the SG&A was going to start trending down as a percentage of sales at least, as some of these sort of startup costs and et cetera flow through. Again, you're running at a SG&A rate that is much, much higher than your peers admittedly. Again, the business model is different. Has there been any thinking to reconsider the fundamental way you guys do business and try to get closer to the other top-tier EMS companies, or do you still feel, moving ahead, that you can run at a theoretically higher gross margin and higher SG&A type model?

Yes, I would just say that, from an SG&A standpoint, we do have a different model and therefore you need a different level of support for the customers, and the numbers of customers who also have the -- we also have the engineering organization, which is -- as a percentage of our business, is reasonably significant. So I think you're going to see us carry along a higher SG&A than some of our competitors are purely focused on higher-volume business and a shorter list customers (sic). But over a longer-term -- again, I don't want to put a stake in the ground for the end of the year -- there's no reason we can't drive SG&A, as we continue to grow, down to 5 percent and perhaps below over a longer period of time, because I think the infrastructure that we need is essentially double the revenues of the business is in place today (sic).

We've pretty consistent, Patrick. I'm not saying that we're going to moderate, really moderate the growth in SG&A while top line grows and then bring down SG&A as a percentage of revenues.

Thomas Dinges with JP Morgan.

Good morning. This is Jason Gursky stepping in for Tom. One question on inventories and then two on segments. The first question -- the issue with the increase of finished goods, is that something that will become the norm going forward, that you will take on some finished goods on behalf of this customer or is this just a one-off turn?

Well, I think, you know, this quarter, we did have -- we had finished goods pop up more than we would've anticipated, based on, as Paul some last-minute mix changes, if you will, or flavor changes, I guess is what Paul referred to it (indiscernible) products, so that we ended up with a little bit more finished goods at the end of the quarter.

It is a condition of the evolution of the industry here that we're going to build more finished products and therefore have more finished goods over the long run. But you know, there's two things that can moderate the growth in that, even as we move forward. Overall, we can moderate inventory growth with the supply chain strategy that Paul talked about to reduce raw materials, but also, as we move toward a more rapid manufacturing engine, reducing work-order cycle times, it does two things; it takes inventory out of WHIP but it also allows us to be much more responsive to the customers and market demand, so therefore we don't need to have as big of a finished goods inventory stock to be able to react to their changing pulse, essentially, from the inventory model.

Okay, thanks. Then two quick questions on segments -- I've got the breakdown of where your new wins came from and where we might anticipate growth in the second half of the year. You stated the number of wins in each segment last quarter but I didn't get a sense of the size of each of them and was wondering if we should be thinking about the growth of each segment kind of being in proportion to the number of wins in each segment, or if there was one win that was larger than another that is going to drive one particular segment higher than another as far as growth in the back half of the year. So just basically, where are we going to see the growth in segments in the back half of the year?

Boy, if I look at the wins and I look at them by individual market sector, I guess the bulk of the bigger wins was in our wireline business, so I would say proportionately that's going to be up somewhat, especially as I look at the ramp rates for those programs. But I don't have -- I don't have the individual projections here that I could give you sector-by-sector. I have the full year that we are projecting at this point, but I'd hate to give that, lay that out there at this point.

Okay, fair enough. Then talking about historical numbers from this quarter, most of your segments were down sequentially. Can you just add a little bit more detail around each of them and what happened in this quarter, whether it was (indiscernible) that didn't pull through or if kind of organic demand wasn't quite as robust as you had anticipated?

Yes, I talked about, from a sector standpoint, wireline working was up and as we said, we had number of customers that had a real strong, strong quarter there. The other sectors -- you know, normally we would have seen medical be recorded as stronger in the December quarter, and typically a number of the customers in that quarter that are normally (indiscernible) -- it's just that we had a few others that had a difficult quarter for different reasons, so there isn't anything necessarily systemic in medical being kind of flat to down just a little bit in Q1.

Industrial seems to have become a little bit cyclical for us. We've seen -- (technical difficulty) -- in past years, a number of soft quarters in Q1 and again now we are expecting that to be up quite strong here in Q2 through the recovery of revenues and the ramp of some new programs that we're going to see in the industrial/commercial space. So there is nothing really here to take away I don't think, from a sector performance, related to any significant trend among our customers in their end markets that I can necessarily detect.

Chris Lippincott with KeyBanc Capital markets.

A quick question -- I just want to kind of go back on the SG&A issue. If I think I heard correctly, you were talking about the SG&A percentage starting to trend down. It sounded like you were talking about perhaps by the end of the fiscal year kind of heading down. Was it towards the 5 percent number that I think I heard come out or did I mishear that?

We said it would be below 6 percent, Chris, and hopefully it will happen actually before the end of the year.

Okay, so if that is happening, I just kind of wanted to get a sense as to how you think that you might be able to ramp up some of the gross margins, just as we are starting to see some of the inefficiencies that are either currently present or perhaps you are addressing that. Do you get a sense as to perhaps either the magnitude or general timing as to how you might be able to improve those margins from some of the efficiency that you're going through right now?

Well clearly, frankly, the startup costs in Penang are actually going to widen a little bit in the second quarter. Then Penang, the new Penang facility should be at least a breakeven in Q3 and modestly profitable in Q4. Of course, the transition costs related to Seattle, the closure of Seattle should be behind us at the end of the second quarter and that will improve profits. As Dean alluded, the second-half revenue forecast is pretty much back-ended, so we're looking for much higher revenue rates from Q3 to Q4 and incremental volume alone will have a beneficial effect on our gross margins. Paul, I don't know if you want to add anything to efficiencies or operating improvements you see in the second half?

Yes, I think we're seeing a combination of labor efficiencies and other margin improvement efficiencies, probably another effect of maybe another 50 basis points by the end of the year.

I would also like to add that we are going to see some leverage on our underutilized sites. As I said, quite a bit of the revenue is coming into some of those sites that have been struggling through last year and the early part of this year, and we've had some good success running business into those locations, so they will start to get to some at least what we call accessible utilization rates as we exit the year.

So it sounds like you have got some good SG&A leverage coming up. You've got good efficiencies and just overall volume leverage, but you also see that perhaps there is any type of mix shift into the second half of the year, given some of the new wins that you are seeing?

I don't think anything that's going to swing us significantly from a gross margin standpoint.

Carter Shoop with Deutsche Bank.

A few questions, if I may? First, if you look at your customer concentration, your top 2 customers, should we expect similar rates for the next few quarters?

Yes, I would anticipate that to stay pretty steady here for a few quarters.

Then would you see a falloff after that once those new programs ramp with other customers?

Well, we expect to continue to grow with those customers that are leaders right now, so I wouldn't expect that to necessarily change even as we exit the year.

The second question, when you look at your different geographies, could you comment on the sequential growth there by geography?

Sure. Let me grab my little report there. If we look geography by geography in the first quarter, we saw revenues in our United States operations were up 17 percent over the prior quarter. That's about what we expected. Mexico was also up about 10 percent; we had expected that to be a little bit stronger but some of the difficulties we had down there did impact revenues a little bit. Asia was also up nicely, up 13 percent, a little stronger than we expected. Then the UK was actually down about 14 percent. Then we had a few customers that just had a soft quarter. There was no significant trend there. We expect that to snap back here in Q2.

Okay, great. Then one more question, if I may. You guys are clearly gaining a lot of share when you look at some of the larger competitors in this space. I was wondering if you could talk briefly about some of the wins you guys are having on the competitive side and also some of the organic wins and talking about organic wins, maybe talk about the opportunity there when you're going out kicking the tires of a lot of these different customers? Are you seeing a lot of opportunities out there, or are you starting to see some of the opportunities dry up? What does that look there?

I actually think the opportunity pipeline is quite healthy, and what I like about it is that we've got much more intelligence behind the companies that we target now, so I think the quality of the opportunity list has improved substantially. We are out there competing against obviously everybody in the marketplace, but I think there does seem to be some realization among customers today that certain EMS providers are better-suited for certain kinds of business than others. We've had some success winning some business from our competitors based on the focus of our business model, and that's been very rewarding for us.

If you look at some of the competitive wins, how do you break out them in regards to your customer base -- I'm sorry, in regards to your competitors? Would you say they are roughly half-and-half or kind of Tier 2 EMS vendors, and that roughly half are Tier 1 vendors?

Boy, I don't know that I could break it down that way. Kristian, do you have a sense of that number either? You are shaking your head no. Again, the competition varies program by program in terms of who is involved in the mix here quoting business, so I don't know that I could give you an accurate number there.

Fair enough. Thanks.

Jim Savage with Wells Fargo Securities.

Good morning, gentlemen. A year ago, you were very, very optimistic about where your gross margins were going to go, and your gross margins in the December quarter were lower than they've been in over a year. Even if you take into consideration the 1.7 million from the transition and startup costs, etc., they were pretty flat. What are your expectations going forward in terms of what your margin mix can look like? Is there increased competitive pressure in terms of pricing on you? Do you still think that it's possible to get gross margins back in the 9 to 10 percent area over the next, say, 12 to 24 months?

I would say yes, I do believe that we can drive gross margins north of 10 percent. When you look at the organization and you look at the performance site by site and you look at the opportunity for margin enhancement through engineering, there's really fundamentally nothing broke in the business model or in the competitive environment that would prohibit us from doing that as we move forward. We definitely just have got to fill up these underutilized sites, we've got to execute a little bit better and the number can continue to grow.

We've been hearing a lot about shifts of even engineering into Asia (inaudible) direct product engineering. Is that putting any pressure on your pricing model for engineering?

Well, we've certainly seen some competition in engineering in that regard, and we've begun to attack that competition by ramping up our own engineering capability in Penang, Malaysia, to address that situation. We think we actually have a competitive advantage over pure Asia engineering organizations because we are able to -- the bulk of our business is U.S.-based or European-based multinationals and our ability to provide close-to-home project management and critical skills close to home while leveraging essentially what is a lower-cost capability in Malaysia is working out to be a good compromise, I think, model for our customers to actually get better performance out of their engineering programs.

Okay, good. In terms of -- just a couple of little things. First, with the finished goods, are you being paid by your customers to hold them?

Yes.

Okay, so you're not having to finance that yourself?

That's correct.

With Taxes, how long do you think these NOLs are going to last and at what point -- what would a normalized rate be when they are finished?

The NOLs should be good for about 2 years and then a normalized rate would probably be in the mid to high 20 percent range.

Okay. One last question -- you said that your inventories would be down about $20 million at the end of the March quarter.

That's right.

Which is when you were beginning to ramp some of these major new programs. We are assuming that there is going to be close to double-digit sequential growth in June. So that would mean that inventory turns would have a huge leap between where we are now and where we're going to be at the end of the June quarter, I would assume.

Yes, that's what we are projecting internally. That's right, Jim.

Todd Coupland with CIBC World Markets.

Yes, good morning, everyone. I was wondering if you could tell us -- are you able to share with us the sector of your business where the inventory increase was required?

Well, I think we've been -- we've led you down the path to tell you that the finished goods inventory was led by one of our biggest customers. Beyond that, I don't know that there's anything meaningful to break down.

Well, you have large customers in a few different sectors, so I mean --.

(indiscernible).

Okay, thank you. Then I was just wondering if you could -- okay, no. That's good. Thank you very much.

Michael Walker with Credit Suisse First Boston.

Actually, my questions have been answered. Thanks.

Amy Junker with Robert W. Baird.

Just a couple of quick ones for you. One, GE going up above 11 percent of revenues -- is that primarily coming in the medical segment? I know it's also in industrial. Where is that ramp really coming?

Well ,we've been working to, as you just pointed out, diversify our business with GE, so some of the impact that you're seeing on the 11 percent is related to our accumulating additional business with GE, but also the medical piece of our business did go up, as I would have expected in Q1.

Finally, can you, Gordon, just give us your expectations for CapEx and free cash flow for the remainder of '05?

CapEx, we continue to refine our CapEx expectations. It's probably 25 to $28 million for the year. I would expect we will have modestly positive free cash flow. I don't think we will be into the revolving credit agreement for the rest of the year.

Okay, modestly positive for the whole year then?

Yes. It might go slightly negative in Q3 as we ramp up, but then I would expect Q4 to be positive.

Ahmed Darunani (ph) with RBC.

Thanks, good morning. Could you talk and give us an update on sort of the transfer of business from the Washington facility? Also, do you have any plans to sort of further consolidate some of the other North American facilities you have right now?

Well, we don't have any active plans to consolidate any other North American facilities. Our preference was to leverage our business development engine and fill those locations up. Closing these facilities down does not come free and creates a lot of disruption and takes the energies of a lot of our key resources to move business around. So at this point, we are driving toward filling those locations up and improving utilization rates. We've had quite a bit of success in that direction already.

Now, you know, this is a continually changing business environment, you know? The strategy that we have to execute will continue to change over time, and we will continue to adapt our footprint to the ever-changing marketplace. But right now, our focus is to fill those sites up.

As for the Seattle area Washington facility, Paul, if you could give just a brief update on customer transitions out and what's remaining?

Yes, so far, we are pretty much on track with the transition plan that we outlaid when we announced the facility closure, so we track that weekly. Right now, everything is on target.

Perfect. Also what is your D&A target for the year?

I didn't hear the question.

The depreciation and amortization, what's your sort of expected annual run-rate for fiscal '05?

About $25 million.

David Pescherine with Smith Barney.

A couple of questions about the engineering piece of the business -- first can you just give us a breakout of how much of your total revenue that represents? Then also give us an estimate of what the current engineering department could support in terms of topline.

Well, the overall percentage of revenue runs around 4.5 to 5 percent -- (technical difficulty) -- looking at the current quarter.

I'm sorry, and how many engineers are in the group?

There's about 350 engineers and technologists.

Gordon, what kind of costs are we talking about to support the engineering group? If we were to strip that completely out of the SG&A, or if is there some in the cost of goods, what's the dollars that we would be able to take out?

We've never gotten to that level of detail. I just don't think that is appropriate.

Are you willing to talk about what the gross and operating margins look like in that business?

I think it's easier to say that the margins could be two times that of the manufacturing.

Meaning that -- two times what they are now or ultimately? Could we get to 5 percent? If we get to 5 percent operating margins in the overall business, does that suggest that you have got 10 percent operating margins in the design business, and is the design business then only generating 3 percent operating margins right now?

Those are reasonable assumptions, yes.

(OPERATOR INSTRUCTIONS). Dave Miller with Tradition.

Good morning. Just going back to the two underutilized facilities, with the new business that you're bringing online, how close does that get you to getting back to breakeven in those facilities? What do you think is a reasonable time frame to get those facilities profitable?

Well, all of these facilities are -- at this point should be reasonably profitable as we exit the year, so we are quite happy. I mean, as I look down the list of our underutilized sites, we actually saw revenue growth through fiscal '04 at all of them with the exception of Seattle, which we made the decision to close down. We've got a faster growth rate in revenues in the key underutilized facilities here through fiscal '05 with the new business wins that we have, so I would expect utilization rates to be pretty decent here as we exit the year.

Okay, thanks. As you look at your pipeline of new business opportunities for the next 12 months, could you talk about where you see some of the better areas of potential new wins?

In terms of individual market sectors are you looking at?

Yes, yes.

Sure. We are seeing, really across all of our key sectors, I'm seeing a pretty strong pipeline of business, and that's really the way we've organized ourselves is around our key market sectors. So as we look at the size of opportunities we've got in kind of our 10 to $20 million bucket, we've got 3 each in Wireline, medical, industrial/commercial that look good for us and we've got 7 opportunities in our 20 to $50 million bucket in our Wireline sector, one in the 20 to $50 million medical, another one in industrial/commercial. Then we've got a couple of nice ones in defense and aerospace as well and then all whole slew of them that are usually or typically incremental business with existing customers that are in that 5 to $10 million range. We usually don't look to engage with new customers below that $10 million level. That usually is focused on incremental business wins with existing customers, and there's 134 opportunities in that smaller bucket across the market sectors.

Okay, thanks a lot.

Thank you. I'm showing no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Okay, I want to thank everyone very much for supporting Plexus and joining us today on the call. With that, we will say goodbye. Thank you.

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