Plexus Corp (PLXS) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Plexus Corp. conference call regarding its third fiscal 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 like to turn the call over to Mr. Kristian Talvitie. Plexus Vice President Marketing Branding Incorporate 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. 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 evaluation allowance on deferred tax assets. All comments concerning earnings comparisons on this call will refer to non-GAAP earnings.

For full 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, Gordon Bitter, Senior Vice President and Chief Financial Officer and Ginger Jones, Vice President of Finance. We will begin today's call with Dean making some brief comments about the third quarter and the outlook for Q4. Ginger will follow up with the details on the financials. We'll then open the call up for questions. Please limit your question to one question and one follow-up. Let me now turn the call over to Dean.

Thank you, Christian and good morning everyone. LAst night we reported results for our third fiscal quarter, revenues were $380 million with GAAP earnings per share of $0.33. Both results were better than our guidance ranges for the quarter. Ginger will provide you some details on numbers following my comments but in summary, our strong third quarter revenue performance was largely the result of higher than anticipated sales in our Medical sector. Earnings benefited from the operating leverage on higher revenues, productivity improvements and expense controls.

Let me continue by providing a few details about our revenues by market sector in the third quarter and our outlook for the fourth quarter. Our wireline networking sector was up sequentially in our fiscal third quarter in line with our expectations. The renewed strength was primarily driven by our lead customer in the sector but we also experienced strength from another significant account and the sector's revenues also benefited from the beginning of the production ramp for an account won in a prior quarter. We currently expect low to mid single-digit percentage growth in our wireline sector in the fourth quarter, driven largely by the ramp up of two recent program wins. Our wireless infrastructure sector was up this quarter, slightly better than expected as one account beat earlier forecasts. Our fourth quarter outlook currently indicates a single-digit percentage growth as this customer continues to experience improved end market demand. As mentioned, the biggest driver of revenue upside in the quarter was improved performance of our Medical sector, where all of our top five accounts performed better than expected in Q3.

Previously we expected the better performance in our Medical sector to occur in our fourth quarter. This is no longer the case. We now expect a decline in the lowest teens percentage range as we currently expect reduced demand from traditional customers to overshadow the ramp of a new customer program that begins in the third quarter.

Our industrial commercial sector was weaker than expected in Q3. The difficulty was again broad based, 11 of our top 15 accounts down in the quarter. We currently expect Q4 revenues to improve in the low teens percentage range as the majority of customers in this sector expect increased end market demand and we begin to recognize revenue for a new customer program ramp. Revenues in our Defense, Security and Aerospace sector improved in line with expectations in Q3, as we fulfilled increased production orders for our largest Defense account.

We currently expect revenues in this sector to be up sharply more than 160% in Q4 as we complete the majority of production orders we announced in our Q2 earnings press release. As we look ahead to Q1 fiscal 2008, we will complete the remainder of the Q2 announced production order and we will begin to complete an additional follow-on production order worth approximately $25 million that we received early in fiscal Q4. While our policy is not to guide specific revenues for specific customer programs, we acknowledge the episodic nature of these Defense orders can have a material impact on our results.

We currently anticipate that revenues for this account will be in the range of 30 million to $35 million in Q1, up from the prior--up from prior expectations, but down sequentially from approximately $58 million in revenue expected in Q4. We recognize that there are a number of competing products in the marketplace and other suppliers of this type of technology have recently won significant orders for their products. We believe this is an indication of ongoing demand for this technology in the marketplace and we received notice of potential additional order of similar size to the latest order that if confirmed could further enhance revenues in fiscal 2008, although we are not willing to speculate on the certainty or the timing of this potential order, therefore, we advise you to model our business without it. Beyond this unconfirmed order we have little visibility into any potential future orders. Addressing our overall revenue concentration. Revenue from our top 10 customers represented 64% of our total revenues this quarter, up from 59% last quarter. Juniper Network's represented 24% of the total up from 19% last quarter.

Turning now to new business wins. In addition to the $25 million follow-on order for the largest Defense sector customer I just discussed we won 12 new manufacturing programs which in the aggregate will add $105 million in annualized incremental revenue as these programs ramp during fiscal 2008. The majority of these program wins will target accounts.

Our final of opportunities remains very healthy at $1.6 billion of qualified new business and encouraging development is the improvement of opportunities in the Medical sector funnel, which represents about a third of the total. On the engineering services front, we won approximately $11 million in new product development business during the quarter with about two-thirds of the win in the Medical sector. We expect many of the program to drive future manufacturing revenues. We continue to add head count to our engineering services organization to support the improved outlook.

Addressing capacity utilization and global growth. Our as tool capacity utilization was approximately 69% overall for the third quarter, up from about 67% last quarter. Our revenue in Asia represented about 29% of total revenues this quarter, and when combined with the revenues of our Mexico site we now recognize approximately a third of our revenues in lower-cost countries. Let me continue by saying a few words about our facility in Mexico which continues to be a drag on our financial performance. We continue to believe our Mexico site is strategically important to our global fulfillment capabilities and offers an important value proposition for certain customers with its lower labor costs and proximity to the U.S. border.

Some time ago we embarked on the operational realignment and a proven plan for the site that includes, upgrading site leadership, investment in new production equipment, improvements in site infrastructure and Security, installation of our standard global IT bundle, acceleration of key material management initiatives including more supplier managed inventory programs. Disengagement from underperforming accounts, realignment of the cost structure to revise revenue outlook, and repositioning the size value proposition and refining our sales strategy to target appropriate accounts. We have made significant progress on many of these initiatives and have seen a steady improvement in key execution metrics and customer satisfaction. But what we still have additional work to complete the plan.

Our business development function won a couple of new programs for the site although one significant program will not begin to contribute until fiscal 2009 and another program ran into market channel difficulties, significantly impacting demand and further delaying the financial recovery of the site. The opportunity funnel is beginning to develop, reinforcing the value proposition in sales strategy for the site. If we are successful with our plan, our current expectation is that we should approach break-even financial performance at our Mexico site as we exit fiscal 2008.

Turning now to our guidance. We currently expect that third quarter revenues to be in the range of 425 to $440 million with EPS excluding any restructuring charges in the range of 45 to $0.50, which includes about $0.03 per share of stock option expense. If achieve, these results will set new revenue and pretax earnings records for the Company and give us decent momentum as we look toward fiscal 2008. With that I would like to turn the call over to Ginger to discuss the numbers in further detail. Ginger?

Good morning, everyone. As Dean mentioned third quarter results were stronger than expected. Our earlier guidance for the quarter was for EPS of 25 to $0.30 and we came in at $0.33. There are two factors that led to this $0.06 improvement over th mid point of our guidance. First, higher revenue contributed about $0.01 to improved EPS. The second factor, which Dean has already discussed is cost reduction and improved operating efficiencies, which together contributed about $0.05 to higher EPS in the third quarter. Looking at the third quarter in more detail I'll begin with the comparison of the current quarter to the second quarter of fiscal '07. Revenue increased by 5%, primarily as a result of increased demand from the Medical market sector. Gross margins for the quarter were 10.1%, an increase from the second quarter's 8.8%. As you may remember the second quarter included a 5.9 million inventory write-down due to financial difficulties for one of our customers. Gross margins in that quarter without this adjustment would have been 10.4%.

SG&A expenses down slightly from the prior quarter, at just over 20 million for 5.3% of revenue. We have carefully controlled spending in view of lower revenues and originally planned for fiscal '07 and we are recording lower incentive compensations than in fiscal '06. Unfortunately our manufacturing facility in Mexico incurred losses of about 4.6 million, an increase from last quarters 1.8 million. The performance for this site was negatively impacted by inventory write down recorded for obsolete inventory relating to a customer disengagement. In addition, a new customer for this site has experienced difficulties in its end markets which is why it's lower than expected revenue. As Dean has already outlined our plan to improve this site performance, I won't spend any more time on that this morning. Our operating margins were 4.8%, an increase from last quarter's 3%. Moderating the impact of the Mexico loss in the third quarter we received cash and recognized revenue in the U.S. on shipments of a financially distressed customers written-down inventory. Excluding the inventory adjustments from both period's results, operating margin for the third quarter increased 20 business basis points from the prior quarter. We continue to use an effective tax rate of 20% consistent with our estimate in the prior quarter. Just as a reminder, the tax rate will vary based on the mix of revenue between the United States and other taxing locations particularly Asia where we currently have tax holidays.

Let me shift now and review the third quarter versus third quarter of '06. Revenue was down 17.8 million or about 4.5%. The largest driver of this variance was our large Defense customer. The third quarter of '06 was the largest quarter for that program in fiscal '06 and this customer represented 10% of revenue in that quarter. In fiscal '07, revenue for this program will be concentrated in the fourth quarter. Excluding this program, revenue in the third quarter increased slightly from the prior year quarter.

Revenue was up over the prior year quarter in both the wireline networking and the wireless infrastructure sectors. This was the result of stronger end market demand from our customers, increased program share with our existing customers and a ramped to production of new programs. Gross margins in the current quarter at 10.1% were below the prior years 11.5%. A less favorable mix of customers in the current quarter, largely offset continued improvements in operating efficiencies. In addition, operating losses at our Mexican site were higher than in the prior year. The start-up losses in the current quarter for our third facility in Penang were around 1 million, with the site forecasting to operate profitably in Q4. This is a one quarter delay in attaining profitability of this site and as a result of lower than expected end market demand.

SG&A expense decreased by 1.4 million or 6.4% to 5.3% of revenue, which is consistent with the prior year's SG&A at 5.4% of revenue. Operating margins for the third quarter were 4.8%, compared to the 6% achieved in the comparable prior year period. The variance here is primarily related to the different mix of customers in the periods including our large Defense customers discussed earlier. Net interest was favorable to the year-ago period. We're operating with higher cash investment balances in a higher interest rate environment than in the prior year and as a result our interest income was higher this year.

Pretax income was 6 million below last year for the reasons that we already discussed and once again the after tax comparisons are difficult because last year at this time we were not tax effecting pretax income in the United States, because of the valuation allowance on the U.S. tax, deferred tax assets that we had at that time. Moving on to the balance sheet and cash flow. The balance sheet held its own in the third quarter. As you saw in the press release, days in receivables during the third quarter were reduced by one day consistent with our performance at the end of fiscal '06. Days in inventory were flat at 68 days. Two factors continue to influence our inventory levels. First, putting inventories in place for the anticipated higher production level for the planned strong fourth quarter and increase risk because inventory maintained for some customers, to enhance our flexibility and to support direct order fulfillment programs. Accounts payable days improved by one day during the quarter.

The cash conversion cycle was flat in the second quarter with planned improvement in net cash days in the fourth quarter of '07. Annualized ROIC was 14.7% which approximates our weighted average cost of capital. Cash flows from operations were approximately 15 million for the third quarter. Net cash increased by 12.5 million for that quarter. We anticipate continued positive cash flow from operations for the fourth quarter of fiscal '07. Capital spending for the quarter was 7.8 million and depreciation expense was 6.8 million. We are currently expecting capital spending for the fiscal year of 55 to 60 million. The reduction in capital spending from previous forecasts is primarily related to delayed projects for which the spend will be completed in fiscal '08.

Summing up the outlook for the fourth quarter we expect revenues in the range of 425 to 440 million with EPS in the range of 45 to $0.50. Looking beyond the fourth quarter, we intend to provide revenue guidance on fiscal '08 and specific guidance for the first quarter fiscal '08, during next quarter's conference call. I would remind you that our quarter to quarter results can and do very significantly between-- very significantly given customer mix issues, and market demands and other factors. For example, as we have discussed on previous calls, in accordance with large concentration of orders with the major Defense program, tend to be more profitable, given the quality. flexibility and speed to market that this program requires. Regardless of these various factors we continue to believe that our 20105 model is achievable and sustainable. With that I'll turn it back to Kristian who will open it for questions.

Just a quick reminder if folks could try to limit their question to one question and one follow up, and with that, we'll turn it over to the operator to open the call for questions. Thank you.

(OPERATOR INSTRUCTIONS) . We'll pause for a moment to compile a Q&A roster. First question is from Brian White of

Good morning.

Morning, Brian.

Could you talk a little bit about, looks like Medical did better than expected, much better here in the June quarter, and we look out to the September quarter, what is really being impacted here? Is this the FDA issues continuing, or is this reimbursement relative to some of the ultrasound programs, or what are we looking at here?

Very good question, Brian. It's really, I would say a confluence of issues here that will bring the number down as we look at the September quarter. Certainly, the ongoing FDA issues are a part of it. Some of you may have paid attention to one of our big customers talking about the deficit reduction act and the impact on demand for certain Medical products and reimbursements for Medical products and so that we're seeing some impact associated with at, at least in the near-term. And then we also have a fairly significant program that has a sophisticated device or dye that ran into a supply chain issue and it needs to be shifted over to another supply chain partner, and that is causing essentially one-quarter gap here in our ability to deliver product for that particular program.

Is it all five customers that are going to decline sequentially in the September quarter, or is it just specific customers?

Oh, boy, let me take a quick look here. As we look at the top five, yeah, we're seeing a decline in four of the top five in the quarter.

Okay. Thank you.

You're welcome.

Thank you, your next question is coming from Shawn Harrison from Longbow Research.

I just wanted to follow up on the margin headwinds, what was the actual gain from the sale of inventory with the distressed customer?

In the quarter there were two inventory recoveries which in total totaled 1.5 million, Shawn.

Okay. And then using my math, it looks like adjusting, if you take Mexico to break-even, and essentially Pinang's offsetting these inventory sales, you're doing about a 6% EBIT margin in the quarter just with break-even in Mexico . My question is, is that type of EBIT margin sustainable given the ebbs and flow or excluding the Defense business as we go into '08, once you get Mexico break-even is the 6% EBIT margin a number we can

Well, I guess I would caution on that, we need to recognize that there are pricing pressure in the business on certain, particular the products in certain end market sectors, that is one of the reasons why we decided to go so strongly after the Defense and Aerospace business in an effort to manage the portfolio business to continue to drive toward our stated model. So I would be cautious about saying, , if you bring Mexico up to break-even or profitable that you can tack all of that on top of our current performance because you have to assume that that as time goes forward we will continue to see competitive issues in some of our

But that's more of a slow degradation than kind of an overnight whack.

That is very true.

And then getting back to Mexico, if you look as you progress through '08, how should we look at kind of the profitability profile of Mexico, and in terms of the losses, is it each quarter it drops by a $1million , and then maybe kind of as a follow-up to that, what was the actual loss excluding the inventory problems in Mexico this

I'll let Ginger follow up with the specific number on the loss. I would say it that it would not be appropriate to model it in a linear fashion and maybe that is something that could be talked about on a follow-up call, because the reality is that business doesn't come in, in a linear fashion. So we need to go out and develop new business and bring in new business into that facility in an effort to get it up to the break-even. So part of our get-well plan is, of course, the management of the sizing of the organization to make sure that it is sized properly. But a significant part of its recovery has to come from developing business, which we have consistently said. The difficulties that we're seeing in Mexico today are not so much around execution, we think we have given them all the key components of the Plexus recipe, sort to speak, to execute well and we have got a very good team of people running that plant down there, to really get it to healthy we have to bring in new business and there is not any specific certainty around quarters when we believe that will happen. So we'll just have to update you quarter by quarter and let you know how we're doing.

Okay.

Ginger can give you a specific number here.

I do. The losses were 4.6 million in the quarter of which 1.6 was the inventory write-down so without that, it would have been $3 million.

Okay. Thank you very much.

Next question is from Jim Suva of Citigroup.

Great. Thank you, and congratulations. Can you talk about your comment about I believe you mentioned a little bit of weakness in Asia and therefore a push-out for your expansion there. Can you talk about that weakness and help us understand that better?

Yes, we refer it to as--we were some what delayed in the profit--bringing up to profitable the new facility over there which, of course, is a very large facility. I would say it is generally marching along to plan although the end market demand for some customers products was a little bit delayed from where we thought. We have some new business coming into that facility and it developed a little bit slower than I would anticipate. I wouldn't look at it as anything systemic or off the rails here, it delays us a little bit into the coming quarter here, into this quarter before we actually turn it into black.

Just to let you know I'm still awake, Gordon. I said I expected that the new facility would be operating profitably in the final month of the quarter, in fact, it operated with a small loss, about 250,000. So we only delayed a month.

Okay. And the end segment is a little bit slower. What end segment would that represent?

Industrial.

Quick follow-up, for this Defense business, which congratulations on getting a follow-on offering, how should we think about that as far as the magnitude in the consistency, as far as 25 million versus I believe the current one is around 70 million with 40 to 50 in the September quarter. Are these just expected to come in a little bit slower or still very lumpy and unpredictable. How should we think about the magnitude?

Jim, I wish I could give you a precise answer on that. We still have a very difficult time trying to get any precision in our ability to forecast that program and I think we're just viewing it as episodic, although I would suggest that a current view, or at least the very most recent history now is that the size of the orders are smaller, and if this last one that's being talked about now, which again I said there is no certainty on, comes through, they're going to come a little more frequently. But I don't know that that is any kind of indication of what's going to happen in the future.

Great. Thank you.

You're welcome.

Thank you, your next question is coming from Steven Fox of Merrill Lynch.

Good morning, just another question on the Defense win. So you're saying in fiscal '08 there could be another major piece of Defense orders. And, Dean, just so I'm clear, you're saying it is whether it's related to whether your customer wins more business or are you saying you have to go out and win the business again with your customer?

No, it is not so much around our competitive situation with the customer, it is around the customer being able to get the confirming order with the U.S. Military and you used the word significant I would say you should think of it we just said there was a $25 million follow-on order. You should think of it at least in the neighborhood of that order.

And are you also--so and you've decided to disclose the potential for that today. I'm just curious why you--you must think there is a real opportunity for it to happen. What happened with that customer that made you decide to disclose that follow-on.

We had a lot of debate whether to disclose it or not, quite frankly, because there is no certainty that it will happen, but we know that some of you are pretty darn good at ferreting out this information in the marketplace and so we felt that since we received notice that it was there was the potential there, that we would mention it. And so that was our motivation, is because we didn't want people to pick up on it on their own and potentially put something in there that was more certain, or was sized on not too out a range.

And then on the Juniper business, is there any way to dissect how many of that was new programs versus Juniper's growth in the quarter.

I'm cautious when I talk about Juniper. I mean, clearly, you Juniper had a decent quarter and of course guided with some enthusiasm looking forward, so obviously the business with Juniper is going well but I would caution there still is--there still is a plan here to kind of level out the current supply chain partners. So they're working still on executing their transition plan, bringing up Flextronics and giving Plexus select on Flextronics the appropriate pieces of business. There is a lot of moving pieces there. I wouldn't read too much into the specific quarter and you should think about the next quarter, with them as kind of probably moving back toward more what the normal sort of concentration would be with Plexus.

Great. Thank you very much.

You're welcome.

Thank you, your next question is coming from Amit Daryanani, from RBC Capital Markets.

Thanks a lot, good morning, guys. Good Morning Amit. I just want to clarify, 1.5 million sales of shipments of inventory, that was written off previously. If I get this right, but COGS is zero, so-- would that enter revenues, right?

That's correct.

I mean that would impact your EPS about $0.03 in a positive way this quarter.

That's right. But don't forget it was offset by a write-out of in Mexico of a similar amount.

Got it. It was net-net, it was not-- it was zero impact.

So net to the quarter there was very little impact.

Got it. Last quarter was $5.9 million inventory write-off. Do you expect to incur more of that beyond the 1.5 million now?

We certainly think that is an opportunity we hope that this customer will need the finished product and continue to have the ability to pay for it. As I remind you when they had financial difficulties in the last quarter, which well we wouldn't want to speak in a lot of detail, but if they have the ability to pay for it, we would be happy to manufacture and ship that to them.

I guess it's not built into your September quarter guidance at this point at all, right?

It is not.

Talk about the trends in the industrial segment, it has been soft for you guys, for two quarters. Generally, that a pretty wide (Inaudible - highly accented) be doing pretty well. What is slowing down the revenue profile, less desire to outsource? Or something else at work there?

Well, that is a good question and of course we think the industrial sector is a broad list of customers for us that maybe represents in some respects what's going on in the overall marketplace, industrial marketplace. I would say that the current quarter miss was somewhat--it was quite broad-based and although, there was a couple of very significant contributors to it, that have very unique problems in their end markets, but we're looking into the Q4, and as I said, we're expecting Q4 to see it up in kind of the low mid-teens range and we're seeing the majority of the top 15 at this point, up in the quarter. So at least in Q4 it looks like there is some recovery here and little bit more enthusiasm in their end markets.

Thanks a lot, guys.

You're welcome.

Thank you, your next question is coming from Tom Dinges from JP Morgan.

Good morning everyone this is Jason Gursky stepping in for Tom. Two quick questions, first on the CapEx can you shed more light on what specifically you scaled back on and you're pushing out into '08, and the reasons for it? And secondly on Juniper, you had mentioned that they are preparing to more evenly distribute the programs amongst the three EMS providers, was there specifically any build of inventory, finished goods inventory in the quarter in preparation that might lead to an explanation for the nice sequential quarter that you had with them.

Let me answer the Juniper question. I don't think that we had anything in the quarter here that was--that was a result of kind of building ahead for the transitions. I think the transitions have been going on now for quite some time. And so, that really didn't have a significant influence on the quarter.

Jason, on the capital question, it was not focussed on anyone side or program. It was broad-based across all of our sites. Just some projects were delayed and we'll complete the spending in fiscal '08.

Okay. Great.Thank you, guys.

Thank you, your next question is coming from Kevin Kessel from Bear, Stearns.

Good morning, guys.

Good morning, Kevin.

My question is on the new program wins you've been announcing over the last four quarters, if you aggregate them all up, they come to 450 million and there is a similar amount for the four quarters prior to that. How should we think about the most recent four quarters of wins in terms of the ramp schedule, should most of that fall into fiscal '08 or multi year in terms of how long it might take to ramp up to full volume?

The reality is program by program it varies quite a bit. I mean, there was a very significant win that we announced earlier in the year that as I said, is slated, when I was talking about my Mexico comments it is slated for Mexico. That one is kind of far out into the future. Historically there has been a pretty good correlation between our kind of quarterly win rate and what you've actually seen on the revenue line for Plexus, and of course this fiscal '07 has been an aberration to that where we really haven't been able to experience the topline revenue associated with this program, somewhat because the programs ramped slower, with the softer end market and then of course on top of that we had soft end markets with the existing programs and so we had that impact on our top line as well.

As we look over the last year, I would say many of those programs, because they were delayed or softer in their start we would expect to see them in '08, but I would also--always caution and I know that you know this as well, Kevin, you just can't take and flop $400 million on top of our overall revenues because there is end of life programs, there is always difficulties in the business and there is degradation that occurs on an ongoing basis and if we just stood still and didn't win anything we would probably see a decline in revenues and maybe 6% of revenues on an annual basis. We have a lot of work to keep ourselves to even let alone to grow the top line.

And I guess as a follow-up, in terms of cash flow from operations, is there an expectation, maybe I missed it, I don't think Ginger mentioned it, in terms of where you guys expect cash flow from operations to finish this fiscal year out at and what your expectations would be and then maybe potential going forward, maybe not in numbers, but just generally.

Positive cash flow is expected for the fourth quarter in the range of 15 to 20 million and obviously we would look for positive cash flow next year. CapEx will be down like the from this year, so we expect to be positive in '08 as well.

And any thoughts, Ginger on what to do with the cash? I know it is a question Gordon laughs about.

Gordon doesn't like to answer.

But now then that cash position getting near $4 a share, one of your competitors actually today announced a stock buy-back that has a similar capital structure.

We saw that, Kevin, we continue to believe that our cash is best used internally to drive our organic growth. So at this point we have no plans of stock buy back. As we said at our Investor Day we'll continue to evaluate all our options around that as we enter '08 and as we begin making cash tax payments in '08. So the short answer is no, no plans at this time.

Thank you.

Thank you.

Thank you, your next question is coming from Bill Stein of Credit Suisse.

Just follow- up on that last one, obviously a buy-back and potential issuance of debt is more beneficial if you are paying taxes, can you update us on that situation?

We will be paying taxes making cash payments for taxes in fiscal '08. As you know, we are recording taxes at a normal level in fiscal '07, and so that will all factor into our thinking into our financial structure.

Great. A question on the Medical end market. I believe one of your larger customers has a business unit that you guys do some work for and they're in a consent decree with the FDA to hold off on product deliveries right now, I think that was extended another quarter. I wonder whether you can comment as to whether that is a meaningful portion of the weakness that we're expecting in Medical in the coming quarter?

It is certainly a component of it, yes.

Okay. And just one more, I wonder if you can give us an update on ERP implementations. I know you guys have been working on that, the rationalization of your ERP platforms. Any update there?

Yes, at this point, and somebody in the room can correct me if I'm wrong, but at this point we have all of our manufacturing sites around the world up on the common IT bundle with the exception of our facility out in the Boston area, and we have not yet brought up our engineering services organization on that platform, either. And then the remaining piece is to to move consolidation to the platform. So we have a little bit of work in front of us, yet, but we have made some fantastic progress.

Boston is currently being implemented as we speak and should go live in the first quarter of fiscal '08.

Great. Thank you.

Thank you, your next question is coming from Reik Read from Robert Baird.

Good morning. With respect to the Defense business and we spent a lot of time on this key customer, but you--Dean, you've talked about wanting to get more broad into that business. What about other customers and potential ramps that you're seeing in that segment?

Well, there is some good news in that we have nice engagements with a number of other Defense contractors in that sector, although I would say the business with them at this point is still substantially smaller, of course, in this one lead account. I would also say a part of that sector at the Aerospace piece, and embedded in the wins that I announced today, was a very nice program with a leading Aerospace company that will also help--help stabilize somewhat that particular sector for us.

And but if you were to take out that big customer, I mean, would we be seeing at least a reasonably steady increase over the next, say, year or so with those other customers, or is that pretty flat?

Well, if you kind of took it out--normalize it over the last year, I mean, just pull it out completely, you would begin to look at an increase, yes.

Okay. And then just back to the CapEx issue, and I understand Ginger your comments that you say it is broad based. Can you give us a sense for why the projects are delayed?

I think in general there are--there is a lot on our plate for our operational facilities and they're focussed on both making improvements and making capital investments and delivering our quarterly numbers. And across the board there was-- just projects they were not able to get to, they're good projects they'll get to them in in fiscal '08. I don't think there is anything more systemic or broad based then that.

This is Gordon. There is nothing sinister going on here. If you look back, we typically only spent 20 to $25 million a year in CapEx. As an organization were incapable of spending $70 million a year. It is as simple as that.

Thank you.

Your next question is coming from Rich Hugo of Needham.

Looking at your pipeline, if you look at $1.6 billion, Dean, you were talking about, I think you mentioned about a third of it was Medical related. How do the other segments show up there, and any changes to your current mix?

I think we're doing in general we're doing a nice job driving fairly balanced approach across the individual sectors. We have-- we recognize the Medical sector in particular is, of course, critically important to us going forward and we have struggled somewhat over the last couple of years to get any real substantial growth and, of course, Medical has got some headwinds with the FDA issues and now the deficit reduction act issues and some of these thing. We really focussed on getting a good solid team to lead there in those programs, in that sector, has seen an appropriate and strong increase in terms of the funnel of opportunities and our brand in Medical is very strong and the other part that we forget to talk about is the strength of the engineering organization which is a good leading driver of business into the Medical sector. So I'm quite pleased to actually--our go to market strategy here of divide and conquer and assembling a focussed team on each one of our key sectors is doing a good job with development of programs.

And does that 1.6 billion include at least what you've talked about today on Military?

In terms of--well, I mean, the programs today that are in--that we've said in Military are out of the pipeline now because we've got them in the forecast. So it would be excluded from the pipeline at this point.

Okay. All right. Thank you.

You're welcome.

Thank you, your next question is coming from Jeff Walkenhorst of Banc of America.

Good morning, thanks for taking my question. If you think about your growth target, top line growth target of 15 to 18% and looking at the various segments and how they performed this year, and maybe this year is a little bit abnormal given the Medical problems and so on, but where are you more optimistic that you can achieve that type of growth as you look to fiscal '0? Thank you.

I think I became most optimistic because we're looking at the wins here in the second half of fiscal 2007 which have been nicely balanced across our sectors and we've already got a good start here in Defense, Security and Aerospace with (Inaudible) and the Aerospace program we just won. I don't know I'm any more enthusiastic or confident about any one particular sector or the other, although I am happy that we've developed a Medical pipeline to a stronger degree.

I would add 15 to 18% that you quoted was our target or our goal, if you will, before we started '07. We haven't given any guidance for total fiscal '08.

That's correct.

That is your long-term ongoing topline target; correct?

That is what we feel the market supports and that our go to market strategy should be able to achieve.

Okay. I know that you've had some cost-downs or price reductions in the Medical side and end of life in certain products. Does that make you concerned even in that area that you should see potentially better growth, that maybe this 15 to 18% is a stretch or do you think it is in the early days that there is potential to see accelerated growth to some of those customers normalize.

Even though the industry itself from a strategy standpoint, for OEMs to outsource is certainly maturing. If you look at the industry in terms of the amount of business that is still internal at OEMs across some of our key sectors is a substantial amount of business and still executed internally. There is still a lot of competing EMS companies in the marketplace, many of which are small and have lesser capabilities. So we think that our ability to continue to be competitive and execute well, we should be able to continue to develop business and support our long-term growth range for the next several year.

Okay. My one follow up question is on the cost side. You're saying you're continuing to add head count to our engineering staff. Where are most of those additions happening and do you think that will change last quarter you mentioned SG&A kind of holding around 20 to 21 million on a go-forward basis. Do you expect that to change with new head count addition?

Let me clarify the engineering organization of course is a profit and loss organization, so it's a services organization, so most of that head count is essentially in COGS. So you shouldn't look at it as a change in the SG&A structure. In terms of where we're adding head count, we are adding head count around the global organization of our technology and engineering services organization, but the more rapid growth is going into our--going into our design center over in Pinang, Malaysia, which is currently under construction.

Okay. That's helpful. Thanks for clarification and good luck guys.

Once again, as a reminder, if you would like to post a question, press star and number one. Next question is coming from Yuri Krapivin from Lehman Brothers.

At your analyst meeting back in June you indicated that you considered using cash for acquisitions should the right opportunity present itself. So without obviously giving us any specifics, can you indicate if you have anything in the acquisition pipeline at this point?

We have nothing in the acquisition pipeline at this point, although we recognize that we are disadvantaged to develop business in Continental Europe, and we believe that if we would begin to set serious and focussed on acquisition opportunities, we would see it as a market entry strategy in a conservative way in Europe.

Okay. Thanks. And my second question is on your favorite subject which is the tax rate. So for fiscal '08, at this point should we continue to assume tax rate of around 20%, or could it actually go higher in fiscal '08?

I would model that at 20%. I don't believe it would go higher, I believe it will be 20% or within a couple points of that.

Okay. Thanks.

Thank you, your next question is coming from John Emerich from Iron Works Capital.

Can you give me the CapEx number for '07, again, fiscal '07.

Yes, really the range will be 55 to 60 million.

And '08 should be down from that?

We believe '08 will be at a more normal level of capital spending which for us would be in the range of 20 to 25 million.

What is D A this year, looking like?

For the quarter 6.8 million, for the year we look to be about 27 to 28 million.

Okay, 27.5 and lastly the cash taxes in '08, does it start literally in the December quarter or happen gradually as the year unfolds.

We'll start paying cash taxes early in fiscal '08.

Early. Thank you very much.

Thank you, and we have a follow-up question coming from Kevin Kessel of Bear, Stearns.

Thank you. Just in terms of Asia, for Pinang. At last, I think update you had three S&T lines in the plant that had capacity in the plant to handle as many as 25. Can you give us an update how many S&T lines are up and running now and how many you expect in fiscal '08.

At this point we've installed six S&T lines and so we're still bringing up production on those lines. At the end of '08, could be as many as nine.

Nine additional or three additional?

Nine in total.

Nine in total.

Yes.

Okay. And then my other question is, in terms of Mexico so the way it's been described, it sounds strictly like it is a volume issue here. How how much--I guess in terms of dollars--do you expect you need to drive into Mexico on a--I guess on a quarterly basis in order to get the operation to break even?

Yes, I think the way we look at it is we got to be somewhere in the 90 million or 100 million annualized run rate in order to be at break-even.

For the--in terms of additional or for the plant.

No, for the plant.

The plant needs to be at 90 to 100.

Yes, so 25 million a quarter, roughly.

And now it is doing something like close to that, right? I mean it is actually not that far.

Actually as we look forward into '08 we're--because we said we're working on a plan to skinny back the customer base and get it aligned properly, we're looking at 60 million right now.

Okay. Okay. I was looking at last quarter it was doing something like 21 and I think the last time you broke even it was doing 32.

Yes.

But now you're saying, okay, you changed the cost structure you can do it at 90 to 125.

We are looking at our customer set and recognizing that we just can't get there with certain customers, so it's a case of skinny it back and get the right kind of customer mix. And, of course, whether it is 90 million or $100 million a year, depends on the particular programs that you would bring in.

The net-net at least we're looking at 10 million a quarter delta in terms of where you are versus to where you want to be.

That is a good way to look at it.

You said something was significant that was supposed to fiscal '09? Is it significant for the site or is it significant program like over 40 million, or something like that?

Well, it's significant for--it would be a nice-sized program for the Company and for the site. But now that we're starting to talk about something that is so far out into the future, it's all speculative at this point and there is a lot of development that has to go on yet with that particular program. I wouldn't hang my hat on that. I would say we need to develop business now and into as we move through the year to bring into that facility too get it back to break-even.

Just the last question on inventory. What is the plan for inventory reduction, and where do you guys think you can take turns over the next couple of quarters?

We think we can have some improvement in our inventory days as we move into Q4, and as you know our motto, we're always going to have more inventory than our competitors based on our model. But we think we can improve it in the fourth quarter and then probably flatten that out in fiscal '08.

Thank you.

Thank you.

Thank you, there appear to be no more questions at this time. I'll turn the floor back to your host Mr. Dean Foate for any closing remarks.

Thank you for joining us this morning, we had what I believe is a good quarter and I'm quite enthusiastic about the coming quarter which is going to set some new records for the Company in terms of our overall financial performance. That is always exciting as we move into a good year. I'm also equally enthusiastic because the pipeline of opportunities and the business development engine really appears to be running quite well. Feeling really good about the business. We have some work cut out for us of course in Mexico, but we can look at that has a glass half empty or half full and I tend to look at it as an opportunity half full and were going to get after it and get that facility up and running and improve performance that we move through the coming year. Thank you for joining us, everyone, and have a good day.

Thank you, this concludes today's Plexus Corp conference call. You may now disconnect.