Plexus Corp (PLXS) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Plexus Corp. conference call regarding its fiscal first quarter 2007 earnings announcement. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open the conference call for questions. The conference call is scheduled to last approximately one hour.

I would now like to turn the call over to Mr. Kristian Talvitie, Plexus Vice President Marketing, Branding, and Corporate Communications. Kristian?

Hello, and thank you for joining us this morning.

Before we begin, I would like to establish that statements made during this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results. And actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of major factors that could cause actual results to differ materially from those projected, please refer to the Company's periodic SEC filings. Also, the Company provides non-GAAP supplemental information, typically earnings and EPS excluding restructuring costs, charges for the impairment of goodwill, and other long-lived assets and adjustments to the valuation allowance on deferred tax assets. All comments concerning earnings comparisons on this call will refer to non-GAAP earnings. For a reconciliation of non-GAAP earnings to GAAP results, please refer to yesterday's press release and our periodic SEC filings.

Joining me this morning are Dean Foate, President and CEO of Plexus; and Gordon Bitter, Senior Vice President and Chief Financial Officer. We will begin today's call with Dean making some brief comments about the first quarter and the outlook for Q2 and the remainder of fiscal 2007. Gordon will follow up with details on the financials. We'll then open the call up for questions.

Let me now turn the call over to Dean Foate. Dean?

Thank you, Kristian, and good morning, everyone. Before I begin, I would like to extend on behalf of the entire Plexus organization, our best wishes to Paul Ehlers, our Chief Operating Officer, as he focuses on overcoming a serious health challenge. The outpouring of personal support from employees and customers was warmly received and appreciated by Paul.

Last night we reported results for our first fiscal quarter. Revenues were $381 million, which was slightly below the low-end of our guidance for the quarter. Our non-GAAP EPS was $0.33, or right at the midpoint of our guidance. Gordon will provide a few -- will provide a detailed analysis of the numbers during his comments. Let me continue by providing you a few details about our first quarter, our second quarter, and full-year outlook. Looking first at our performance by market sector. Our wireline networking sector was up about 10% sequentially in our first fiscal quarter. We had expected even stronger performance. The continuing to ramp of new business wins was muted, and about two-thirds of our customers in this sector disappointed due to end market softness. Looking to the second quarter, we currently expect mid single digit decline to revenues as the consequence of continuing end market softness afflicting a broad list of accounts.

Our wireless infrastructure sector was flat this quarter, below our expectations for modest growth. While we experienced strong double digit growth with a leading account in this sector, most customers came in short of expectations. Looking to the second quarter, we currently anticipate a mid single digit decline in revenues as end market volatility takes a toll on our relatively shortlist of accounts in this sector. Our medical sector performed better than expected in Q1, turning in mid single digit growth. We had expected flat to modestly down performance as we executed a product model transition with a large medical account. Better-than-anticipated demand from a few leading accounts drove the upside. However, and disappointingly, we learned late in the quarter that one of our customers had erred, double forecasting demand for a certain product line, overdriving channel inventory. As a consequence of the forecast miscue, as well as continuing softness with a few other accounts, we currently anticipate a disappointing second quarter with revenues declining sharply in the high teens percentage range.

Our industrial commercial sector declined significantly in our first quarter, slightly more than expected. This sector is made up of our broadest portfolio of customers, and about 50% of them missed earlier expectations. In particular, one leading customer pulled back sharply in an effort to reset [bloated] channel inventory. Looking to the second quarter, we currently expect sequentially flat performance with mixed and perhaps volatile forecast across our customer base. As expected, revenues in our defense, security, and aerospace sector contracted sharply in the first quarter, reflecting the essential completion of the first production orders from a significant non-disclosed account in this sector. Looking to our second quarter, we currently expect revenues to be flat, as previously anticipated orders for this account have failed to materialize in time to enable second quarter production. As I outlined last quarter, longer [range] expectations for this account remain difficult, as manufacturing volumes ultimately depend on extremely lumpy purchase orders from the United States military. Our customer contacts continue to assure us that additional orders are pending. Despite this assurance, as well as purchase orders received for certain long-lead time components, we are prudently forecasting increasingly conservative level of production orders for the second half of fiscal 2007.

Addressing our overall revenue concentration. Revenue from our top 10 customers represented 60% of our total revenues this quarter, about the same as last quarter. Juniper Networks represented 19% of the total, up 2 percentage points from last quarter; our business with GE, inclusive of multiple GE divisions, represented 13% of total revenues. Turning now to new business wins. During the period, we won 13 significant new manufacturing programs, which in total will add approximately $90 million in annualized incremental revenue as these programs begin to ramp during fiscal 2007 and on into 2008. Half of these programs will increase our share with current customers, while 6 are new customer wins. One of these new accounts will add a strong industrial commercial customer to our top 20 customer list as we ramp revenues in the later half of fiscal 2007 and on into 2008.

Our funnel of opportunities remains very healthy at $1.4 billion of qualified new business. We continue to balance our growth by pursuing increased share with existing accounts, while adding new strategic accounts to our sector portfolios. On the engineering services front, we won approximately $7 million in new product development business during the quarter. In light of past wins, this is a sufficient level of business to sustain a healthy backlog. Once again, we won new opportunities in all of our key sectors, engineering services in our medical sector remained strong, while we're increasingly gaining opportunities in defense, security and aerospace, as well as with our growing portfolio of customers in industrial/commercial. Addressing capacity utilization and global investments. Our [as tooled] capacity utilization was approximately 75% overall as we exited the first quarter, down from 82% last quarter. The decline was, in part, a consequence of lower revenues, but the greater impact was driven by continuing capacity investments at our manufacturing sites in Asia. As I outlined last quarter, utilization rates in Asia are above practical maximums. We are expanding physical capacity in both China and Malaysia; Gordon will address these Asian expansion projects during his remarks.

Looking at guidance, as you undoubtedly realize from my earlier comments and from last night's press release, we are in for a lousy Q2, resulting in a material impact to our growth goals for the fiscal year. We are facing a quarter where multiple customers across all market sectors have backed away from earlier forecasts. We are seeing the end market weakness affect both longer term programs -- existing longer term programs as well as customers won in recent quarters. However, as our revised full-year revenue target applies, we currently expect growth to resume in all sectors in the third quarter. We also expect growth to continue into the fourth quarter. But, given the steepness of the recent end market pull back, we are approaching the later quarters with a measure of caution. I want to emphasize that the setback in Q2 is not -- I repeat, not -- a result of execution difficulties or significant customer defections. In fact, our customer satisfaction levels are extraordinarily high. So we are not taking our foot off the gas pedal. Our value proposition has never been stronger as demonstrated by the strength of our pipeline and the pace of new business wins. We will continue to make progress on key initiatives essential to support growth in revenues and profits, improve working capital management, and further enhancement of our global value proposition.

Let me quickly summarize a few of these initiatives. The consolidation of our facilities in the UK was completed in December. Our facility in Mexico is expected to return to profitability in the second half of the fiscal year. Production in our new facility in Penang, our third facility, is expected to begin in Q2. The expansion of our site in Xiamen, China, is expected to be completed by fiscal year-end. The rollout of our global IT platform will largely be completed this fiscal year. The expansion of our global design services business will continue. We are adding key resources to our market sector base business development engine; we developing a Lean Sigma culture throughout Plexus, including our administrative functions; and we will increase our focus on developing our people.

With that, I would like to turn the call over to Gordon to discuss the details of the numbers. Gordon?

Thanks, Dean.

Let me make a few brief comments on Q1 performance verses our previous guidance. Although revenues were below the low end of our earlier guidance, earnings per share were actually at the midpoint of our guidance for the quarter. Lower SG&A expense and a slightly lower tax rate, 23% as opposed to 25%, essentially made up for the revenue shortfall. Turning now to comparisons against last year's first quarter. Revenues for the first quarter of the current year at $380.8 million were up 16% over the comparable prior year period, mainly on strength in the wireline networking segment, which increased by $31.6 million or 24%. Actually, each of our end markets demonstrated growth with the exception of wireless infrastructure, which was essentially flat. Gross margins in Q1 of fiscal '07 were 10.4% or 90 basis points better than last year. The improved gross margin reflects operating leverage and better operating efficiencies at a number of sites, partially offset by incremental depreciation expense and other components of fixed manufacturing costs, as well as a widening of the losses in Mexico. I will revisit Mexico in a few minutes.

SG&A expense, once again excluding restructuring costs, was up $3.1 million or 18% higher than in the first quarter of last year, which requires some explanation. The increase represents, in part, higher wage and salary expense following annual adjustments to salaries that occurred early in the current fiscal year as well as for additional headcount and related expenses for incremental sales and marketing resources. But there are two other factors to consider. First, last year's first quarter included a benefit of $1.2 million for the recovery of a previously written off account receivable. The second factor was $800,000 of incremental stock option expense included in this year's first quarter's SG&A accounts. So if you adjust for the nonrecurring bad debt recovery in the prior year and higher stock option expense this year, SG&A increased at a much more reasonable pace over the prior year.

Operating margins were 5.1%. Once again, this excludes restructuring costs. The Q1 '07 operating margin was 80 basis points ahead of last year's first quarter. Favorable interest and miscellaneous other income added about $800,000 to pretax income. Unfortunately, we faced a much higher effective tax rate in the current year, 23%, than the 1.8% in the prior year, and that of course, moderated the year-over-year improvement on an after-tax basis. Recall that for most of last year we had a valuation allowance on U.S. deferred tax assets that allowed pretax income earned in the United States to drop to the bottom line without a tax effect.

Let me make a few observations about our performance verses last quarter, that is the fourth quarter of fiscal '06. Overall revenues were down 4% quarter-over-quarter, although there was substantial variation by end market sectors, as Dean has already discussed. Gross margins slipped about 90 basis points from the previous quarter, a consequence of lower production levels and an unfavorable mix of programs. And SG&A expense was at the same level in absolute dollars, but that, of course, represented an increased percentage of revenues. Consequently, operating margins in the first quarter contracted by 110 basis points from the previous quarter's 6.2% to 5.1%. There was nothing much of interest below the operating income line, except, of course, the big increase in the effective tax rate that I've already discussed.

Let me turn now to the quarter end balance sheet and the first quarter's cash flows. The overall cash conversion cycle extended 8 days in the first quarter, moving from 50 days at the '06 fiscal year-end to 58 days at the end of Q1. Days in accounts receivable actually improved by 2 days, but this was more than offset by a 5 day worsening in both inventories and accounts payables. Inventories increased by $12.3 million. The increase was in both finished goods and raw material components of our inventory. The increase reflects, first, the weaker end market demand in the quarter, which left us with completed product for certain customers whose contracts allow them to defer taking delivery of finished products; and secondly, the relative suddenness of the change in end market expectations for the second quarter. We simply could not turn off the parts procurement pipeline quickly enough. The slippage in accounts payable was due to a shift in our supplier base to a few vendors with which we have not yet negotiated more favorable payment terms. Cash flow from operations in the first quarter was a negative $7.8 million, driven mainly by the reduction in accounts payable and the increase in inventories that I just noted. Cash flow from investing was most significantly the capital expenditures in the first quarter of approximately $14 million, which included the acquisition of a building for our third site in Penang, Malaysia. More on that expansion in Malaysia in a minute. Cash flow from financing in the first quarter was nearly $4 million; this represented mainly the income tax benefits from prior exercises of stock options. As a result of the cash used in operations and fairly heavy capital expenditures, cash and marketable securities came down by $17 million to a combined fiscal first quarter end balance of $177.9 million.

Let me conclude my discussion with a brief update on a few of our facilities. First, Xiamen, China. Recall that we are doubling the footprint in this facility from 60,000 square feet to about 120,000 square feet. The expansion is currently about 4 weeks ahead of schedule, and we expect to begin production early in the September quarter. We don't expect any significant start up costs with turning on this expansion. Second, Malaysia. As I commented earlier, we completed the acquisition of our third facility in Penang, Malaysia, for approximately $11 million during the fiscal first quarter. Capital spending for building improvements as well as for the initial outfitting of production equipment is currently underway and expected to result in an additional $14 to $15 million of capital spending during the second quarter of fiscal '07. Total fiscal '07 spending on this new facility is currently estimated at about 30 to $33 million. This new facility is expected to begin production in early -- early in February, and an initial operating loss of about $600,000 is now anticipated in the fiscal second quarter.

Third, let me say a few words about the closure of the facility in Maldon, England. This is a modest 40,000 square foot facility, that until recently was used as a final assembly test and repair center. These operations were successfully transferred to our facility in Kelso, Scotland, and the Maldon facility was closed in mid December. About 75 employees were affected. Severance costs of approximately $500,000 were accrued for this restructuring action in the December quarter. And we do not expect to incur any additional restructuring costs for this facility. The building is already under contract for sale in the fiscal second quarter. I expect that we will generate approximately $4 million in net cash proceeds from the sale and record a modest gain of less than $100,000 after taxes. And finally, let me touch on our plans for our Mexican operations. Mexico was our only site operating at a loss in the fiscal first quarter. We incurred an operating loss in Mexico during the first quarter of approximately $1.4 million. This was about $1 million more than the loss incurred in the first quarter of 2006. The problem in Mexico is simply related to the lack of volume for this site, a problem that we've addressed by winning a significant new program that will be manufactured in Mexico, as well as by transferring certain existing programs to the Juarez site. I would expect an improving financial performance over the rest of fiscal 2007.

With that, let me turn the call back to the operator, and we'll open up the call for questions. Operator?

[OPERATOR INSTRUCTIONS]. Brian White, Jefferies.

Hi. Good morning, guys. Just a question, when did you start to see a slow down?

Well, we started to see things come unglued in -- right in the last couple weeks of the quarter. And it wasn't clear to us yet what the overall impact was going to be because there was just an extraordinary number of moving pieces. In fact, as we came into the early weeks of January, we started rerolling our forecasts on almost a weekly basis, which is atypical. We typically take a look at revenue on a frequent basis, but we typically don't roll the entire thing on a weekly basis because it's quite an effort. But that's when we started to see the -- what I would call to be atypical volatility. I mean, we always have some volatility in the customer forecast, but that's when things really started to heat up.

Okay. And when do you think the last time was you've seen a slow down like this?

I would have to go back to kind of after the bubble blew, but at the same time, it's -- there was a lot of other things about our business in terms of our strength of our global footprint and our go to market strategy as well as a number of other things that certainly had an impact on our value proposition to customers that aren't threatened today. So I'd say in terms of volatility, I would say that would be a similar period of time, but I think the reasons are substantially different, perhaps.

Okay. And just on the defense program, you said you really -- you cut what is in your forecast for this new program. Is that signed yet? Or is that why you're cutting it in your forecast?

Well, we continue to trim it back. I mean, as we say, it's -- even though we have a -- we're the -- the vendor of choice, obviously, and we have the capability to manufacture the product, we don't have a green light to manufacture the product without a hard purchase order in hand.

Right.

So we're doing our best to conservatively put in there what we think is going to happen with a high level of assurance from customers it's going to happen. They have put some money on the table, essentially, to fund certain long lead time for components so that we can turn the thing back on perhaps a little bit quicker than would otherwise happen. But the same thing, as time continues to march on, our ability to rely on that program to drive our performance over the long run diminishes. So we're trying to be cautious about it.

Okay. Thank you.

You're welcome, Brian.

Shawn Harrison, Longbow Research.

Hi, good morning.

Good morning.

My first question just has to do with the third quarter and fourth quarter growth assumptions. It looks like if I'm modeling correctly, there has to be at least double digit sequential growth in both the third and fourth fiscal quarters to even achieve kind of the low end of the 8 to 12% full-year guidance. I was wondering if you could just expand upon where you think the growth will come back from? And then, as part of that, maybe how much you're expecting from this unnamed defense customer in 2007 in terms of revenues.

Well, let me just say, I would say we do have currently as we build up the forecast, of course, we take a look in the out quarters at the current customers; and we do our best to utilize their information as well as our own understanding of their markets, which, of course, is limited when you have as many customers with as many different products as we build. But we do our best to try to load in a forecast based on that information. We also, of course, anticipate. I mean, it's only January here, it's just past the end of our first quarter, but we also anticipate a certain level of new business wins to continue and to have some level of impact yet on the fiscal year. And then of course, we've built in what we believe to be our best and conservative estimate of what we would get out of this defense program. So I would say we've got -- you look at our SEC filings, there's a lot of risk that could torpedo our business, and we put them in there for good reason. But I would also say if you look at our risks to be able to grow throughout the year based on the numbers that we're laying out there, I mean, you have to look at new business wins, you have to look at the strength of the current customer base and their performance in markets. And, of course, because of the nature and the volatility and the lack of visibility on decision processes related to the defense program, you would have to put that in there, as well. But I'm not comfortable yet giving you specific forecast numbers for any particular customer, or the detail of any particular customer.

What about by end market, if we look to the second half of the year? Maybe if you could comment on which end market you expect to perform better than the others, or even just kind of maintain stability verses actually seeing growth?

Well, if we look out -- if we look out through the -- let me just give you the entire year. I mean, we do expect the wireline sector to grow very strongly during the course of the year. Wireless we expect somewhat in the flattish to potentially up a little bit. Medical, given the significant hole that we've created for ourselves here in Q2, we expect to have flat to very probably low digit growth. Industrial, somewhat mid-single digit growth, and I would say defense because of the strong performance last year and, again, the amount of revenue we've taken out here in the first couple of quarters that we're communicating today, we would see flat to just modest -- a modest single digit uptick at best.

Okay. The second question I have, just, is in regards to some commentary made about your outlook in terms of declining profitability throughout the remainder of the year related to mix and other factors. Just -- I was hoping you could put more color to that and also whether you think it's possible to get back to the EBIT margins you attained this quarter?

Yes, well, I'm going to let Gordon -- details on that.

The -- our guidance is really specifically addressed to the second quarter profitability performance. We see the gross margins and our operating margins really snapping back in the second half of the year, Shawn.

Okay.

The impact in the second quarter, we have the volume impact, obviously. Lower revenues, but we're also having an unfavorable product mix. That is -- the revenues that we're missing were perhaps relatively higher gross margin products than the overall. We also have the impact of the start up of the Penang facility, which, as I mentioned, will cost us about $600,000 in operating income in the second quarter. But as you perhaps know, that's coming onstream very rapidly. I think it'll reach profitability or at least a break even probably by the third quarter.

So there's nothing within your forecast that you see as an impediment to getting back above a 5% EBIT margin in the second half of the year? Just to be clear?

I think that's fair to say, yes.

All right. Thank you.

Steven Fox, Merrill Lynch.

Hi. Good morning. First of all, Dean, you mentioned industrial market as being one area that also would snapback. But given how that market usually rolls out, can you give us more specifics on why it would only be a one-quarter issue outside of the new program wins that you have?

Well, again, I'm just -- we're trying to do our best to go off to the direction that our customers are telling us. And right now there was a significant -- if you look across the customers, like I said, we saw probably 50% or so that didn't live up to earlier expectations, but we also had a couple that drove probably a sizable percentage of that and one in particular that had a serious channel inventory problem that they basically put the brakes on. And that -- we expect that problem to be worked off here as we move through the quarter, and then we'll be turned back on for production for that customer. So we see it, essentially, based on information from that particular customer as well as others that they expect growth in the back half of the quarter and we, of course, have been winning new business along the way here, some of which is reasonably significant for that particular market sector.

How significant was that one industrial customer to the whole industrial shortfall?

I didn't break out the specific percentage, but it was -- it was quite significant.

Okay. And then what type of contingency plans would you have in place in case this is an extended downturn in, say, one or more of the markets that you serve?

Well, I mean, obviously there are things that we can do. And I -- we started to run through the detail of that with our team as we started -- particularly after we get back off the call here, we're going to go back and take a harder look at it. But right now, we are seeing it as, hopefully, just a one quarter significant reset here. But if that -- if it turns out to be the worst, then we'll have to obviously go out and begin to look at the cost side of things and look at slowing down some of our initiatives for the year. And in particular, we've got CapEx that's planned for expected certain revenue growth, those kinds of things that we can begin to back off on.

And then last question, just on the SG&A dollar budget for the year, Gordon. Have you changed that at all based on this outlook? I think you guys were sort of intimating to be in the $90 million range? How would you describe that now?

Well, as Dean said, we're looking at programs to do what we can to moderate the downturn in revenues in the second quarter. We consider the second quarter to be more of a pause than the start of a trend. But clearly in we're wrong in that assumption, we'll have to take a more aggressive look at the SG&A line.

Did you take any changes to this quarter specifically in SG&A, or you're going to wait to see how it plays out?

I think we're going to wait and see how it plays out.

Thank you.

Alex Blanton, Ingalls Snyder.

Good morning. On the -- on the gross margin question that was mentioned earlier, you did have a very large incremental -- negative incremental profit. In other words, sequentially, the gross profit went down 32% of the sales decline. Is that product mix primarily that very large incremental -- negative incremental profit margin?

Well, as I said, the biggest factor was just the lower volume.

Well, lower volume -- this is a 32% negative incremental margin. If you have a gross profit of 10%, normally volume would not make that much difference because you don't have fixed costs that are that high. You'd have to have a high fixed cost operation to have an incremental margin like this from volume alone.

Alex, just to get my bearings, are you talking about from Q4 of '06 to Q1 of '07, or Q1 '06 --

I'm talking sequentially.

Okay.

Yes. You'd have to have a very high fixed cost to have an incremental margin -- I mean, Caterpillar has incremental margins like this. I wouldn't expect that from your company from volume alone. So that's why I'm focusing on the mix question. And which products really contributed the most to that?

Well, I'm not going to get into product line profitability on the call, Alex. One of the factors, perhaps, is the stock based compensation. In Q4 of '06 -- I guess that's not a major factor. I guess it was about --

We're talking quarter-over-quarter here, yes. So Q4 of '06, there was stock based compensation, but there was also in the first quarter, right?

Yes, but it was a little bit higher.

But we're looking at gross profit, is that in the gross profit line?

Yes. There's some stock based compensation costs in gross profit, and that was up about $300,000 over -- in Q1 '07 over Q4 of '06. Total stock based compensation was up $1.1 million, as I mentioned in my comments. There's about 800,000 of that's in SG&A.

But -- but -- it looks like most of this change in gross profit was really product mix. Is that correct? I mean, you said that earlier, but I just wanted to --

What, Alex? I'm sorry.

Product mix change from quarter-over-quarter. Is that right, that most of that change in the gross profit margin was product mix?

I think that's fair to say, yes.

Okay. Second question is -- I guess nobody's really asked this. They've asked you why you expect improvement in the second half, and you're basing that on customer forecast. But why were customer forecasts so wrong on such a widespread basis for the December quarter? Do you have any theory on that?

Well, I would just say this. I would say if you look at some of the indicators across the tech space, and you look at the supply chain to us, and you start looking at book to bill ratios, I mean, there's been some degradation recently of those. And I think those are becoming a much more --

Well, I guess the reason is -- the question is why has that happened? The economy doesn't seem to be the factor. I mean, the economy's pretty strong.

Yes, well, we're not economists here. I mean, we do our best to try to forecast this accurately and with a measure of appropriate conservativeness when we feel it prudent. And our customers' end markets came apart. That's all I can say.

Well -- yes, but they're not coming apart in the aggregate in the economy that I know of. I mean, OEMs are not reporting big shortfalls. The economy is still strong, the consumer spending was stronger than expected in December, so there's -- should be -- on that side, this might not effect you as much, but good sell-through. Was there an inventory build that had to be adjusted? One, say, in the second -- in the third -- in the September quarter, did the customers build inventory and then had to run it off? What happened?

Well, in some cases that's what happened. In some cases, as I said, there was actually a forecasting error where they overforecasted --

Right.

-- as a product line. There's a number of factors that affected it.

Okay. But you really don't have an overall theory about what's going on here?

Well, I have a theory, but I don't know that it's meaningful for me to speculate. Like I said, there's plenty of --

Well, we're interested.

-- people that are talking head on television that have probably more meaningful theories than I might.

We're interested in what you think.

I think we're seeing a broad-based inventory correction on the part of many of our customers, Alex. And as you know, the economy works with leads and lags, and that's about all we can shed on it.

I mean, there is a trend for OEMs to try and reduce inventory permanently. And this could be affecting orders for a variety of customers at the same time and have nothing to do with the economy, correct? I mean, is this a possibility?

It's certainly a possibility.

I mean, we have Cisco -- Cisco doing that. Cisco Lean program, trying to reduce their inventory and get it back through the supply chain. So I'm trying to figure out whether this is a -- company-specific, economy or -- it sounds as if there is a bit of everything in there. Okay. Finally, in the low cost regions, you mentioned you were 100% of capacity.

Yes.

Now, to what extent is there a shift going on from your current high cost regions, let's say, North America to China, or is new business flowing to China is existing business that you're doing in the U.S. shifting over there under the pressure of having to have cost reductions and at the same time having the Chinese work force becoming more skilled? We just heard Jabil tell us yesterday that 40% of their medical products are manufactured in Asia. Now, these are very complex high-end products that -- and they indicate that that's going to increase. So is there a shift going on there that might affect you -- your North American capacity utilization going forward?

Well, I would just say this. Right now, there obviously is some programs that we win in the United States that certain subassemblies and perhaps, in some cases, the entire product does migrate over to Asia, and for that matter Mexico, other low cost locations as time moves forward. But if you look at our growth rate here over the last three years, we've actually grown in North America in revenue terms. So if you look at our strategy and the individual end market sectors that we serve, the types of complexity of products, the value proposition in the U.S. is still very meaningful to our customers. Now, having said that, the growth rate in Asia has been extraordinarily high, and that is why we are continuing to expand the brick and mortar in that part of the world to support that higher growth rate. But right now, I don't see our North American capacity, particularly capacity in the United States or Mexico, being under threat at this point. We think we've got it sized about right for the growth that we expect over the next couple of years.

Okay. Thank you.

You're welcome.

Kevin Kessel, Bear Stearns.

Thank you. Good morning. This was mentioned earlier. But when you look, again, at the guidance of 8 to 12% for the fiscal year, the way I look at it, at an 8% growth rate, you'd have to be up anywhere from 10 to 15% sequentially in June and in September, and if you hit the top end of your range it would be 15 to 20% sequentially. And that's, I guess, if it was evenly balanced. Do you have any sense for what the balance will be? Will it be evenly balanced? Are you expecting much more growth, for example, sequentially in September?

Well, I'm cautious about trying to guide on the shape of the out quarters yet at this point, given the amount of volatility we've seen over the last several weeks in forecasts. So we've got it in our plan here shaped as best we can, but I am reluctant to actually give you specific quarter shape at this point.

Okay. What about the large defense program? Last quarter you mentioned -- last quarter when the guidance was 15 to 18%, you said if it didn't show up, it was probably on the low end. What do you think at this point in terms of the 8 to 12? If it doesn't come in at all in the fiscal year, does that mean you're at the low end or does that mean you're below the low end?

Well, that's a good -- that's a very good question. I think certainly if it doesn't come in, I mean, the low end is going to be more likely where we're going to end up. But as I said earlier, and admittedly the defense piece of this is a continuing risk, but I would also say continuing risk is volatility of the current customer base and their forecasts, as well as our ability to bring in anticipated new business wins as we move through the next quarter and a half or so.

Great. And then, I guess, maybe that answers the balance question. I mean, if the defense program, I imagine, comes in sooner than maybe the balance is skewed a little bit --

Right.

-- or lighter. Okay. And then in terms of the [10-5-5] model you guys have spoken of in the past for margins, does that still remain valid at this point? And if so, I mean, I heard Gordon just say 5% operating margin would be achievable in the June or September quarter. But just curious in terms of the gross margin.

I like the 10-5-5 model, and I don't see any reason why we can't continue to deliver on it.

If we're going to get 5% operating margins, Kevin, we've got to get gross margins around the 10% range.

Okay. And then, in terms of -- in terms of the inventory correction we've obviously discussed, where do you expect your actual inventory to go next quarter, and then maybe by the fiscal year end, how much would you expect it to decline?

I think the inventory issue is going to be around for at least another quarter. I would expect it not to get significantly better until the June quarter.

Okay. And then -- and then, when you kind of look at year end from where we are today, I mean, is there any sense for how much inventory -- where inventory might end the year if it's currently at 237 million and it might be up a little bit in June?

Well, we've got to get back to at least the 6 times inventory turn, Kevin.

Okay. And then, in terms of that, the largest customer, they grew looks like 7% sequentially, and you've spoken about this in the past. Do you expect, I guess, continued growth still from this customer? Or how do you think about that? I know you said your wireline should be up year-over-year.

Well, we're not going to talk about specific forecast for the quarter for -- you're speaking of Juniper, Kevin.

Yes, for -- I'm just talking about for this fiscal year, not so much for next quarter.

Yes, we expect -- we expect Juniper to -- as I've said consistently, we expect Juniper to grow right now the way we see our year is it'll be up in -- we're not going to crack double digit range, but we'll be up single digit growth for the year with Juniper.

Great. And then, I guess, lastly, if we just think again about the changes year to forecast, you said inventory correction as well as demand, is there any way to say roughly on a percentage-wise how much of the reduction is related to inventory corrections from your customers verses actual demand declines?

Well, that's a little bit difficult for us to actually get at with any kind level of precision. I mean, we know of specifically certain ones that we have -- we've had visibility into what their finished inventory is. With others, we don't have great visibility into finished inventory because in some cases, of course, we're building just subassemblies of products so it's a little hard for us to get our arms around that.

Thank you very much.

You're welcome.

Operator, if we could try to have folks limit their questions to one question and one follow-up in an effort to allow more people to get through, that'd be great.

Michael Walker, Credit Suisse.

Hey, guys. It's Will Stein subbing in for Mike here.

Good morning, Will.

I'll try to keep it to under 18 questions. First, on the guidance, I know that people have been touching on this, but I just want to ask it a different way. You're predicting a pretty healthy snapback in the second half, but on a segment basis, things don't look great with the exception of, I believe, wireline. Is that the right way to think of it, that essentially all the growth in the second half is going to come from that segment?

Well, what I talked about was where I expected the entire year to go and then -- with the hope that you could extrapolate kind of what that meant sector by sector, but there's now question at wireline we continue to expect it to be strong. But when you look at the hole dug in the second quarter, I mean, you will see some recovery, obviously, of other market sectors with a pretty strong percentage growth rate sequentially in some of those sectors.

One follow-up. Given what happened with the medical customer, and we've seen this kind of thing happen from time to time, not just with you guys but with all the EMS companies, what are you doing to make sure that it doesn't happen in the end? And why weren't you able to anticipate that that forecast may have been inaccurate? I mean, don't you have -- do you have a process of going through forecasts relative to historical performance and questioning your customers when they provide you forecast that wind up being double what the actual demand is?

Well, we do. I mean, we try to be as -- like I said, we try to be as accurate as we can, but if you kind of look under the hood of our business, I mean, we have probably 110 very active manufacturing customers that we build thousands of different subassemblies for those customers. So I don't think that in this case that the production volume of that particular subassembly was extraordinarily out of line with the production rates that we had seen earlier. But like I said, there was a number of product -- product line changes going on, subassembly changes and revisions that were happening, and simply said, someone within our customer's organization made an error in terms of forecasting the volumes associated with the product line switchovers. And those things can be complicated. So I'm not sure that we could have necessarily anticipated that they were off as much as they were off.

Thank you.

You're welcome.

Reik Read, Robert Baird & Co.

Good morning. Can -- the double order, Dean, can you just talk a little bit about what that customer's told you in terms of how long that will take to burn off?

Well, what we've done is we've -- it's part of -- if you look at the decline in medical in the second quarter. I mean, that's a -- that's essentially when we expect to have it burned off and have forecasts to return to what is expected to be a more normalized level.

But they're not seeing necessarily any weaker demand? It's just -- it really is a snafu in terms of double ordering and it takes a quarter?

A snafu in terms of double ordering, but again, there's a -- I'm trying to -- I'm hedging a little bit because there's a -- it's a product line shift that's going on, as well. So there's model number changes and things that are happening. So you can imagine when you roll out a new product line, there's a -- they got to be careful not to kill the prior product line and hurt their revenue stream, all that kind of stuff. So there's a number of complexities happening here, and so understand -- I mean, maybe not understandably, but unfortunately, there was an error made here in how they interpreted the transition.

Okay. And for them, is that transition complete at this point?

It's my understanding that they got their arms now around the appropriate volumes of the different product models, and that they are -- the transition will take some time in terms of the end market product. But my understanding is they've got a good understanding of what they need for product models at this point.

Okay. And then, as part of your comments, you had mentioned that within the customer contracts, they can defer receipt of product that I take it was -- is on your books as finished goods. What do the contracts say in terms of how long they can defer that even though it's already been made?

Let's disconnect that a little bit from the medical discussion, but it is true that we have certain customers that can defer product, yes, and maybe, Gordon, you may want to provide some light on it, I guess.

Well, one of them is a very large customer in the wireline business, and the other is a very large customer in the medical business -- a couple of customers in the medical business.

And, Gordon, can that be indefinitely?

No, of course not.

Can you give us some idea of what the parameters are?

It varies by contract, Reik, and I guess I'd really rather not get into the specifics.

Okay. Great. Thank you.

You're welcome.

Jim Suva, Citigroup.

Great. Thank you. Can we circle back a little bit on the commentary around the operational profitability snapback comments? We got a lot of moving parts really going on right now. All the way from Penang in Malaysia and such. Why or how would we be confident that we would see a complete snapback in June? Or should we just kind of see more gradual steps for a snapback? Because gradual steps verses a complete snapback can really be interpreted two different ways.

Fair enough.

Jim, a lot of it's just going to be driven by the higher revenue assumptions that we're assuming for the back half of fiscal '07. We've talked about Malaysia being a drag in the second quarter, but less of a drag in the second half, in fact, hopefully it'll get to a profit. We've talked about Mexico, currently at a substantial loss, expected to get better. I think Dean mentioned in his comments we expect it to be profitable in the third quarter. So I think it's a snapback of volume. It's the -- getting better in Penang, getting better in Mexico. A favorable mix. We do still have some assumption in there for the military coming back as well as medical coming back.

Okay. And my follow-up question would be then on the inventory in a semiconductor environment where typically ASP part prices continue to decline, is there any chance we'll see some inventory write-downs due to the ordering and inventory build?

I don't think so, Jim. As you know, we basically have contractual arrangements with our customers that if we buy according to their forecast and we don't use those parts, we generally have the ability to put them back to our customers. So I don't think you should expect and inventory write-off.

And the inability to turn the pipeline off of ordering. You had mentioned you don't see any inventory write-downs on that part either?

Yes, insofar as we didn't buy ahead of the order -- the customer orders. If we bought to the customers' specifications, we should not have a risk.

Okay. Thank you.

Amit Daryanani, RBC Capital Markets.

Thanks. Good morning, guys.

Morning.

Just a question on the inventory from the prior caller. Just given the limited visibility you have on the defense program, and -- can you just talk about the comfort level you have regarding the inventory you have built for this program? I mean, worst case scenario, do we have contractual agreements in place so we don't take the write-off?

Yes, any material that we have on hand has essentially been bought at the customers' risk with specifics according to purchase orders for those materials.

And that's true for this case even though we don't have a confirmed purchase order in our hands, right?

About the military program?

Yes, the military one.

Yes, that's right. As Dean mentioned in his comments, we've actually been authorized to go ahead and procure long lead components for this program at the customer's risk.

All right. And then, you guys have a fairly healthy balance sheet. You've been building a nice amount of cash, given the way the stock's acting for the last few weeks and probably today. What's your thought on potentially doing a buy back at this point?

We've looked at it, Amit, but I wouldn't want to say that it's imminent by any means. Short answer's no.

All right. Thanks.

Jason Gursky, JPMorgan.

Good morning, guys. Just a quick question on the margin snapback, one last time here for you. To what extent are there some other moving parts aside from mix shift back towards medical, industrial, and the military that are going to drive the margin improvements? Are there some mix issues within the other two segments, wireless and wireline, that are going to help you there? Were there some ramp costs this quarter that are going to, perhaps, decline over the next couple of quarters that are going to help you drive those margins back? Or is it all kind of dependent on the mix shift?

Well, as we've -- I think we've covered it, it depends on the incremental volume. Talks about -- depends on improvements in Malaysia and improvements in Mexico, but ramping really doesn't affect it. That's one factor that's not -- not in the mix.

Okay. And then in Asia this quarter, to what extent did capacity -- perhaps capacity constraints over there limit any of your revenue this quarter or, perhaps, some of the efficiencies in margins over there? And then just a housekeeping question for Gordon. Any changes on expectations for CapEx for the year?

Well, let me answer the second one first. We're looking at our CapEx expenditures over the next few quarters, but a lot of the CapEx that we're committed to is really big chunks of investments in Asia, and that's really necessary for the long-term success of the Company. So the amount of CapEx that we can tweak is probably less than $15 million, but we are looking at that.

Okay. Then on the Asia constraints --

No, we were not -- our revenues were not held back by any constraints in Asia.

Okay. Thanks, guys.

Rich Kugele, Needham & Company.

Thank you. Just one quick question, guys. As this situation has developed from a demand and ordering perspective with your customers, obviously, the other companies must be seeing this as well. Have you noticed any competitive changes in the way people are bidding for business? Has there been more pricing pressure? Anymore aggression? Has it changed the way you've done any business?

I don't think the competitive marketplace is substantially changed over the course of the last year. I mean, there is a number of competitors, I think, that are challenged, particularly in North America from an execution standpoint and that has been favorable to us. And -- but in terms of pricing, I mean, there's always the outlier in terms of someone trying to underbid the market, so to speak. But overall, I think pricing and competitiveness on programs has been reasonably stable. And we certainly aren't going to move from what we think to be the right pricing model for profitable growth for Plexus.

Okay. Thank you very much.

Thank you.

Jason Loeb, Lord Abbett.

Hi. Just a quick question on Juniper. Obviously, a large customer with a number of products that go back a number of years. But this quarter, I was just curious if -- if you saw any new -- new products that have begun ramping or some of the new wins and penetration that you've had with Juniper is still ahead of you?

Well, I want to be careful about what we say relative to Juniper's individual product lines; but let me just, in a general sense, tell you that we're not committed to just building legacy products. And -- which is, of course, part of the reason why we continue to expect growth with Juniper throughout the year and on into next year.

Okay. Thank you.

Thank you.

Thank you. There appear to be no further questions.

All right. Well, we want to thank everyone. We had a lot of great questions this morning, and I want to thank you for your support and interest in Plexus, and with that, we'll end the call. Thank you very much.

Thanks, operator.

Thank you. This does conclude today's Plexus Corp. conference call regarding first fiscal quarter 2007 earnings announcement. You may now disconnect your lines and have a wonderful day.